The Balance of Payments (BoP) is a record of all economic transactions between the residents of a country and the rest of the world in a year. It shows whether a country earns more than it spends abroad. BoP and foreign trade terms are common in the economics section.
Balance of Trade vs Balance of Payments
- Balance of Trade (BoT) - the difference between the value of exports and imports of goods only.
- Balance of Payments (BoP) - records all transactions, including goods, services and capital flows.
- BoP is wider; BoT is just one part of it.
Parts of Balance of Payments
- Current account - trade in goods and services, income and transfers like remittances.
- Capital account - flows of capital such as loans, foreign investment and borrowings.
- In theory, the BoP always balances overall, but individual accounts may show a surplus or deficit.
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Deficits and Surplus
- A trade deficit occurs when imports are greater than exports.
- A trade surplus occurs when exports are greater than imports.
- A current account deficit (CAD) means the country spends more abroad than it earns.
- India usually has a trade deficit because of heavy oil and gold imports.
Foreign Trade Terms
- FDI - Foreign Direct Investment in businesses and assets.
- FPI - Foreign Portfolio Investment in shares and bonds.
- Trade is governed by the Foreign Trade Policy and the DGFT.
Quick Revision Points
- BoT = exports minus imports of goods.
- BoP = all transactions with the world.
- BoP has current account and capital account.
- Trade deficit = imports more than exports.
- India usually runs a trade deficit (oil, gold).
- FDI = direct investment; FPI = portfolio investment.