What is Balance of Payments (BOP)?

The term balance of payments (BOP) imply that the balance of all financial exchanges between one country and another country of the rest of the world, made up of the current account (visible and invisible trade) and capital account (capital movement) and financial transfers excluding Central Bank’s reserve. If the inward supply of funds such as export proceeds of goods and services exceeds use of such foreign exchange for the purpose of payment towards import of goods and services, then balance of payment is said to be surplus or positive. If the country is importing more than the export, its balance of payment is said to be in deficit or negative. The balance of payments usually summarized for a specific period mostly once in a year in terms of domestic currency of the country concerned.

The balance of payments (BOP), statement summarizes all transactions between a country’s individuals, companies including government bodies and the individuals, companies, including government bodies outside the country. The transactions shown in the statement give us the idea of all imports and exports of goods, services and capital, as well as transfer payments such as foreign aid and remittances. The transactions also includes changes of ownership and other changes in that economy’s monetary gold, Special Drawing Rights (SDRs) and claims and liabilities to the rest of the world. Thus, any surplus or deficit in current account and capital account of counterpart would be resulted into capital flow and change in reserves of a country.

Related article: What is a balance of trade?