A systematic record of all economic transactions between the residents of a country and the rest of the world over a given period.
- Two main accounts: the current account (trade in goods and services, income, and transfers) and the capital and financial account (investment and borrowing flows).
- The trade balance is exports minus imports of goods; the current account also includes services (such as software), remittances, and investment income.
- The current account deficit (CAD) arises when current outflows exceed inflows; it is financed by capital-account inflows such as FDI and FPI.
- The capital account records FDI, portfolio flows, external borrowing, and changes in foreign-exchange reserves (compiled by the RBI).
- The BoP always balances in accounting terms; "BoP crisis" refers to a shortage of foreign exchange to meet external obligations, as in India in 1991.
The current-versus-capital account split, the CAD, and the 1991 crisis link are core external-sector facts; it ties to trade, the rupee, and reserves.
Trade balance (goods only) versus current account (goods plus services, income, transfers); current account (trade and income) versus capital account (investment and borrowing); the BoP balances in accounting even when there is a deficit on one account.
Record of all external transactions; current account (trade, services, transfers) plus capital account (investment, borrowing); a CAD is financed by capital inflows.