Monetary Approach to the Balance of Payments

BOP—got you.

The BOP, or balance of payments, is the difference in payments coming into and payments going out of a country. Think: international trade, investment income, and assets. If there’s a deficit, it means a country is raking in more than it’s doling out. If there’s a surplus in the balance of payments, that means the opposite, such as higher exports than imports.

The monetary approach to the balance of payments is seeing the BOP in a new light: BOP deficits or surpluses are the result of disequilibrium of the demand and supply of money.

Like monetarism, which largely focuses on the money supply, the monetary approach of BOP says that too much money circulating compared to the demand for money matches up with BOP deficit. With all that excess money, foreign goods and investments are being bought up. Likewise, the reverse: when there’s a higher demand for money than there is supply of money, BOP surplus is reflected. Of course, this comes with a set of assumptions...like...that goods cost the same in different countries after transportation costs, full employment, etc.

BOP. Got you again.