Balance of payments: equilibrium and disequilibrium

By balance of payments equilibrium we mean a situation in which the sum of the goods balance and the capital movements balance is equal to zero. We have a surplus (deficit) when official reserves increase (decrease). Equilibrium of the balance of payments is a long-run economic policy objective, in the sense that a country must seek on average to offset deficits it may run in some periods with surpluses from other periods. The pursuit of continuous surpluses is feasible in appearance, while persistent deficits are not, since they would eventually exhaust the country's foreign reserves and make further net payments abroad impossible. An exception to this is when the country is itself the issuer of a reserve currency that is accepted without limits by the other country (for instance, under a Gold Exchange Standard in which the convertibility of the reserve currency is, for whatever reason, always credible).

Upon closer analysis, however, running a constant surplus is not feasible either, since it implies a persistent deficit for the other country, which is not technically possible in general, as we have said. Therefore, when we speak of ‘persistent surpluses’, we mean a country that runs a balance of payments surplus for a long but not infinite period.