The balance of payments (BoP) is a comprehensive record of all economic transactions between a country and the rest of the world. It is divided into three main accounts: the current account, the capital account, and the financial account.
1. Current Account
The current account captures the flow of goods, services, income, and current transfers between residents of a country and the rest of the world. It includes:
Trade in goods: Exports and imports of physical items such as machinery, agricultural products, and raw materials.
Trade in services: Exports and imports of intangible services such as tourism, banking, transportation, IT services, and education.
Income flows: Earnings from labour and capital between countries—e.g., wages earned abroad, dividends, and interest payments.
Current transfers (optional to include depending on level): Such as foreign aid, remittances, and international gifts.
A current account surplus means exports and income received exceed imports and income paid. A current account deficit means the opposite.
2. Capital Account
The capital account records transactions in non-produced, non-financial assets, such as:
Transfers of land or buildings across borders
Sales or purchases of patents, trademarks, copyrights
Debt forgiveness and other capital transfers
It is usually small compared to the other accounts.
3. Financial Account
The financial account records flows of investment into and out of a country. It includes:
Direct investment (e.g., foreign companies building factories)
Portfolio investment (e.g., buying and selling shares or bonds)
Other investments such as loans, deposits, and trade credits
Reserve assets (central bank foreign currency reserves)
A financial account surplus means more investment is flowing into the country than out.
Overall Balance of Payments
When the three accounts are combined, they show the net financial position of a country relative to the rest of the world.
If exports and inflows > imports and outflows, the country has a BoP surplus.
If imports and outflows > exports and inflows, the country has a BoP deficit.
In practice, the balance of payments always “balances” because deficits in one account are offset by surpluses in another (with small statistical adjustments).
