Balance of Payments

This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.

For roughly three centuries, European statesmen judged a nation's economic health by a simple test: did more gold and silver flow in from trade than flowed out? Mercantilist policy, dominant from the sixteenth through the eighteenth centuries, treated a favorable balance of trade as close to the whole of economic strategy, to be pursued through export subsidies, import tariffs and colonial trade monopolies that channeled bullion toward the mother country. The idea that a country's wealth could be read off a single trade number proved durable, and something like it survives today, not as bullion accumulation but as the balance of payments, the comprehensive statistical record of a country's transactions with the rest of the world. What changed is the theory underneath the accounting. Where mercantilists saw a scoreboard to be won, modern balance-of-payments statistics, standardized globally by the International Monetary Fund's BPM6 manual, are understood as a neutral record of saving, investment and exchange, not a report card, a shift in interpretation owed directly to Adam Smith and David Ricardo's critique of the mercantilist framework in the following article.

This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.

Adam Smith opened The Wealth of Nations in 1776 with a direct attack on the mercantilist consensus he had grown up under. A country that runs a trade deficit, importing more than it exports, is not thereby getting poorer, he argued, any more than a household that buys more from its neighbors than it sells to them is impoverished by the exchange, so long as it is paying for what it buys with something of equal value it produced more cheaply. David Ricardo sharpened the argument a generation later with comparative advantage, showing mathematically that two countries gain from trading even when one is more efficient at producing everything, because both are better off specializing in what they produce relatively best and trading for the rest. Together, Smith and Ricardo replaced the mercantilist question, how do we keep more gold than we send out, with a different one, how do we let both trading partners get more of what they want for less. A persistent bilateral trade deficit, on this view, is not a national scorecard failure; it more often simply reflects that a country is investing more than it saves domestically and importing the difference, a statement about capital flows, not a verdict on competitiveness.