Meaning of Balance of Payment - SS3 Economics Lesson Note

Balance of Payment refers to the record of all financial transactions made between a country and the rest of the world over a specific period, usually a year. Balance of Payment is also the measure of the inflow and outflow of money from a country's economy and it is divided into two main components: the current account and the capital account.

Current Account

The current account records all the international transactions related to the trade of goods and services, income, and current transfers between a country and other countries. If a country exports more goods and services than it imports, it will have a surplus in the current account, and if it imports more than it exports, it will have a deficit.

Capital Account

The capital account, on the other hand, records all transactions related to the purchase and sale of assets between a country and other countries. This includes transactions such as foreign direct investment, portfolio investment, and loans. If a country receives more investment than it invests in other countries, it will have a surplus in the capital account, and if it invests more than it receives, it will have a deficit.

The balance of payment is important because it provides insight into a country's economic health and its level of international financial transactions. If a country consistently runs a current account deficit, it may indicate that it is relying too much on imports and not producing enough for export. Similarly, a capital account deficit may indicate that a country is not attracting enough foreign investment to support its economic growth.