Balance of Payments (BoP) Explained
The Balance of Payments (BoP) is a systematic record of all economic transactions between residents of a country and the rest of the world over a period.
The Balance of Payments (BoP) is a systematic record of all economic transactions between residents of a country and the rest of the world over a period.
Two main accounts
The BoP has two main accounts: the current account (trade in goods and services, income and transfers) and the capital (and financial) account (investments, loans and reserves).
Balancing item
In principle the BoP always balances; changes in foreign-exchange reserves absorb any gap. A surplus builds reserves, while a deficit draws them down.
Why it matters for UPSC
The structure of the BoP — current vs capital account and the role of reserves — is a reliably tested Economy concept.
Practise related UPSC PYQs
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Practise PYQs →Frequently asked questions
What are the two main accounts of the BoP?
The current account and the capital (and financial) account.
What absorbs a gap in the Balance of Payments?
Changes in foreign-exchange reserves.