BALANCE OF PAYMENTS:

The record of all transactions (trade and financial) of the residents of one country with the rest of the world is Balance of Payments (BoP). The direction of money flows determines whether a particular transaction is a Credit or Debit item.  For example, exports of goods is a credit item as money flows into the economy.  Similarly, import of goods is a debit item as money flows out of the country.  Investment abroad (i.e., export of saving) is a debit item as the transaction results in out flow of money while foreign investment in a country is a credit item.

The BoP has two accounts: Current and Capital accounts. All current/revenue expenditure transactions (such as exports and imports of goods, transfer payments, non-factor payments, etc.) are recorded in current account.  The current account balance reflects whether there is a surplus (+) or deficit (-) in this account. All transactions, (export and import) that influence country's capital assets are recorded in capital account.  For example, if a country borrows capital from foreign sector, it would be recorded as credit item and if the country lends capital to the foreign sector, it would be recorded as debit item in capital account. The net surplus (+) or deficit (-) in capital account is recorded in capital account balance. The components of current and

capital accounts are presented in table 1