💰 Balance of Payments (BoP)

The Balance of Payments (BoP) is a systematic record of all economic transactions between residents of a country and the rest of the world.

➡️ The current account and BoP positions can significantly influence a country’s economic policies.
✅ A sustained current account surplus encourages the government to liberalize imports and capital movements.

📘 The BoP is divided into three main accounts:

1️⃣ Current Account

Records day-to-day transactions of the country with the rest of the world.

Includes:

• Goods: Exports and imports of physical products (also called visible trade)

• Services: Tourism, transportation, IT services, etc. (invisible trade)

• Income: Earnings from investments abroad (e.g., dividends, interest, wages)

• Current Transfers: One-way transfers with no return expected (e.g., remittances, foreign aid, gifts)

📌 Key Idea:
It reflects how much a country earns vs. spends through trade and transfer payments.

2️⃣ Capital Account

Deals with unilateral capital transfers and non-produced, non-financial assets.

Includes:

• Capital Transfers: Debt forgiveness, migrants’ transfers

• Sale/Purchase of Non-Produced Assets: Rights to natural resources, trademarks, patents, etc.

📌 Key Idea:
This account is relatively small and involves one-time capital flows, not investments.

3️⃣ Financial Account

Records investment flows between countries. It shows how a country finances its current account deficit or uses its surplus.

Includes:

• Foreign Direct Investment (FDI): Investments where control is established (e.g., buying a company, setting up a factory)

• Portfolio Investment: Buying foreign stocks, bonds, etc., without control

• Other Investments: Loans, bank deposits, trade credits

• Official Reserves Transactions: Movements of foreign exchange reserves by the central bank

📌 Key Idea:
It reflects ownership of financial assets and capital flows between nations.