A statement that summarizes the total economic transaction of a country with the rest of the world.
The Balance of Payment sheet should net zero while the individual components may net surpluses or deficits.
The three components within the BOP
- current account: Measures net flow of trade, factor income, and transfer payments.
- capital account: Measures the net flow of investment and loan.
- financial account: Measures the difference between domestic ownership of foreign assets and foreign ownership of domestic assets.
“When all components of the BOP sheet are included it must balance – that is, it must sum to zero – there can be no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter balanced in other ways – such as by funds earned from its foreign investments, by running down reserves or by receiving loans from other countries.” – Wikipedia
FXTimes perspective:
The Balance of Trade, along with the components in the Balance of Payments is a significant fundamental indicator that one can use to gauge the supply and demand of a nation’s currency.
