The Balance Of Payments (BOP), also known as the balance of international payments, is a statement of all transactions made between entities in one country and the rest of the world over a defined period, such as a quarter or a year. It summarizes all transactions that a country's individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country.A surplus on the current account means that more money is coming into the country than going out. This can be caused by exports being greater than imports or by foreign investment in domestic assets being higher than domestic investment abroad. A deficit on the current account means that more money is going out of the country than coming in. This can be caused by imports being greater than exports or by domestic investors pulling their money out of foreign investments faster than foreigners are investing in domestic investments.The capital account measures flows of financial capital between countries. A surplus indicates net inflows (more incoming funds then outgoing) while a deficit indicates net outflows (more outgoing funds then incoming). The most common type of transaction tracked on this account is foreign direct investment (FDI). FDI occurs when an entity from one country invests directly in an entity from another country—for example, when an American company builds a factory in China.). Other types include portfolio investment (such as buying stocks or bonds) and other long-term investments such as loans and leases.). Short-term financial flows like currency speculation are not included here.)There are three main factors that affect BOP:
1.Trade Policies
2.Exchange Rates
3.Economic Conditions both at Home and AbroadSo what exactly does this mean for your average person? Let's take it down to basics:If your home economy is doing well compared to other's, you're likely to see your currency strengthen against other currencies because people will want to invest there. This makes your exported goods more expensive for foreigners, but it also makes imported goods cheaper for you. In theory, this should make your trade deficit smaller. On the flip side, if our economy isn't doing so well compared to other's, our currency will weaken; making our exported goods cheaper for foreigners but more expensive for us. This would lead to an increase in our trade deficit.
