The balance of payments — current and capital accounts — Economics

Before this

Measuring national income
The circular flow

This leads to

Current account deficits
How exchange rates are determined · coming soon
Capital and financial account · coming soon

Forty years of deficits, and the books still balance

The United Kingdom has had a deficit on the current account of its balance of payments in every year since 1984 (ONS). For more than forty years it has paid more to the rest of the world for goods, services and income than it has received.

A family that did this would run out of money. So how does a country keep doing it? Stranger still: Every year, the UK's balance of payments adds up to zero. So does every other country's.

Both facts are true. Once you see why, you understand the whole balance of payments. The key is one idea: every transaction with the rest of the world is recorded twice.

What the balance of payments records

The balance of payments is a record of every economic transaction between a country's residents and the rest of the world. It covers a period such as a year.

Notice the word resident. The balance of payments does not ask about passports or nationality. It asks where a person or firm mainly lives and works. As a general rule, someone who lives in a country, or plans to, for a year or more is a resident there (IMF, sixth edition of the Balance of Payments Manual, BPM6). Students and patients abroad stay residents of their home country. A firm is a resident where it is set up and operates. So a factory in Thailand owned by a foreign company is a Thai resident.

Each transaction is a credit or a debit. A credit brings payment in, as when a country sells abroad, and has a plus sign. A debit sends payment out, as when a country buys from abroad, and has a minus sign.

The record is divided into three accounts, shown in the figure.

The three accounts of the balance of payments. The current account records earning and spending. The capital account records a few special transfers. The financial account records how assets change hands. Net errors and omissions is the gap that statisticians cannot trace.

The current account: earning and spending

The current account records what a country earns from the rest of the world and what it pays to it. It has four parts.

Trade in goods is exports of goods minus imports of goods. These are things you can touch: rice, cars, medicines, phones, oil. Some books call it "visible trade".

Trade in services is exports of services minus imports of services. Banking, insurance, shipping, tourism and education are all services. Some books call this "invisible trade". Think carefully about which way each one runs. When a student from Kenya pays fees to a university in Australia, Australia is exporting a service, even though nothing leaves Australia.

Primary income is income earned by providing labour or capital across a border. It has two main parts. Investment income is the interest, dividends and profits earned on assets owned abroad. Compensation of employees is the pay of people who work for a short time in another country while remaining residents at home, such as seasonal farm workers.

Secondary income is money sent across a border with nothing given in return. Economists call these transfers. Examples are money sent home by migrants to their families, aid paid by a government, and a government's payments to international organisations.

The current account balance is the sum of the four:

Current account = goods + services + primary income + secondary income

The national income lecture met primary income without naming it. It wrote GNI = GDP + income from abroad − income paid abroad. That difference is exactly the primary income balance. This is why Ireland, where foreign owners receive a large share of the profits, has a GNI well below its GDP.

Stop and think

Ana is from the Philippines. She works in Singapore as a nurse on an eight-month contract, then goes home. Her cousin Marco moved to Singapore for good five years ago, and sends money to his parents in Manila every month. In the Philippines' balance of payments, where does each kind of money appear?

Show the answer

Ana is abroad for less than a year, so she is still a resident of the Philippines. Her pay comes from a non-resident employer, so for the Philippines it is compensation of employees, a credit in primary income. Marco is now a resident of Singapore. His monthly money is a gift from a Singapore resident to a Philippine household, with nothing in return. So it is a personal transfer, a credit in secondary income. Both families might call the money "remittances". The balance of payments puts them in different places because the rule is residence, not nationality.

The World Bank's figure for "personal remittances" adds the two together: compensation of employees and personal transfers. By that measure, India received about $129 billion in 2024, more than any other country (World Bank estimate, December 2024). In India's own balance of payments, those dollars are split between primary and secondary income.

The capital and financial accounts: buying and selling assets

The current account records earning and spending. The other two accounts record something different: changes in who owns what.

The capital account is usually small. It records capital transfers, such as one government cancelling a debt owed by another. It also records the buying and selling of non-produced assets: things nobody made, such as land bought by a foreign embassy, or rights such as licences and brand names.

The financial account is large. It records the buying and selling of financial assets between residents and non-residents. It has five parts.

Direct investment: buying a lasting interest in a firm abroad, such as building a factory or buying a large share of a company. In the official rules, a share of 10% or more of the votes counts as direct investment.
Portfolio investment: buying shares or bonds without taking part in running the firm. A pension fund buying a small number of foreign company shares, or a foreign bank buying government bonds, is portfolio investment.
Financial derivatives: contracts whose value depends on something else, such as an exchange rate.
Other investment: mainly bank loans and deposits.
Reserve assets: the foreign currency and gold held by the central bank.

In this course, the financial account is measured as the net financial inflow. When non-residents buy a country's assets, or lend to it, money flows in, with a plus sign. When residents buy assets abroad, money flows out, with a minus sign. Official tables that follow BPM6 turn this sign round, so a country borrowing from abroad shows a negative financial account there. The economics is the same.

Why it always adds up to zero

This is the hard part of the lecture. Spend time here.

Every transaction with the rest of the world has two sides. Something is given, and something is received in return. The balance of payments records both sides, once each, with opposite signs. This is called double-entry recording.

Take an example. Country A (invented) imports $120 million of fuel. That is a debit in trade in goods: $- 120$ . But how was it paid? Suppose A's importer paid from a bank account it holds abroad. Then A now owns $120 million less in foreign assets. Selling, or running down, a foreign asset brings money in, so the financial account records $+ 120$ . The two entries add up to zero.

Every transaction works like this. So the entries for a whole year must add up to zero:

current + capital + financial + net errors and omissions = 0

That is it. That is the whole idea. The balance of payments balances because of the way it is recorded. It is an accounting identity, true by definition, not a lucky result.

The two sides of a transaction are usually reported by different people, through customs forms, bank reports and surveys. So the collected figures never add up perfectly. The difference is shown as net errors and omissions, the balancing item.

Try it below. Each button adds one transaction to Country A's accounts.

Explore — the two-sided ledger

Press a transaction to record it. You can press each one more than once. Read where its two entries go, and watch the total at the bottom. All figures are for invented Country A, in millions of dollars.

Seven transactions for invented Country A, each recorded twice, in millions of dollars.

Exports machinery worth 80; the buyer pays into the exporter's bank account abroad. Goods $+ 80$ . A now owns more foreign deposits, which is an outflow: financial $- 80$ .
Imports fuel worth 120, paid from A's bank deposits abroad. Goods $- 120$ . A runs down a foreign asset, which is an inflow: financial $+ 120$ .
Foreign tourists spend 30 in A's hotels. Services $+ 30$ . The hotels now hold foreign currency: financial $- 30$ .
A's firms pay 20 of dividends to foreign shareholders, into the shareholders' bank accounts in A. Primary income $- 20$ . Foreigners now own more of A's bank deposits: financial $+ 20$ .
Migrants living in A send 15 to their families abroad. Secondary income $- 15$ . Financial $+ 15$ .
A foreign firm builds a factory in A worth 60, with money brought from abroad. Direct investment into A: financial $+ 60$ . A's banks receive the foreign money: financial $- 60$ . The current account does not change at all.
A foreign government cancels 10 that A's government owed it. Capital $+ 10$ . A's debts to foreigners fall, which counts as an outflow: financial $- 10$ .

Account	Balance
Trade in goods	−40
Trade in services	+30
Primary income	−20
Secondary income	−15
Current account	−45
Capital account	+10
Financial account (net inflow)	+35
Total	0

What should you have seen? Every button changed two numbers, and the total stayed at 0. The factory put both its entries in the financial account, so the current account did not move. Press every button once, and A's current account deficit of 45 is covered exactly by the capital account (+10) and the financial account (+35).

Stop and think

If every transaction adds two entries that cancel, how can a country have a current account deficit at all?

Show the answer

The two entries cancel in the whole balance of payments, not inside each account. An import puts $- 120$ in the current account and $+ 120$ in the financial account. So the current account can be in deficit, as long as the other accounts are in surplus by the same amount. A current account deficit always means a net financial inflow: the country is borrowing from abroad, selling assets to foreigners, or using up its reserves.

Now sort some real-world transactions. Each card is seen from the point of view of Country A.

Sorter — which account?

Put each transaction in the account where Country A records it. Tap a card, then tap a box. Read the reason after each one.

Ten transactions, seen from Country A, and where each one is recorded.

Trade in goods: A's farmers sell rice to buyers abroad.
Trade in services: a student from A pays university fees abroad (an import); a shipping firm in A is paid to carry foreign cargo (an export).
Primary income: A's government pays interest to foreign holders of its bonds; a nurse from A on a six-month contract abroad is paid there.
Secondary income: a woman from A who has moved abroad for good sends money home; A's government pays its yearly contribution to an international organisation.
Capital account: a foreign government cancels a debt that A owed it.
Financial account: a foreign company buys 40% of a bank in A (direct investment); a pension fund in A buys a few shares in foreign companies (portfolio investment).

Working with the accounts

Worked Example 1 — Finding the current account balance (invented)

Country B's figures for one year, in billions of dollars:

Item	Credits	Debits
Goods	210	250
Services	90	60
Primary income	25	40
Secondary income	5	12

Find each balance as credits minus debits. Goods: $210 - 250 = - 40$ . Services: $90 - 60 = + 30$ . Primary income: $25 - 40 = - 15$ . Secondary income: $5 - 12 = - 7$ .

Current account: $- 40 + 30 - 15 - 7 = - 32$ billion dollars, a deficit.

Country B's GDP is $800 billion. Balances are usually compared with GDP, and here the deficit is $32 \div 800 = 4.0%$ of GDP. And GNI = GDP + net primary income $= 800 - 15 = 785$ billion dollars.

Check: total credits $330$ , total debits $362$ , and $330 - 362 = - 32$ . ✓

Worked Example 2 — How the deficit was financed (invented)

In the same year, Country B's capital account was $+ 2$ billion dollars. In its financial account, foreign banks bought 20 of B's government bonds, and foreign firms put 15 into direct investment in B. B's residents bought 9 of foreign shares. B's central bank sold 3 of its foreign currency reserves. Find the net financial inflow and the net errors and omissions.

Inflows are positive and outflows negative. Bonds $+ 20$ , direct investment $+ 15$ , shares bought abroad $- 9$ . Selling reserves means the central bank gives up a foreign asset, which brings money in: $+ 3$ .

Net financial inflow: $20 + 15 - 9 + 3 = + 29$ .

The four items must add to zero: $- 32 + 2 + 29 + errors = 0$ , so net errors and omissions are $+ 1$ billion dollars.

Check: $- 32 + 2 + 29 + 1 = 0$ . ✓ Notice what the deficit means here. B paid for spending more than it earned by selling bonds and part of its firms to foreigners, and by using reserves.

A real case: the United Kingdom in 2025

The question. What did the UK's deficit look like in 2025, and who paid for it?

The prediction. If the identity holds, the net financial inflow should be almost as large as the current account deficit. The small gap should be covered by the capital account and net errors and omissions.

What happened. The UK's current account deficit in 2025 was £91.6 billion, or 3.0% of GDP (ONS, The Pink Book, 30 October 2026). The figure shows its four parts.

The UK's current account in 2025, in billions of pounds. A large deficit on goods was mostly, but not fully, covered by a surplus on services. Primary and secondary income were both in deficit. Source: ONS, The Pink Book 2026. The secondary income figure is worked out from the published totals (published as 0.6% of GDP).

The goods deficit was £234.3 billion: the UK imported far more goods than it exported. The services surplus was £194.8 billion, much of it from financial and business services. Primary income was in deficit by £35.3 billion, because more income was paid to foreign owners of UK assets than UK owners earned abroad. Secondary income was in deficit by about £16.8 billion. Together: $- 234.3 + 194.8 - 35.3 - 16.8 = - 91.6$ .

The ONS reports a net financial inflow of £85.6 billion. Most of it came from portfolio investment, a net inflow of £83.9 billion, as foreign investors bought UK shares and bonds. Direct investment brought a net inflow of £21.2 billion. Other investment was a small net outflow of £0.9 billion.

The verdict. The prediction held. The current account deficit (£91.6 billion) and the net financial inflow (£85.6 billion) were close but not equal. The remaining £6.0 billion is covered by the capital account and net errors and omissions together. The accounts balanced, as an identity must. But the case also shows what the balancing hides. Most of the 2025 deficit was paid for by foreigners buying UK shares and bonds. Those assets will pay interest and dividends to their foreign owners in future years, which will appear as debits in primary income. Whether that matters is the question of the next lecture.

Three classic mistakes

Trap 1 — "The balance of payments balances, so there is no deficit"

The whole balance of payments always adds up to zero. The current account almost never does. A news report about a "balance of payments deficit" means a current account deficit, matched by surpluses on the other accounts.

Trap 2 — Treating foreign investment as an export

When a foreign firm builds a factory in a country, nothing is exported, and no income is earned yet. It is a sale of an asset, so it goes in the financial account. In later years, the factory's profits paid to its foreign owner will be a debit in primary income.

Trap 3 — Putting income in the services account

Interest, dividends and profits are not payments for services. They are primary income, earned by owning an asset. The pay of a short-term worker abroad is primary income too. Money sent home by a migrant who has moved for good is secondary income. The test is always what was exchanged, and who is a resident.

Try it yourself

Work each one on paper first. Open a hint only when you are stuck.

For Country C (invented), say whether each is a credit or a debit, and in which part of the current account: (a) C imports laptops. (b) Foreign tourists stay in C's hotels. (c) A firm in C receives dividends from its factory abroad. (d) C's government sends aid money to a neighbouring country after a flood.

Hint 1
Ask: does money come in to C (credit) or go out (debit)?

Hint 2
Then ask what was exchanged: a good, a service, income from an asset, or something for nothing.

Full answer
(a) Debit, trade in goods. (b) Credit, trade in services: C is selling hotel services to non-residents. (c) Credit, primary income: dividends are income from owning an asset. (d) Debit, secondary income: aid is a transfer with nothing in return.
Country D (invented) has, in billions of dollars: goods exports 150, goods imports 120, services exports 20, services imports 45, primary income received 10, paid 30, secondary income received 18, paid 3. Find each of the four balances and the current account balance.

Hint 1
Each balance is credits minus debits.

Hint 2
Goods: $150 - 120$ . Then add all four balances, keeping the signs.

Full answer
Goods $+ 30$ , services $- 25$ , primary income $- 20$ , secondary income $+ 15$ . Current account $= 30 - 25 - 20 + 15 = 0$ . D's current account balances exactly, even though none of its parts does. Check: credits $150 + 20 + 10 + 18 = 198$ , debits $120 + 45 + 30 + 3 = 198$ . ✓
Country E (invented) has a current account deficit of $50 billion and a capital account of $+ 1$ billion. Foreigners buy $35 billion of E's bonds, foreign firms invest $12 billion directly in E, and E's residents put $6 billion into foreign bank accounts. Statisticians record net errors and omissions of $+ 2$ billion. By how much did E's central bank change its reserves, and did they rise or fall?

Hint 1
The four items add to zero, so the net financial inflow must be $50 - 1 - 2$ .

Hint 2
The private flows give $35 + 12 - 6$ . The reserves item is whatever is still needed. A fall in reserves is an inflow.

Full answer
The net financial inflow must be $50 - 1 - 2 = 47$ . Private flows give $35 + 12 - 6 = 41$ . So reserves must provide $47 - 41 = + 6$ : an inflow of 6, which means the central bank sold $6 billion of its reserves. Check: $- 50 + 1 + (41 + 6) + 2 = 0$ . ✓
A student says: "In 2025 the UK paid out £91.6 billion more than it earned, so the country lost £91.6 billion of money." Use the UK figures to explain what really happened. Then explain why the deficit might matter in future years.

Hint 1
Look at the financial account. Where did the money to pay for the deficit come from?

Hint 2
Foreigners bought £83.9 billion of UK shares and bonds (net). What will they receive on those assets in later years, and in which account?

Full answer
No money disappeared. The deficit was matched by a net financial inflow of £85.6 billion, plus about £6.0 billion from the capital account and errors and omissions. In other words, the UK paid for spending more than it earned by selling assets to foreigners and borrowing from them, mostly through portfolio investment (£83.9 billion net). The country's wealth did change: foreigners now own more UK assets. Those assets will pay interest and dividends abroad in future years. These will be debits in primary income, so future current account balances will be worse, unless the money raised earns enough to pay for them. Check: $- 91.6 + 85.6 + 6.0 = 0$ . ✓

The bigger idea

Return to the family from the hook. A family that spends more than it earns does not break any law of arithmetic. It borrows, or it sells something it owns, such as a car or some savings. Its accounts still balance. A country is the same. A current account deficit is not money vanishing. It is the country paying for extra spending by selling assets or taking on debts to the rest of the world.

So the real question is not whether the accounts balance. They always do. It is what the borrowing pays for: new factories and skills that will earn income later, or today's spending, with interest still to pay. The next lecture asks why current account deficits happen and when they become a problem.

Key concepts in this lesson

The balance of payments records every economic transaction between a country's residents and the rest of the world, and residence depends on where people live and work, not on nationality.
The current account has four parts: trade in goods, trade in services, primary income (investment income and pay of short-term workers), and secondary income (transfers with nothing in return).
The capital account records capital transfers and non-produced assets, and the financial account records the buying and selling of financial assets: direct investment, portfolio investment, derivatives, other investment and reserves.
Every transaction is recorded twice with opposite signs, so the current, capital and financial accounts plus net errors and omissions always add up to zero.
A current account deficit is always matched by a net financial inflow, which means the country is borrowing from abroad, selling assets or using up reserves.