The Balance of Payments

What is Balance of Payments?

The BoP or balance of payments record the undertakings or transactions of commodities, assets and services between citizens of a nation with the rest of the world for a stated time frame frequently every year. There are 2 main accounts in the BoP –

  • Current account
  • Capital account

What is Current Account?

Current Account is the record of business in commodities, transfer payments and services. Trade in commodities comprises exports and imports of commodities. Trade in services comprises factor income and non-factor income transactions or undertakings. Transfer payments are the receipts which the citizens of a nation get for ‘free’, without having to provide any commodities or services in return. They comprise of remittances, grants and gifts. They could be provided by the government or by private residents living abroad.

The Balance of Payments

What is Capital Account?

Capital Account records all international undertakings of assets. An asset is any one of the types in which wealth can be held, for instance : stocks, bonds, Government debt, money etc., Purchase of assets is a debit on the capital account. If an Indian purchases a UK Car Company, it enters capital account undertakings as a debit (as foreign exchange is going out of India). On the other hand, sale of assets like sale of share of an Indian company to a Japanese customer is credit on the capital account. These items are Foreign Direct Investments – FDIs, Foreign Institutional Investments – FIIs, assistance and external borrowings.

The Balance of Payments

The above mentioned is the concept that is explained in detail about The Balance of Payments for the class 12 students. To know more, stay tuned to BYJU’S.