Define Balance of

Countries trade with one another to buy goods not produced in the domestic economy. With the advent of globalization, investment to and fro have also increased. A country’s trade and other economic exchanges with the world are recorded on its external account in the form of balance of payment (BoP) transactions.

There are two components of BoP:

1. Current Account

2. Capital Account

Current Account:

Current Account deals with current, ongoing, short term transactions like trade in goods, services etc. It shows the nation’s net income. Example: if we buy a laptop from the US, it will be a current account transaction and it will be debit on current account as we have to pay to the US.

There are 4 components of Current Account:

1. Goods – It deals with trade in goods

2. Services (invisible): this Records all transactions of foreign currencies resulting out of export & import of services such as banking, insurance, software, consultancy etc.

3. Income –Investment income includes any income made from investing abroad, profits from business activities of subsidiaries located abroad, interest received from investment and loans abroad, and dividends from owning shares in overseas companies.

4. Current unilateral transfers –this includes donations, gifts, grants, remittances Note that grants might appear as a component of capital account but are included in current account as they are unilateral, create no liability. The recipient does not have to give anything back in return.