The balance of payments (BOP) is a record of all international financial transactions made by the residents of a country. It is a statistical statement that summarizes transactions between residents and non-residents during a period. The BOP consists of three main accounts: the current account, the capital account, and the financial account.
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Current Account: This account reflects a countrys net income from trade in goods and services, as well as net income from investments and transfers. It includes transactions in goods, services, income, and current transfers.
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Capital Account: This account reflects the net change in ownership of national assets, including physical assets such as real estate and financial assets such as stocks and bonds. It includes transactions in non-produced, non-financial assets.
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Financial Account: This account reflects the net change in ownership of foreign financial assets and liabilities, including direct investment, portfolio investment, and other investment. It includes transactions in financial assets and liabilities.
Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance, but in practice, this is rarely the case. The BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming. The balance of payments is an important economic indicator for "open" economies that engage in international trade because it summarizes how resources flow between countries.
