- The balance of payments records every transaction between a country and the rest of the world, split across the current, capital, and financial accounts.
- Watch a country's balance of payments along with your own customer data, and you can flag risk early. Letters of credit, standby letters of credit, and export trade credit insurance all help you manage it once you do.
- A deepening deficit weakens a currency and tightens credit conditions, and often before a customer in that market starts missing payments.
- The balance of trade only covers goods and services, while the balance of payments adds investment, income, and transfers on top, of a country's actual position.
A country's balance of payments (BoP) can tell you a customer's about to become a problem, weeks before their first missed invoice. A growing deficit weakens a currency, squeezes local demand, and puts pressure on every business trading there, including the one that owes you money.
In this guide, we'll explain what the balance of payments actually measures, its three main accounts, and how a deficit, surplus, or crisis affects a business extending credit abroad.
If you read the warning signs early, a shaky market will stop being a surprise.
Summary
Key Takeaways
What is the definition of balance of payments?
The balance of payments, by definition, is a record of every transaction between a country and the rest of the world over a set period, usually a quarter or a year. It covers goods, services, investments, and income moving in both directions.
Countries follow a shared standard, the IMF's Balance of Payments Manual, so figures stay comparable across borders. In the UK, the Office for National Statistics publishes this data every quarter.
Balance of payments: the 3 components
The balance of payments splits into three parts, and each tracks a different kind of activity.
1. Current account
Trade in goods and services, plus income like dividends and wages earned abroad. This is the part most people mean when they talk about a trade deficit or surplus.
2. Capital account
A smaller category covering one-off transfers, such as debt forgiveness, and the sale of things like patents or land.
3.Financial account
Investment flowing across borders, including direct investment in businesses, purchases of shares and bonds, and reserves held by the Bank of England on behalf of the UK government.
These three accounts should all balance to zero, as every payment leaving one column shows up as a matching entry somewhere else.
Primary and secondary income
There are also two further categories inside the current account that you should know about. Neither reflects a sale or a purchase, but both still shape a country's overall position.
- Primary income covers earnings that cross borders without a physical trade behind them, such as a UK company's dividend from an overseas subsidiary, or interest on a foreign bond.
- Secondary income captures one-way payments with nothing sent in return, like remittances from workers abroad or foreign aid between governments.
Balance of payments formula
The current account balance comes from one simple sum:
(Exports − Imports) + Net primary income + Net secondary income = Current account balance
For example, a country exports £250 million of goods and services, imports £220 million, earns £12 million in dividends and interest from abroad, and sends £4 million in aid overseas. That gives you:
(£250m − £220m) + £12m − £4m = £38 million surplus
Swap the numbers around (imports higher than exports, more aid going out than income coming in) and the same formula can just as easily land in deficit.
Deficit, surplus, and crisis
- A current account deficit means more money leaves a country than comes in. If left unchecked, this can weaken the currency, as demand for it falls relative to what's flowing out. A weaker currency raises import costs and can leave banks tightening credit just as your customer needs it most.
- A surplus points the other way, e.g. strong exports, steady inflows, a currency with firm demand behind it. That sounds like good news for anyone trading there, but a persistent surplus can also invite trade disputes or stricter export rules from frustrated trading partners.
- A crisis is the extreme version of a deficit, when a country can no longer cover its imports or meet its debts. Currencies collapse quickly, foreign reserves run dry, and banks cut off credit almost overnight. For a business with customers there, this is the scenario you should be on alert for well before it arrives.
Meaning of balance of trade vs. balance of payments
These two get mixed up all the time, but they're not the same measure. The balance of trade (BoT) only covers goods and services, such as what a country sells abroad minus what it buys in.
The balance of payments is the more complete view, adding investment flows, income, and transfers on top of that trade figure.
A country can run a healthy trade surplus while still slipping into an overall balance of payments deficit, if enough money leaves through investment or income elsewhere. But you’d miss it entirely if you just looked at the trade figures.
What is the balance of trade formula?
The balance of trade is calculated by subtracting the value of a country's imports from the value of its exports:
Balance of Trade = Exports − Imports
A positive result indicates a trade surplus, where exports exceed imports, while a negative result indicates a trade deficit, where imports exceed exports. The balance of trade forms an important part of a country's current account within the balance of payments.
How to manage risk when trading internationally
If you spot a shift in a country's balance of payments, you need to act on it. A few practical options exist, depending on how exposed you are:
- A standby letter of credit gives you a bank-backed guarantee that steps in only if a buyer defaults. This is useful when a single high-value contract carries most of the risk. Read our guide to standby letters of credit for how they work.
- A letter of credit works more directly at the point of payment, with a bank paying you once agreed conditions are met, rather than waiting for a default. See how a letter of credit compares with other options.
- For risk spread across your whole customer base rather than one contract, trade credit insurance covers non-payment more broadly, and export trade credit insurance is built specifically for businesses extending credit to buyers overseas.
Where to find current UK data
Everything above holds true regardless of what's happening right now. For the UK's actual position, the Office for National Statistics makes new figures public every quarter, and our UK country risk outlook explains what those numbers mean for businesses trading today.
Balance of payments data won't chase your invoices for you
A country's balance of payments won't tell you the exact day a customer stops paying, but it gives you a head start that most businesses never look for. If you keep an eye on the bigger picture, and not just your own customer's books, it can mean fewer nasty surprises when a market turns.
Export trade credit insurance protects you when that risk turns into a missed payment, wherever in the world your customer trades from. Contact us to find out how it works for businesses selling internationally.
FAQs about balance of payments
The balance of payments (BoP) is a record of all economic transactions between a country and the rest of the world over a specific period, including international trade, foreign investment, and cross-border transfers. For businesses, it provides insight into a country's economic health, helping identify potential risks and opportunities by highlighting shifts in trade activity, investment flows, and wider market conditions that could affect customers, suppliers, and payment behaviour.
The balance of payments records everything a country buys and sells with the rest of the world. If a country exports more than it imports and earns more from overseas investments than it sends out in aid or transfers, the current account lands in surplus.
See our example above for the exact calculation.
The balance of payments is made up of three main accounts: the current account, which records trade in goods and services, as well as income and transfers; the capital account, which covers one-off transfers and transactions involving non-financial assets such as patents; and the financial account, which tracks investment flows between countries, including foreign direct investment and the buying and selling of financial assets. Together, these accounts provide a complete picture of a country's economic transactions with the rest of the world, with each transaction recorded so that the overall balance of payments balances.
Balance of trade is narrower; just what a country sells and buys abroad.
Balance of payments takes in everything else too: money moving through investment, income, and transfers, not only physical goods and services.
Start with exports minus imports, then add net income and transfers from abroad. See the formula above for the full calculation. The capital and financial accounts sit together with this and should balance the total to zero.
Every international transaction gets recorded twice: once as money coming in, once as money going out. Sell goods abroad, and you record the sale as a credit and the payment you receive as a debit. Add every transaction together this way, and the totals cancel out to zero by design.
It’s not often that published figures land exactly on zero, as timing differences and gaps in data collection are unavoidable. Statisticians label the shortfall ‘net errors and omissions’ instead of leaving it unexplained.
This happens when a country's imbalance becomes too large to sustain without action. It could be a government stepping in with a new trade policy, a central bank changing interest rates, or, in severe cases, help from the International Monetary Fund.
It usually points to something structural, like falling competitiveness or unsustainable borrowing.
The UK's balance of payments changes over time as trade, investment and financial flows fluctuate. In recent years, the UK has typically recorded a current account deficit, meaning it imports more goods, services and income than it exports. For the latest figures, visit the Office for National Statistics (ONS) balance of payments data. The ONS publishes balance of payments figures for the UK every quarter.
The UK's balance of payments with the EU reflects all economic transactions between the UK and EU member states, including trade in goods and services, investment income, and financial flows. The position changes over time as trade and investment patterns evolve, so there is no single fixed balance. For the latest UK-EU balance of payments statistics, refer to data published by the Office for National Statistics (ONS).
A current account deficit happens when a country pays out more than it receives through trade, income, and transfers. Persistent deficits tend to weaken the currency and can lead to tighter credit conditions for businesses trading there.
A crisis happens when a country can no longer afford its imports or meet its foreign debts. It's usually triggered by a deficit that's run for too long without correction, leading to a rapid currency collapse and depleted foreign reserves.
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