Measuring Balance of Payments Deficits

Measuring Balance of Payments Deficits
Balance-of-payments (BOP) deficits have occupied the attention of policymakers and economists for decades, and recent developments have brought renewed interest to the question of how they should be measured and when they become a cause for concern. The BOP is an accounting framework that tracks all economic transactions between United States persons and the rest of the world on a double-entry bookkeeping basis. Much as double-entry bookkeeping helps businesses manage their accounts, the BOP accounting framework organizes international transactions. Under the BOP accounting framework, the balance of payments (as an accounting identity) must balance. A BOP deficit, therefore, does not refer to the accounting identity itself, but to a deficit in a particular subset of transactions. Measuring a BOP deficit requires choosing which subset is economically relevant for the question at hand.