AP Macroeconomics · Unit 6 · Topic 6.1

Balance of Payments Accounts Study Lab

The balance of payments records every transaction between a country's residents and the rest of the world. Trade, income, and gifts go in the current account; purchases and sales of assets go in the capital and financial account, and the two always sum to zero. Sort transactions into the right account with the right sign, then build a ledger and watch the balances offset.

1. Sort it, then balance it

Every entry is from the point of view of the United States. Money flowing into the U.S. is a credit (+). Money flowing out is a debit (−).

A. Sorting game

Item 1 of 150 / 0 fully correct

Step 1: Which account?

Step 2: Credit or debit for the U.S.?

How to decide

A good or service is bought or sold: current account, trade in goods and services.
Interest, dividends, or profits earned on assets owned abroad: current account, investment income.
A one-way gift, aid, or money sent home with nothing bought: current account, transfers.
An asset changes hands (stocks, bonds, real estate, factories, bank deposits, official reserves): capital and financial account.
Payment comes into the U.S. (exports, foreigners buying U.S. assets): credit +. Payment goes out (imports, Americans buying foreign assets): debit −.

Sorted correctly so far

B. The ledger: every transaction has two sides

Pick this year's transactions billions of dollars

U.S. balance of payments billions of dollars

Current account itemsCapital and financial account itemsSum of both accounts

Try a scenario

Balance of trade

Current account

Capital and financial account

Current + financial

2. Key ideas

Definition

Balance of payments

A record of all transactions between one country's residents and the rest of the world over a period of time. It has two main parts: the current account and the capital and financial account.

CA = trade + income + transfers

Current account

Records trade in goods and services, net investment income (interest and dividends earned abroad minus those paid to foreigners), and net transfers (gifts, aid, remittances).

Not the same number

Balance of trade vs. current account

The balance of trade is exports minus imports of goods and services. It is one piece of the current account. A trade deficit means imports are larger than exports. The current account adds net investment income and net transfers on top.

Assets

Capital and financial account

Records purchases and sales of assets: stocks, bonds, bank deposits, real estate, and factories (foreign direct investment). Official reserve transactions by central banks are included here. Foreigners buying U.S. assets is a credit; Americans buying foreign assets is a debit.

+ and −

Credits and debits

A credit brings payment into the country: exports, income received, gifts received, and asset sales to foreigners. A debit sends payment out: imports, income paid, gifts sent, and purchases of foreign assets.

CA + FA = 0

The two accounts offset

Every transaction has two sides, so the balances sum to zero. A current account deficit is matched by a capital and financial account surplus of the same size: foreigners acquire more U.S. assets than Americans acquire foreign assets.

3. Where does it go? Cheat sheet

All entries are for the United States. Learn the tricky pairs: buying a stock is the financial account, and the dividends it pays are the current account.

Transaction	Account	Part	U.S. entry
U.S. firm sells goods or services to a foreign buyer (export)	Current	Trade in goods and services	Credit +
Americans buy foreign-made goods or services (import)	Current	Trade in goods and services	Debit −
Foreign tourist spends money in the U.S.	Current	Trade (service export)	Credit +
American tourist or student spends money abroad	Current	Trade (service import)	Debit −
U.S. owners receive interest or dividends from abroad	Current	Investment income	Credit +
U.S. pays interest or dividends to foreign owners	Current	Investment income	Debit −
Remittances or foreign aid sent out of the U.S.	Current	Transfers	Debit −
Gifts or remittances received from abroad	Current	Transfers	Credit +
Foreigners buy U.S. stocks, bonds, real estate, or factories	Capital and financial	Financial inflow	Credit +
Americans buy foreign stocks, bonds, real estate, or build factories abroad	Capital and financial	Financial outflow	Debit −
A foreign central bank adds U.S. Treasury bonds to its reserves	Capital and financial	Official reserves	Credit +

4. Answering it on the FRQ

Moves that earn points

Name the account in full: "current account" or "capital and financial account". Then say whether the balance increases, decreases, or does not change.
Write the formula before the numbers: current account = balance of trade + net investment income + net transfers.
Find the balance of trade first: exports of goods and services minus imports of goods and services.
When given the current account, get the financial account from current account + capital and financial account = 0. Show the sign: a −$40 billion current account means a +$40 billion financial account.
When a question lists official reserve transactions separately, include them in the financial account total before you check that the sum is zero.
Explain a change in one sentence that names the flow, such as "Japanese firms buying U.S. bonds is a financial inflow, so the U.S. financial account balance increases."

Common mistakes

Putting dividends or interest in the financial account. Buying the stock or bond is financial; the income it pays is the current account.
Calling a purchase of a foreign asset a credit because the U.S. "gains" something. Payment leaves the U.S., so it is a debit.
Treating the balance of trade and the current account as the same number. Income and transfers can make them differ.
Mixing up a trade deficit with a budget deficit. A trade deficit is about imports and exports; a budget deficit is about government spending and taxes.
Putting remittances in the financial account. No asset changes hands, so they are transfers in the current account.
Saying the balance of payments is in deficit. The two accounts always sum to zero; only the parts can be in deficit or surplus.

5. Practice questions

AP-style multiple choice. Pick an answer to see the explanation.

0 / 0 correct

6. Key terms

The vocabulary for topic 6.1. Read the list, flip through flashcards, or quiz yourself. For every term in the unit, see the Unit 6 terminology guide.