A country's balance of payments is a systematic account of all the exchanges of value between residents of that country and the rest of the world during a given time period. Two flows occur in any exchange, or transaction, according to double-entry bookkeeping:

• A credit item (+) is a flow for which the country is paid.
• A debit item (-) is a flow for which the country must pay.

1. The goods and services balance equals the net exports of both goods and services. It is often called the trade balance.
2. The current account balance equals the net credits minus debits on the flows of goods, services, income, and unilateral transfers.
3. The net private capital account balance equals net credits minus debits involving changes in nonofficial foreign financial assets and liabilities.
4. The overall balance (or official settlements balance) equals the sum of the current account balance plus the private capital account balance. If it is in surplus, it is counterbalanced by an increase in the country's official reserve holdings or a decrease in its official liabilities to other countries' monetary authorities (debit items at the bottom of the accounts). If it is in deficit, it is counterbalanced by a decrease in the country's official reserve assets or an increase in its official liabilities (credit items at the bottom of the accounts).

The current account balance (CA) has special macroeconomic meaning. Because the current account balance equals net foreign investment (If), it also equals the difference between national saving (S) and domestic capital formation (Id). A nation that is running a current account deficit, like the United States since 1982, is a nation that is saving less than its domestic capital formation. The current account deficit represents net foreign borrowing used to finance part of its relatively high level of domestic investment. The current account balance also equals the difference between domestic production of goods and services (Y) and national expenditures (E, expenditure on consumption, domestic capital formation, and government goods and services). Thus, yet another way of looking at the U.S. current account deficit is that the United States is buying more goods and services than it is producing (or spending more than its national income).

The overall balance is intended to indicate whether the overall pattern of the country's balance of payments has achieved a sustainable equilibrium. The official settlements balance does not quite match this concept, but it is still useful in macroeconomic analysis. It indicates the extent of official intervention in the foreign exchange markets—the buying and selling of currencies by the monetary authorities. As we will see in subsequent chapters, such intervention can have effects on exchange rates, money supplies, and many other macroeconomic variables.

A nation's international investment position shows its stocks of international assets and liabilities at a moment in time. These stocks are changed each year by the flows of private and official assets measured in the balance of payments. As a result of large current account deficits since the early 1980s, the United States switched from being the world's largest net creditor to being its largest net debtor.