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).