{"id":596,"date":"2015-04-22T19:31:48","date_gmt":"2015-04-22T19:31:48","guid":{"rendered":"https:\/\/courses.candelalearning.com\/masterybusiness1xngcxmaster\/?post_type=chapter&#038;p=596"},"modified":"2024-05-02T19:37:58","modified_gmt":"2024-05-02T19:37:58","slug":"balance-of-trade-and-balance-of-payments","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-introductiontobusiness\/chapter\/balance-of-trade-and-balance-of-payments\/","title":{"raw":"Balance of Trade and Balance of Payments","rendered":"Balance of Trade and Balance of Payments"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Differentiate between balance of trade and balance of payments<\/li>\r\n \t<li>Differentiate between trade deficits and trade surpluses<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"alignright wp-image-10713\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/143\/2017\/03\/13222256\/101005443_88257f93cd_o-1.jpg\" alt=\"decorative image\" width=\"350\" height=\"279\" \/>Nations and businesses that trade back and forth, buy and sell companies, loan\u00a0one\u00a0another money, and invest in real estate around the globe need to have a way to evaluate the impact of these transactions on the economy. They need to make decisions about trade policies, regulations, and trade agreements, and until they can get a snapshot of what global trade is doing to hurt or help its economy, they can't make these decisions.\r\n\r\nIt's a lot\u00a0like your own finances, just on a much larger scale. At the end of the month, have you spent more than you earned? Do you have a large positive balance in your bank account as a result of receiving a financial aid check? Did you need to borrow money from your parents to buy books or clothes? Until you really examine where your money is coming from and balance your checkbook, it's hard to make\u00a0long-term financial plans\u2014like, say, deciding whether or not to buy a new car or purchase a home.\r\n\r\nThis is very similar to what countries do when they\u00a0measure the impact of trade on their economy. In this section, we'll look at two key measurements of trade: balance of trade and balance of payments.\r\n<h2>Balance of Trade<\/h2>\r\nOne of the ways that a country\u00a0measures global trade is by calculating its balance of trade.\r\n\r\n<strong>Balance of trade <\/strong>is the difference between the value of a country\u2019s imports and its exports, as follows:\r\n<p style=\"text-align: center;\"><strong>value of exports \u2013 value of imports = balance of trade<\/strong><\/p>\r\n\r\n<div class=\"textbox shaded\">NOTE: It's important to use this formula just as it's presented, without altering the sequence of values.<\/div>\r\nThe calculation of the balance of trade yields\u00a0one of two outcomes: a trade deficit or a trade surplus. A <strong>trade deficit\u00a0<\/strong>occurs when a nation imports\u00a0more than it exports. Since 1976, the United States has consistently run trade deficits due to\u00a0high imports of oil and consumer products. In recent years, the biggest trade deficits were recorded with China, Japan, Germany, and Mexico. This shouldn't come as a surprise to you if you emptied your backpack and counted up all the items <em>not<\/em> made in the United States. In contrast, a <strong>trade surplus<\/strong>\u00a0occurs when a nation exports more than it imports. Although the United States has run an overall trade deficit since 1976, it doesn't mean that we import more from <em>every<\/em> country than we export. On the contrary, the\u00a0United States records trade surpluses with Hong Kong, the Netherlands, the United Arab Emirates, and Australia.\r\n\r\nBecause the balance of trade is calculated using\u00a0<strong>all<\/strong> imports and exports, it's possible for the United States to run a surplus with some nations and a deficit with others. As with your checkbook, the balance reflects the difference\u00a0between <em>total<\/em> exports (sales, which result in a deposit in your account or \"deposits\") and\u00a0<em>total<\/em> imports (purchases, which result in a withdrawal from your account or \"withdrawals\"). When a nation exports, other nations pay it for goods or services, so it gets to take their money and make a deposit. When a nation imports, it pays other nations for their goods and services, and they would need to make a withdrawal to pay for them.\r\n<div class=\"textbox examples\">\r\n<h3>Imagine Nation's Balance of Trade<\/h3>\r\nLet\u2019s look at the balance of trade for \"Imagine Nation.\"\r\n\r\nImagine Nation is located in a region that lacks phosphate as\u00a0a natural resource. However, it\u00a0does have an abundance of sugarcane. As a result of its comparative advantages, Imagine Nation imports phosphate from Christmas Island (it's a real place in Australia\u2014look it up!) to fertilize the sugarcane it grows, and it uses the sugarcane to manufacture saltwater taffy, which it exports to Christmas Island.\r\n\r\nThe following table shows Imagine Nation's\u00a0imports and exports with Christmas Island in 2017.\r\n<div align=\"center\">\r\n<table style=\"width: 372px;\"><caption>Imagine Nation 2017 Import and Exports with Christmas Island<\/caption>\r\n<thead>\r\n<tr>\r\n<th style=\"width: 54px;\" scope=\"col\"><strong>Year<\/strong><\/th>\r\n<th style=\"width: 187px;\" scope=\"col\"><strong>Imports (phosphate)<\/strong><\/th>\r\n<th style=\"width: 131px;\" scope=\"col\"><strong>Exports (taffy)<\/strong><\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td style=\"width: 54px;\"><strong>2017<\/strong><\/td>\r\n<td style=\"width: 187px;\">$45,000,000<\/td>\r\n<td style=\"width: 131px;\">$75,000,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nUsing these figures, we can easily calculate Imagine Nation's balance of trade in 2017:\r\n<p style=\"text-align: center;\"><strong>$75,000,000 (exports) \u2212 $45,000,000 (imports) = $30,000,000<\/strong><\/p>\r\nThis means that Imagine Nation had\u00a0a trade surplus of $30,000,00\u00a0with Christmas Island, since exports exceeded imports. We can also say that Imagine Nation was a \"net exporter,\" meaning it exported more than it imported.\r\n\r\nHowever, the picture\u00a0changed in\u00a02018, when the Australian government closed the phosphate mine on Christmas Island. Imagine Nation had to import\u00a0phosphate from Morocco, instead, and was not able to get the same favorable pricing as before. Consequently, sugarcane farmers paid more for fertilizer, the price of sugarcane went up, and Imagine Nation had to raise the price on its saltwater taffy. Sadly,\u00a0the people of Morocco aren't\u00a0really big fans of saltwater taffy, so exports fell. The following table shows Imagine Nation's imports and exports with\u00a0Morocco in 2018.\r\n<div align=\"center\">\r\n<table style=\"width: 372px;\"><caption>Imagine Nation 2018 Imports and Exports with Morocco<\/caption>\r\n<thead>\r\n<tr>\r\n<th style=\"width: 53px;\" scope=\"col\"><strong>Year<\/strong><\/th>\r\n<th style=\"width: 192px;\" scope=\"col\"><strong>Imports (phosphates)<\/strong><\/th>\r\n<th style=\"width: 127px;\" scope=\"col\"><strong>Exports (taffy)<\/strong><\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td style=\"width: 53px;\"><strong>2018<\/strong><\/td>\r\n<td style=\"width: 192px;\">$65,000,000<\/td>\r\n<td style=\"width: 127px;\">$55,000,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nWe can use the figures to calculate Imagine Nation's\u00a0balance of trade:\r\n<p style=\"text-align: center;\"><strong>$55,000,000 (exports) \u2212<\/strong><strong>\u00a0$65,000,000 (imports) = \u2212$10,000,000<\/strong><\/p>\r\nThe negative number indicates a\u00a0trade deficit of $10,000,000, showing that Imagine Nation imported more from Morocco than it exported. We would say that Imagine Nation became a\u00a0\"net importer\"\u2014importing more than it was exporting.\r\n\r\nObviously, this is a simple example. A country's global business doesn't amount to just trading phosphate and taffy or cell phones and blue jeans. It includes all kinds of financial transactions: goods and services imported and exported, foreign investments, loans, transfers, and so on. Tracking all these payments provides another way to measure the size of a country's international trade: the balance of payments.\r\n\r\n<\/div>\r\n\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/f146760d-8659-411e-9d3e-7ce07b917cc1\r\n\r\n<\/div>\r\n\r\n<h2>Balance of Payments<\/h2>\r\n<strong>Balance of Payments<\/strong> is the difference between the total flow of money coming into a country and the total flow of money going out of a country during\u00a0a period of time.\u00a0Although\u00a0related to the balance of trade, balance of payments is the record of <strong>all<\/strong>\u00a0economic\u00a0transactions between individuals, firms, and the government and the rest of the world in a particular period. Thus the balance of payments includes <strong>all<\/strong> external transactions of a country, including\u00a0payments for the country's exports and imports\u00a0of\u00a0goods,\u00a0services,\u00a0foreign investments, loans and foreign aid, financial capital, and\u00a0financial transfers.\r\n\r\nFor instance, if a U.S. company buys land or a factory in another country, that investment is included in the U.S. balance of payments as an <em>outflow<\/em>. Likewise, if a U.S. company is sold to a foreign company, it's included in the balance of payments. Just recently,\u00a0Didi Chuxing, the Chinese ride-hailing service, bought Uber\u2019s subsidiary in China\u00a0in a deal valued at $35 billion. This sale will create a <em>cash inflow\u00a0<\/em>to the United States, but over the long term, it will decrease the revenue flowing in from China through Uber.\r\n\r\nIf a nation receives foreign aid or borrows money from another country, this amount is also reflected in its balance of payments as a <em>cash inflow<\/em>.\u00a0For example, the bailout\u00a0Greece received from the Eurozone and IMF in 2010 to help stabilize its failing economy affected the balance of payments for all of the nations involved. Greece recorded the \u20ac110 billion loan as an <em>inflow<\/em> in its balance of payments, while the Eurozone members recorded it as an <em>outflow<\/em> in their balance of payments.\r\n\r\nA country's balance of payments is calculated as follows:\r\n<p style=\"text-align: center;\"><strong>\u00a0t<\/strong><strong>otal money coming into a country (inflow) \u2212 total money going out (outflow) = balance of payments<\/strong><\/p>\r\n\r\n<div class=\"textbox shaded\">NOTE: It's important to use this formula just as it's presented, without altering the sequence of values.<\/div>\r\n<div class=\"textbox examples\">\r\n<h3>Imagine Nation's\u00a0Balance of Payments<\/h3>\r\nLet's examine Imagine Nation's balance of payments in\u00a02018. The following table shows all of its external transactions during the year.\r\n<div align=\"center\">\r\n<table><caption>Imagine Nation 2018 External Transactions<\/caption>\r\n<thead>\r\n<tr>\r\n<th scope=\"col\"><strong>Year<\/strong><\/th>\r\n<th scope=\"col\"><strong>Imports (phosphates)<\/strong><\/th>\r\n<th scope=\"col\"><strong>Exports (taffy)<\/strong><\/th>\r\n<th scope=\"col\"><strong>Foreign aid (loan) from Hooperland<\/strong><\/th>\r\n<th scope=\"col\"><strong>Purchase of Wandaland assets<\/strong><\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td style=\"text-align: center;\"><strong>2018<\/strong><\/td>\r\n<td style=\"text-align: center;\">$65,000,000<\/td>\r\n<td style=\"text-align: center;\">$55,000,000<\/td>\r\n<td style=\"text-align: center;\">$25,000,000<\/td>\r\n<td style=\"text-align: center;\">$30,000,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nWhen we calculated Imagine Nation\u2019s balance of trade in 2018, we <em>did not<\/em> take into account the following two transactions:\r\n<ol>\r\n \t<li>Imagine Nation received foreign aid in the form of a loan from the government of Hooperland in the amount of $25,000,000. This <em>inflow<\/em> of funds will affect Imagine Nation\u2019s balance of payments.<\/li>\r\n \t<li>Imagine Nation invested in a factory in Wandaland and purchased the factory from the government for $30,000,000. This <em>outflow<\/em> of funds will affect Imagine Nation\u2019s balance of payments.<\/li>\r\n<\/ol>\r\nWhen we calculate Imagine Nation\u2019s 2018 balance of payments, by taking the inflows (revenue from exports and foreign aid) and subtracting\u00a0the outflows (payments for imports and purchase of foreign assets), the balance is negative, as shown below:\r\n<p style=\"text-align: center;\">($55,000,000 + $25,000,000) (total inflow) \u2013 ($65,000,000 + $30,000,000) (total outflow) = \u2212$15,000,000<\/p>\r\nWhat effect will this have on Imagine Nation? Well, when Imagine Nation's\u00a0leader is briefed by her council of international economic advisers, they will inform her that the country currently has an \"unfavorable balance of payments.\" That is, less\u00a0money is coming into the country than is going out. If, on the other hand, the balance of payments were a positive number (inflow exceeded outflow), then Imagine Nation could say that it has a \"favorable balance of payments.\"\r\n\r\n<\/div>\r\nAt this point, it's tempting to make judgments about these different types of trade measurements and conclude\u00a0that trade surpluses and favorable balance of payments are always indicators of a strong economy, but unfortunately it's not so cut\u00a0and dry. Balance of trade and balance of payments are starting points\u2014much in the way that an individual's credit rating might be a starting point for seeking a loan. How the numbers\u00a0are interpreted and viewed by the country's leaders, other countries, and the world depends on many factors, such as where\u00a0a country is in its economic development, the factors contributing to the balance of trade or payments, the health\u00a0of the overall global economy, what the country is doing with its imports, and so on. As you might guess, assessments of these factors can be intensely political. You'll learn more about these considerations later in this module when we discuss how nations attempt to\u00a0restrict or control trade.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/5f513543-c169-46c8-8bf5-c5660a3fa8fa\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Differentiate between balance of trade and balance of payments<\/li>\n<li>Differentiate between trade deficits and trade surpluses<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-10713\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/143\/2017\/03\/13222256\/101005443_88257f93cd_o-1.jpg\" alt=\"decorative image\" width=\"350\" height=\"279\" \/>Nations and businesses that trade back and forth, buy and sell companies, loan\u00a0one\u00a0another money, and invest in real estate around the globe need to have a way to evaluate the impact of these transactions on the economy. They need to make decisions about trade policies, regulations, and trade agreements, and until they can get a snapshot of what global trade is doing to hurt or help its economy, they can&#8217;t make these decisions.<\/p>\n<p>It&#8217;s a lot\u00a0like your own finances, just on a much larger scale. At the end of the month, have you spent more than you earned? Do you have a large positive balance in your bank account as a result of receiving a financial aid check? Did you need to borrow money from your parents to buy books or clothes? Until you really examine where your money is coming from and balance your checkbook, it&#8217;s hard to make\u00a0long-term financial plans\u2014like, say, deciding whether or not to buy a new car or purchase a home.<\/p>\n<p>This is very similar to what countries do when they\u00a0measure the impact of trade on their economy. In this section, we&#8217;ll look at two key measurements of trade: balance of trade and balance of payments.<\/p>\n<h2>Balance of Trade<\/h2>\n<p>One of the ways that a country\u00a0measures global trade is by calculating its balance of trade.<\/p>\n<p><strong>Balance of trade <\/strong>is the difference between the value of a country\u2019s imports and its exports, as follows:<\/p>\n<p style=\"text-align: center;\"><strong>value of exports \u2013 value of imports = balance of trade<\/strong><\/p>\n<div class=\"textbox shaded\">NOTE: It&#8217;s important to use this formula just as it&#8217;s presented, without altering the sequence of values.<\/div>\n<p>The calculation of the balance of trade yields\u00a0one of two outcomes: a trade deficit or a trade surplus. A <strong>trade deficit\u00a0<\/strong>occurs when a nation imports\u00a0more than it exports. Since 1976, the United States has consistently run trade deficits due to\u00a0high imports of oil and consumer products. In recent years, the biggest trade deficits were recorded with China, Japan, Germany, and Mexico. This shouldn&#8217;t come as a surprise to you if you emptied your backpack and counted up all the items <em>not<\/em> made in the United States. In contrast, a <strong>trade surplus<\/strong>\u00a0occurs when a nation exports more than it imports. Although the United States has run an overall trade deficit since 1976, it doesn&#8217;t mean that we import more from <em>every<\/em> country than we export. On the contrary, the\u00a0United States records trade surpluses with Hong Kong, the Netherlands, the United Arab Emirates, and Australia.<\/p>\n<p>Because the balance of trade is calculated using\u00a0<strong>all<\/strong> imports and exports, it&#8217;s possible for the United States to run a surplus with some nations and a deficit with others. As with your checkbook, the balance reflects the difference\u00a0between <em>total<\/em> exports (sales, which result in a deposit in your account or &#8220;deposits&#8221;) and\u00a0<em>total<\/em> imports (purchases, which result in a withdrawal from your account or &#8220;withdrawals&#8221;). When a nation exports, other nations pay it for goods or services, so it gets to take their money and make a deposit. When a nation imports, it pays other nations for their goods and services, and they would need to make a withdrawal to pay for them.<\/p>\n<div class=\"textbox examples\">\n<h3>Imagine Nation&#8217;s Balance of Trade<\/h3>\n<p>Let\u2019s look at the balance of trade for &#8220;Imagine Nation.&#8221;<\/p>\n<p>Imagine Nation is located in a region that lacks phosphate as\u00a0a natural resource. However, it\u00a0does have an abundance of sugarcane. As a result of its comparative advantages, Imagine Nation imports phosphate from Christmas Island (it&#8217;s a real place in Australia\u2014look it up!) to fertilize the sugarcane it grows, and it uses the sugarcane to manufacture saltwater taffy, which it exports to Christmas Island.<\/p>\n<p>The following table shows Imagine Nation&#8217;s\u00a0imports and exports with Christmas Island in 2017.<\/p>\n<div style=\"margin: auto;\">\n<table style=\"width: 372px;\">\n<caption>Imagine Nation 2017 Import and Exports with Christmas Island<\/caption>\n<thead>\n<tr>\n<th style=\"width: 54px;\" scope=\"col\"><strong>Year<\/strong><\/th>\n<th style=\"width: 187px;\" scope=\"col\"><strong>Imports (phosphate)<\/strong><\/th>\n<th style=\"width: 131px;\" scope=\"col\"><strong>Exports (taffy)<\/strong><\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td style=\"width: 54px;\"><strong>2017<\/strong><\/td>\n<td style=\"width: 187px;\">$45,000,000<\/td>\n<td style=\"width: 131px;\">$75,000,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>Using these figures, we can easily calculate Imagine Nation&#8217;s balance of trade in 2017:<\/p>\n<p style=\"text-align: center;\"><strong>$75,000,000 (exports) \u2212 $45,000,000 (imports) = $30,000,000<\/strong><\/p>\n<p>This means that Imagine Nation had\u00a0a trade surplus of $30,000,00\u00a0with Christmas Island, since exports exceeded imports. We can also say that Imagine Nation was a &#8220;net exporter,&#8221; meaning it exported more than it imported.<\/p>\n<p>However, the picture\u00a0changed in\u00a02018, when the Australian government closed the phosphate mine on Christmas Island. Imagine Nation had to import\u00a0phosphate from Morocco, instead, and was not able to get the same favorable pricing as before. Consequently, sugarcane farmers paid more for fertilizer, the price of sugarcane went up, and Imagine Nation had to raise the price on its saltwater taffy. Sadly,\u00a0the people of Morocco aren&#8217;t\u00a0really big fans of saltwater taffy, so exports fell. The following table shows Imagine Nation&#8217;s imports and exports with\u00a0Morocco in 2018.<\/p>\n<div style=\"margin: auto;\">\n<table style=\"width: 372px;\">\n<caption>Imagine Nation 2018 Imports and Exports with Morocco<\/caption>\n<thead>\n<tr>\n<th style=\"width: 53px;\" scope=\"col\"><strong>Year<\/strong><\/th>\n<th style=\"width: 192px;\" scope=\"col\"><strong>Imports (phosphates)<\/strong><\/th>\n<th style=\"width: 127px;\" scope=\"col\"><strong>Exports (taffy)<\/strong><\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td style=\"width: 53px;\"><strong>2018<\/strong><\/td>\n<td style=\"width: 192px;\">$65,000,000<\/td>\n<td style=\"width: 127px;\">$55,000,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>We can use the figures to calculate Imagine Nation&#8217;s\u00a0balance of trade:<\/p>\n<p style=\"text-align: center;\"><strong>$55,000,000 (exports) \u2212<\/strong><strong>\u00a0$65,000,000 (imports) = \u2212$10,000,000<\/strong><\/p>\n<p>The negative number indicates a\u00a0trade deficit of $10,000,000, showing that Imagine Nation imported more from Morocco than it exported. We would say that Imagine Nation became a\u00a0&#8220;net importer&#8221;\u2014importing more than it was exporting.<\/p>\n<p>Obviously, this is a simple example. A country&#8217;s global business doesn&#8217;t amount to just trading phosphate and taffy or cell phones and blue jeans. It includes all kinds of financial transactions: goods and services imported and exported, foreign investments, loans, transfers, and so on. Tracking all these payments provides another way to measure the size of a country&#8217;s international trade: the balance of payments.<\/p>\n<\/div>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p>\t<iframe id=\"assessment_practice_f146760d-8659-411e-9d3e-7ce07b917cc1\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/f146760d-8659-411e-9d3e-7ce07b917cc1?iframe_resize_id=assessment_practice_id_f146760d-8659-411e-9d3e-7ce07b917cc1\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<h2>Balance of Payments<\/h2>\n<p><strong>Balance of Payments<\/strong> is the difference between the total flow of money coming into a country and the total flow of money going out of a country during\u00a0a period of time.\u00a0Although\u00a0related to the balance of trade, balance of payments is the record of <strong>all<\/strong>\u00a0economic\u00a0transactions between individuals, firms, and the government and the rest of the world in a particular period. Thus the balance of payments includes <strong>all<\/strong> external transactions of a country, including\u00a0payments for the country&#8217;s exports and imports\u00a0of\u00a0goods,\u00a0services,\u00a0foreign investments, loans and foreign aid, financial capital, and\u00a0financial transfers.<\/p>\n<p>For instance, if a U.S. company buys land or a factory in another country, that investment is included in the U.S. balance of payments as an <em>outflow<\/em>. Likewise, if a U.S. company is sold to a foreign company, it&#8217;s included in the balance of payments. Just recently,\u00a0Didi Chuxing, the Chinese ride-hailing service, bought Uber\u2019s subsidiary in China\u00a0in a deal valued at $35 billion. This sale will create a <em>cash inflow\u00a0<\/em>to the United States, but over the long term, it will decrease the revenue flowing in from China through Uber.<\/p>\n<p>If a nation receives foreign aid or borrows money from another country, this amount is also reflected in its balance of payments as a <em>cash inflow<\/em>.\u00a0For example, the bailout\u00a0Greece received from the Eurozone and IMF in 2010 to help stabilize its failing economy affected the balance of payments for all of the nations involved. Greece recorded the \u20ac110 billion loan as an <em>inflow<\/em> in its balance of payments, while the Eurozone members recorded it as an <em>outflow<\/em> in their balance of payments.<\/p>\n<p>A country&#8217;s balance of payments is calculated as follows:<\/p>\n<p style=\"text-align: center;\"><strong>\u00a0t<\/strong><strong>otal money coming into a country (inflow) \u2212 total money going out (outflow) = balance of payments<\/strong><\/p>\n<div class=\"textbox shaded\">NOTE: It&#8217;s important to use this formula just as it&#8217;s presented, without altering the sequence of values.<\/div>\n<div class=\"textbox examples\">\n<h3>Imagine Nation&#8217;s\u00a0Balance of Payments<\/h3>\n<p>Let&#8217;s examine Imagine Nation&#8217;s balance of payments in\u00a02018. The following table shows all of its external transactions during the year.<\/p>\n<div style=\"margin: auto;\">\n<table>\n<caption>Imagine Nation 2018 External Transactions<\/caption>\n<thead>\n<tr>\n<th scope=\"col\"><strong>Year<\/strong><\/th>\n<th scope=\"col\"><strong>Imports (phosphates)<\/strong><\/th>\n<th scope=\"col\"><strong>Exports (taffy)<\/strong><\/th>\n<th scope=\"col\"><strong>Foreign aid (loan) from Hooperland<\/strong><\/th>\n<th scope=\"col\"><strong>Purchase of Wandaland assets<\/strong><\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td style=\"text-align: center;\"><strong>2018<\/strong><\/td>\n<td style=\"text-align: center;\">$65,000,000<\/td>\n<td style=\"text-align: center;\">$55,000,000<\/td>\n<td style=\"text-align: center;\">$25,000,000<\/td>\n<td style=\"text-align: center;\">$30,000,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>When we calculated Imagine Nation\u2019s balance of trade in 2018, we <em>did not<\/em> take into account the following two transactions:<\/p>\n<ol>\n<li>Imagine Nation received foreign aid in the form of a loan from the government of Hooperland in the amount of $25,000,000. This <em>inflow<\/em> of funds will affect Imagine Nation\u2019s balance of payments.<\/li>\n<li>Imagine Nation invested in a factory in Wandaland and purchased the factory from the government for $30,000,000. This <em>outflow<\/em> of funds will affect Imagine Nation\u2019s balance of payments.<\/li>\n<\/ol>\n<p>When we calculate Imagine Nation\u2019s 2018 balance of payments, by taking the inflows (revenue from exports and foreign aid) and subtracting\u00a0the outflows (payments for imports and purchase of foreign assets), the balance is negative, as shown below:<\/p>\n<p style=\"text-align: center;\">($55,000,000 + $25,000,000) (total inflow) \u2013 ($65,000,000 + $30,000,000) (total outflow) = \u2212$15,000,000<\/p>\n<p>What effect will this have on Imagine Nation? Well, when Imagine Nation&#8217;s\u00a0leader is briefed by her council of international economic advisers, they will inform her that the country currently has an &#8220;unfavorable balance of payments.&#8221; That is, less\u00a0money is coming into the country than is going out. If, on the other hand, the balance of payments were a positive number (inflow exceeded outflow), then Imagine Nation could say that it has a &#8220;favorable balance of payments.&#8221;<\/p>\n<\/div>\n<p>At this point, it&#8217;s tempting to make judgments about these different types of trade measurements and conclude\u00a0that trade surpluses and favorable balance of payments are always indicators of a strong economy, but unfortunately it&#8217;s not so cut\u00a0and dry. Balance of trade and balance of payments are starting points\u2014much in the way that an individual&#8217;s credit rating might be a starting point for seeking a loan. How the numbers\u00a0are interpreted and viewed by the country&#8217;s leaders, other countries, and the world depends on many factors, such as where\u00a0a country is in its economic development, the factors contributing to the balance of trade or payments, the health\u00a0of the overall global economy, what the country is doing with its imports, and so on. As you might guess, assessments of these factors can be intensely political. You&#8217;ll learn more about these considerations later in this module when we discuss how nations attempt to\u00a0restrict or control trade.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p>\t<iframe id=\"assessment_practice_5f513543-c169-46c8-8bf5-c5660a3fa8fa\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/5f513543-c169-46c8-8bf5-c5660a3fa8fa?iframe_resize_id=assessment_practice_id_5f513543-c169-46c8-8bf5-c5660a3fa8fa\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-596\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Balance of Trade and Balance of Payments. <strong>Authored by<\/strong>: Linda Williams. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><li>Practice Questions. <strong>Authored by<\/strong>: Nina Burokas. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Balance. <strong>Authored by<\/strong>: Alexander Muse. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.flickr.com\/photos\/alexmuse\/101005443\/\">https:\/\/www.flickr.com\/photos\/alexmuse\/101005443\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc-nd\/4.0\/\">CC BY-NC-ND: Attribution-NonCommercial-NoDerivatives <\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":78,"menu_order":7,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Balance of Trade and Balance of Payments\",\"author\":\"Linda Williams\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Balance\",\"author\":\"Alexander Muse\",\"organization\":\"\",\"url\":\"https:\/\/www.flickr.com\/photos\/alexmuse\/101005443\/\",\"project\":\"\",\"license\":\"cc-by-nc-nd\",\"license_terms\":\"\"},{\"type\":\"original\",\"description\":\"Practice Questions\",\"author\":\"Nina Burokas\",\"organization\":\"Lumen 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