What is a Balance of Payments Deficit? Part 1

A Balance of Payments deficit sounds like an oxymoron. The Balance of Payments has to balance...doesn't it. Well, the answer is yes and no. If the central bank of a country is intervening by supplying official reserve assets (i.e., dollars or euros) to bring the balance of payments into balance, economists say the Balance of Payments is running a deficit. Balance of Payments deficits occur when countries have a overvalued currency. When this is the case, the quantity supplied of domestic currency is greater than the quantity demanded at the peg - that is, without intervention. The central bank then provides the necessary credits by demanding their own currency with the reserve assets. Basically, they are "drawing down" their reserve assets to bring the Balance of Payments back into balance - i.e., clear the exchange market at their pegged rate. This video is made for 1st year college students or AP/IB Economics students. It focuses on foundational economic concepts.