📒 What Is the Balance of Payments?
Definition: Balance of payments (BoP).
The BoP has three main accounts. Think of it as a country's financial statement for international transactions.
- Current account — trade in goods, trade in services, primary income (investment income), secondary income (transfers/remittances).
- Capital account — capital transfers (debt forgiveness, migrant transfers, EU structural funds). Usually small.
- Financial account — foreign direct investment (FDI), portfolio investment, reserve assets. Records cross-border investment flows.
The BoP always balances: Current account + Capital account + Financial account = 0. A deficit in one account must be offset by a surplus in another.
📊 The Current Account
The current account is the most commonly discussed component— it measures the flow of goods, services, and income.
Components
- Trade in goods (visible trade) — exports and imports of physical goods (cars, oil, machinery).
- Trade in services (invisible trade) — tourism, financial services, transport, consulting.
- Primary income — investment income flowing in and out (dividends, interest, profits from FDI).
- Secondary income (transfers) — remittances from workers abroad, foreign aid, pensions.
Current account deficit.
Current account surplus.
Feeling unprepared for exams?
Get a clear study plan, practice with real questions, and know exactly where you stand before exam day. No more guessing.
Get Exam Ready Free7-day free trial • No card required
💰 The Financial Account
- Foreign Direct Investment (FDI) — long-term investment in physical assets (building a factory abroad). The most stable form of capital flow.
- Portfolio investment — buying foreign shares and bonds. More volatile than FDI.
- Reserve assets — changes in the central bank's foreign currency reserves.
The link between accounts
A country with a current account deficit must have a financial account surplus (net capital inflow). It pays for its excess imports by attracting foreign investment or borrowing.
USA example: The US runs a persistent current account deficit — it imports far more than it exports. This is financed by a financial account surplus — foreign investors buy US government bonds and invest in US assets.