the sum of the capital account balance and the current account balance; put another way, the net change in financial reserves of a country, whether in the form of income (current account) or foreign investments (capital account)
For example, in all years since 1980, the
USA has run a large-to-huge current account deficit, but in most years it has run a capital account surplus that is almost as big as the current account deficit. As a result, the
USA has run a medium-to-large balance of payments deficit over this
period.
A commonly-overlooked byproduct of
BoP is that it determines whether or not a currency can be used as an international reserve currency. Despite repeated efforts by the governments of the EU and
Japan to get their currencies established as such, they have failed to dent the US dollar's global primacy as the
money for international transactions. This is because EU member states and
Japan (as well as other major economies) run very large surpluses in their
BoP.
Japan, in particular, imports extremely little, and retains huge reserves rather than invest all of its net export earnings overseas. As a consequence, overseas holdings of euros or
yen are much to small to serve as an alternative to the US dollar.
Since the
oil embargo of the 1970's, the US has run a balance of payments deficit because its trade deficit was enormous; prior to the embargo, the US
BoP deficit was
large because the US exported such an enormous amount of finance capital. As a consequence, the balance of payments deficit has persisted since the end of the Korean War (1953).
