Definition of Balance of Payments

International trade and other international transactions result in a flow of funds between countries. All transactions relating to the flow of goods, services and funds across national boundaries are recorded in the balance of payments of the countries concerned.

Balance of Payments – Meaning and Definition

Balance of payments (BoPs) is systematic statement that systematically summarizes, for a specified period of time, the monetary transactions of an economy with the rest of the world. Put in simple words, the balance of payments of a country is a systematic record of all transactions between the ‘residents’ of a country and the rest of the world. The balance of payments includes both visible and invisible transactions. It presents a classified record of:

 i: All receipts on account of goods exported, services rendered and capital received by ‘residents’ and

 ii: Payments made by then on account of goods imported and services received from the capital transferred to ‘non-residents’ or ‘foreigners’.

Thus the transactions include the exports and imports (by individuals, firms and government agencies) of goods and services, income flows, capital flows and gifts and similar one-sided transfer of payments. A rule of thumb that aids in understanding the BOP is to “follow the cash flow”. Balance of payments for a country is the sum of the Current Account, the Capital Account, and the change in Official Reserves.