Balance of Payments

The Balance of Payments or BoP is a statement or record of all monetary and economic transactions
made between a country and the rest of the world within a defined period (every quarter or year). These
records include transactions made by individuals, companies and the government. Keeping a record of
these transactions helps the country to monitor the flow of money and develop policies that would help
in building a strong economy.

A BoP surplus indicates that a country’s exports are more than its imports.

A BoP deficit, on the other hand, indicates that a country’s imports are more than exports

Current Account

The current account monitors the flow of funds from goods and services trade (import and export)
between countries. Now this includes money received or spent on manufactured goods and raw
materials. It also includes revenue from tourism, transportation receipts, revenue from specialized
services (medicine, law, engineering), and royalties from patents and copyrights. In addition, the current
account includes revenue from stocks.

Or

The current account measures a country's trade balance plus the effects of net income and direct
payments. When the activities of a country's people provide enough income and savings to fund all their
purchases, business activity, and government infrastructure spending, then the current account is in
balance.

Capital Account

The capital account monitors the flow of international capital transactions. These transactions include
the purchase or disposal of non-financial assets (for example, land) and non-produced assets. The capital
account also includes money received from debt-forgiveness and gift taxes. In addition, the capital
account records the flow of the financial assets by migrants leaving or entering a country and the
transfer, sale, or purchase of fixed assets.

Or

The capital account measures financial transactions that don't affect a country's income, production, or
savings. For example, it records international transfers of drilling rights, trademarks, and copyrights.
Many capital account transactions happen infrequently, such as cross-border insurance payments. The
capital account is the smallest component of the balance of payments.

Financial Account

The financial account measures: 1) changes in domestic ownership of foreign assets and foreign
ownership of domestic assets. If foreign ownership increases more than domestic ownership does, it
creates a deficit in the financial account. This means the country is selling off its assets, like gold,
commodities, and corporate stocks, faster than it is acquiring foreign assets.

What Is Balance of Trade (BOT)?

The balance of trade is the difference between the value of a country's imports and exports for a given
period. The balance of trade is the largest component of a country's balance of payments. Economists
use the BOT to measure the relative strength of a country's economy. The balance of trade is also
referred to as the trade balance or the international trade balance.

Calculating a Country's BOT

For example, if the United States imported $1.5 trillion in goods and services in 2017, but exported only
$1 trillion in goods and services to other countries, then the United States had a trade balance of -$500
billion, or a $500 billion trade deficit.

In effect, a country with a large trade deficit borrows money to pay for its goods and services, while a
country with a large trade surplus lends money to deficit countries. In some cases, the trade balance may
correlate to a country's political and economic stability because it reflects the amount of foreign
investment in that country.