Balance of Payments

As countries trade goods and services, financial capital flows to establish trade balances. Capital either flows out or in, which creates the country's current account balance. The record of these transactions is reflected over a period of time in what is known as the balance of payments. Read this page and focus on how flows of goods and services are closely connected to flows of capital.

Trade Balances and Flows of Financial Capital

LEARNING OBJECTIVES

By the end of this section, you will be able to:

  • Explain the connection between trade balances and financial capital flows
  • Calculate comparative advantage
  • Explain balanced trade in terms of investment and capital flows

As economists see it, trade surpluses can be either good or bad, depending on circumstances, and trade deficits can be good or bad, too. The challenge is to understand how the international flows of goods and services are connected with international flows of financial capital. In this module we will illustrate the intimate connection between trade balances and flows of financial capital in two ways: a parable of trade between Robinson Crusoe and Friday, and a circular flow diagram representing flows of trade and payments.

Source: OpenStax, https://courses.lumenlearning.com/suny-fmcc-macroeconomics/chapter/trade-balances-and-flows-of-financial-capital/
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