What is Balance of Payments?

The Balance of Payments is defined as the synopsis of the transactions of the national economy with the rest of the world. The term covers all the transactions which are done between the residents and non-residents of the country encompassing the goods, services and income. It also covers the liabilities and all transfer as gifts. These transactions are further divided into two categories under Balance of Payments, namely, current account and capital account.

Current account involves all transactions in goods, services, investment income and current transfers while capital account contains the transactions involving the financial instruments. In addition, there is a category of Errors and Omissions to cater to times when there is an apparent imbalance seen in the balance of payments. It is usually compiled by using double entry bookkeeping system.

Balance of Payments does not refer to actual payments which are made but is concerned with the transactions. It is vital in framing both the national and international economic policy. Notable aspects like various payment imbalances and FDI are the key issues addressed by the national economic policy. Latter in turn has a profound impact on the balance of payments.