Economic growth and the balance of payments are closely linked, mainly because higher income levels change how much a country imports. As an economy grows, household incomes rise, leading to more consumer spending and increased demand for imports.

This leads to the following outcomes:

• Trade Deficit: If a country imports more goods and services than it exports, the current account worsens. This is sometimes called a growth-induced trade deficit.
• Capital Inflows: Strong economic growth often makes a country more attractive to foreign investors, leading to investment arriving through the financial account.
• Policy Conflicts: Policymakers often face a dilemma. While they want to encourage growth, the policies used to boost the economy can sometimes harm the balance of payments if capital inflows are used for consumption instead of productive investment.