What is Basic Balance
Basic balance is an economic measure for the balance of payments that combines the current account and capital account balances. The current account shows the net amount of a country's income if it is in surplus, or spending if it is in deficit. The capital account records the net change in ownership of foreign assets. The basic balance represents an alternative approach to the surplus or deficit for the balance of payments under pegged exchange rate systems.
BREAKING DOWN Basic Balance
Economists use the basic balance to help determine long-term trends in a country's balance of payments. The measure is less sensitive to short-run fluctuations in the interest or exchange rates, providing insight for the long term. The basic balance incorporates international investment fluctuations from the capital account, making it more responsive to long-term changes in a nation's productivity.
Economists seek to identify the balance of payments for a given period in order to determine the relationship between the amount of money that is coming into the country and the amount of money that flows out to other countries. Ideally, the balance between these two amounts will be within a range that the nation considers beneficial for their internal economy. In the event that the basic balance indicates that the difference between the inflow and outflow of money is not within acceptable limits, a government may be able to take action to correct the situation and recover a more equitable balance.
Balance of payments is normally calculated quarterly, and the resulting basic balance helps identify emerging trends for an economy. For example, if the basic balance indicated the beginnings of a trend of a reduced cash flow into the country, the government could take steps to minimize the impact on the economy. From this perspective, the data generated by the basic balance is very valuable, as it creates rationale for preparation to deal with projected consequences in order to maintain a stable economy.
Identifying the Ideal Basic Balance
While the ideal basic balance is actually zero, indicating a perfect balance between the inflow and outflow of money, nations rarely have a zero basic balance. In lieu of perfection, most countries will identify a range between surplus and deficits they consider acceptable, based on the unique economic characteristics of their country as it relates to resources and industries that operate within the their borders. Should the basic balance indicate movement outside that range, strategies can be implemented to slow that movement and prevent potential damage to the economy.