Balance of Payments (BOP)
Definition
The Balance of Payments is a comprehensive record of all economic transactions between a country and the rest of the world.
It includes:
- Current Account (trade, income, transfers)
- Capital Account
- Financial Account (investment flows)
Why It Matters
- Shows whether a country is a net borrower or lender to the world.
- Influences currency strength, capital flows, and sovereign risk.
- Critical for analyzing external stability and FX reserves.
Interpretation
- Current account surplus: Exports > imports; currency support.
- Current account deficit: Imports > exports; external financing needed.
- Financial inflows: Capital entering the country.
- Financial outflows: Capital leaving the country.
Example
If a country runs a $200B current account deficit but receives $250B in financial inflows, the BOP is in surplus.