Balance of Payments is a statement containing the record of all the economic transactions (in goods, services, assets etc) between an economy with the rest of the world in a year.
It consists of:
Current Account: The current account measures the short-term transactions like:
- Goods – trade in goods
- Services (invisible) – trade in services eg. tourism
- Income – investment income
- Transfers – donations, gifts, grants, remittances.
Capital Account: It deals with long term transactions i.e. those transactions which create assets or liabilities. It has the following four components:
- Foreign Direct Investment (FDI)
- Foreign Portfolio Investment (FPI)
- External Borrowings such as ECB
- Foreign loans
