What is Balance of Payment with an Example?

Balance of Payments is made up of 3 components.

  1. Current Account – Deals with inflow and outflow of goods and services between countries.
  2. Capital Account – Deals with foreign exchange reserves, investments, loans & borrowings.
  3. Financial Account – Deals with investments in real estates, business ventures, Foreign Direct Investments.

Candidates would find this topic to be of importance while preparing for IAS Exam.

Why Balance of Payment is Important?

  1. It helps the Government to analyse a particular industry and formulate policies accordingly.
  2. Helps the Government to detect the state of the economy and accordingly plan the monetary policy, fiscal policies.
  3. It helps the government to evaluate the tax rates for exports and imports.

What is the Current Account Deficit?

The total of Current Account must balance with the total of Capital and Financial Accounts in ideal situations. When a country’s imports are more than the country’s exports then it is called the current account deficit. In a vice versa situation then it called current account surplus.

What is the Balance of Payments Formula?

Balance of Payment = Balance of Current Account + Balance of Capital Account + Balance of Financial Account.


The above details would help candidates preparing for UPSC 2020.

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