Balance of Payments (BOP)

Definition:

The Balance of Payments (BOP) is a comprehensive record of all economic transactions between the residents of a country and the rest of the world over a specific period, usually a year. It shows the financial flows resulting from trade, investments, and financial transfers.

Structure of the Balance of Payments

The BOP consists of three main accounts:

1. Current Account:

   • Records the flow of goods, services, income, and current transfers.
   • Components:
     1. Trade in Goods (Merchandise): Exports and imports of tangible products.
     2. Trade in Services: Transactions like tourism, banking, and transportation.
     3. Income Flows: Earnings from investments abroad (e.g., dividends, interest).
     4. Transfers: One-way transfers like remittances, foreign aid, or gifts.

2. Capital Account:

   • Records capital transfers and the acquisition/disposal of non-financial, non-produced assets (e.g., land, patents, or natural resources).

3. Financial Account:

   • Tracks investments and financial flows related to assets and liabilities.
   • Components:
     1. Direct Investment: Long-term investments, such as establishing subsidiaries or acquiring companies abroad.
     2. Portfolio Investment: Short-term investments in stocks and bonds.
     3. Other Investments: Loans, currency deposits, and banking flows.
     4. Reserve Assets: Changes in a country’s foreign currency reserves, managed by its central bank.