Balance of payments is an annual statement of accounts of monetary transactions of a country vis-à-vis the rest-of-the world. These monetary transactions arise due to:

•    transactions in goods, also known as merchandise or visible (i.e., inflow and outflow of goods between nations).

•    transactions in services, also known as invisible items (i.e., inflow and outflow of services between nations), and

•    transactions in capital, like loans, deposits, investments, etc., (i.e., inflow and outflow of capital between nations).

These transactions are settled in foreign exchange, more generally in hard currency like dollar.

Inflows of foreign exchange constitute the credit side of the accounts. Outflows of foreign exchange constitute the debit side of the accounts.

Components of Balance of Payments

Balance of payments statement is divided into two parts:
A.    Balance of payments on current account, and
B.    Balance of payments on capital account.
The sum total of these two accounts is known as the balance of payments.

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