1) Meaning of Balance of Payments
The Balance of Payments (BoP) is a systematic record of all economic transactions between residents of a country and the rest of the world during a period (usually a year/quarter).
It includes:
- trade in goods and services,
- income flows,
- transfers,
- capital and financial flows,
- changes in reserves.
2) BoP vs Balance of Trade (common trap)
- Balance of Trade (BoT): exports and imports of goods only.
- BoP: much broader (goods, services, income, transfers, capital flows, reserves).
3) Main components of BoP (CUET-friendly)
3.1 Current Account (CA)
Records flows related to current production/income:
- Trade in goods (merchandise exports/imports)
- Trade in services (IT services, tourism, transport)
- Primary income (factor income: interest, dividends, profits from abroad minus paid abroad)
- Secondary income / transfers (remittances, gifts, grants)
If CA is negative → current account deficit (CAD).
3.2 Capital Account (small in many presentations)
Includes capital transfers and non-produced, non-financial assets (in many texts this is small).
3.3 Financial Account (FA)
Records transactions in financial assets and liabilities:
- FDI (foreign direct investment)
- FPI (portfolio investment)
- External commercial borrowings (loans)
- Banking capital flows
- Other investments
3.4 Official reserve transactions
Central bank changes in foreign exchange reserves (RBI interventions).