6.1 Balance of Payments Accounts

The Balance of Payments

The balance of payments (BOP) records all transactions between a country's residents and the rest of the world over a given period. It has two main components: the current account and the financial (capital) account. In theory, these two accounts must sum to zero — surpluses in one are offset by deficits in the other.

Current Account

The current account tracks trade in goods and services (net exports), net income earned abroad, and net transfers (like foreign aid or remittances). A current account deficit means a country imports more than it exports, sending currency abroad; a surplus means the opposite.

Financial (Capital) Account

The financial account records flows of financial assets — like stocks, bonds, and real estate — between countries. A country running a current account deficit typically runs a financial account surplus, since foreigners acquire domestic assets in exchange for the currency sent abroad, keeping the BOP balanced.

Key terms

Balance of Payments (BOP)

A record of all economic transactions between a country's residents and the rest of the world.

Current Account

Tracks net exports, net income from abroad, and net transfers (aid, remittances).

Financial (Capital) Account

Records flows of financial assets (stocks, bonds, real estate) between countries.

Current Account Deficit

Occurs when a country imports more goods/services than it exports.

Why BOP balances

A current account deficit is offset by a financial account surplus (and vice versa), so the two sum to zero.

Try an AP-style question

The current account includes…

1. foreign direct investment
2. purchases of foreign stocks
3. central bank reserves only
4. trade in goods and services