THE BALANCE OF PAYMENTS ALWAYS BALANCES

Economic Concepts

Balance of payments

Capital account

Current account

Financial assets

Trade deficit

Trade surplus

Content Standards

Standard 5: Students will understand that: Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and among individuals or organizations in different nations.

• Students will be able to use this knowledge to: Negotiate exchanges and identify the gains to themselves and others. Compare the benefits and costs of policies that alter trade barriers between nations, such as tariffs and quotas.

Benchmarks, Grade 12: At the completion of grade 12, students will know

• A nation pays for its imports with its exports.

Lesson Overview

Balance of payments accounting is an often misused and misunderstood tool for keeping track of our economy’s flow of imports and exports. While the data, itself, is neutral, it is sometimes reported in ominous tones, especially when the numbers total up to a deficit in the merchandise account. As students learn more about trade, they appreciate that a trade deficit is not necessarily bad any more than a trade surplus is necessarily good. This lesson reinforces their appreciation of that reality by identifying the components of the balance of trade. Learning about the flow of financial assets captured in the capital account should add a whole new dimension to their understanding of the full scope of trade. The accompanying classroom activity allows students to explore balance of payments accounting in a simplified example of trade among 3 states in the U.S.

Key Points:

Keeping the Ledger: The Nuts and Bolts of Balance of Payments Accounting

1. Balance of payments accounting