Why is the balance of payments always balanced?

The balance of payments is always balanced because it is a double-entry system, recording both inflows and outflows of money.

The balance of payments (BoP) is a comprehensive record of a country's economic transactions with the rest of the world over a specific period. It includes the trade of goods and services, financial transfers, investments, and other forms of economic interaction. The BoP is based on the principle of double-entry bookkeeping, meaning that every transaction is recorded twice - once as a credit (inflow) and once as a debit (outflow). This ensures that the sum of all transactions, or the balance of payments, is always zero.

The BoP is divided into two main accounts: the current account and the capital and financial account. The current account records transactions related to goods, services, income, and current transfers. The capital and financial account records transactions related to investment, loans, and other forms of capital transfers. If a country has a surplus in its current account, it must have a deficit in its capital and financial account, and vice versa. This is because a surplus in one account represents an outflow of money, which must be balanced by an inflow of money in the other account.

For example, if a country exports more goods and services than it imports, it will have a current account surplus. This means that money is flowing into the country, which is recorded as a credit in the current account. However, this money must be balanced by a debit somewhere else in the BoP. This could be in the form of foreign investment in the country, a decrease in the country's foreign reserves, or an increase in the country's overseas liabilities.

IB Economics Tutor Summary: The balance of payments is always balanced due to it being a double-entry system, where every economic transaction with the world is recorded twice: as money coming in and going out. It comprises two main parts: the current account and the capital and financial account. Surpluses or deficits in one account are offset by changes in the other, keeping the overall balance at zero.