The balance of payments (BoP) records all economic transactions of a country represented in goods, services and assets with the rest of the world for a specified period of time, usually over a quarter or a year.

BoP helps to know the strength and weaknesses of the economy of a country. By analysing the BoP accounts of the previous year, we can know the overall gains and losses from international trade.

There are two main accounts in the BoP –

1. current account; and

2. capital account.

The current account records exports and imports in goods, trade in services and transfer payments.

The capital account records all international purchases and sales of assets such as money, stocks, bonds, etc. It also includes foreign investments and loans.

Balance of Payments Surplus arises when money coming into a nation is more than the money going out in a particular time.

To remove the surplus government will deposit the excess foreign exchange in its Foreign Exchange Reserves.This is an accommodating transaction of the government made only to bring equilibrium in the Balance of Payment.

Balance of Payments Deficit means the nation imports more commodities, capital and services than it exports. It must take from other nations to pay for their imports.The government could use its reserves of foreign exchange to balance any shortfall in BoP. These are the accommodating transactions of the government made only to bring equilibrium in the Balance of Payment.