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Definition:
A countrys balance of payments is commonly defined as the record of transactions between its import and exports over a specified period. Each transaction is recorded in accordance with the principles of double-entry bookkeeping. Consequently, the sums of the two sides of the complete balance-of-payments accounts should always be the same, and in this sense the balance of payments always balances. However, there is no bookkeeping requirement that the sums of the two sides of a selected number of balance-of-payments accounts should be the same, and it happens that the balances or imbalances shown by certain combinations of accounts are of considerable interest to analysts and government officials. It is these balances that are often referred to as surpluses or deficits in the balance of payments.
Explanation:
A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa, but this negative amount has to be balanced out with account payable on credit side. This BoP is recorded in one currency which is usually the countrys own currency. BoP may be used as an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency. This is just another economic indicator of a country's relative value and, along with all other indicators, should be used with caution. The BOP includes the trade balance, foreign investments and investments by foreigners. The BOP is divided into three main categories: the current account, the capital account and the financial account. Within these three categories are sub-divisions, each of which accounts for a different type of international monetary transaction.