Q.Define Balance of Payments. Why is it said to always 'balance'?
The Balance of Payments (BOP) is a systematic, statistical record of all economic transactions — of goods, services, income and capital — between the residents of one country and the residents of the rest of the world, over a given period, usually one year. The IMF defines it as a statistical statement summarising transactions between residents and non-residents during a period.
Why it always 'balances': BOP accounts are prepared on the double-entry principle — every international transaction generates one debit entry and one exactly offsetting credit entry (e.g. an import of goods paid for in foreign currency is a debit on the trade side and a matching credit on the capital/reserve side, representing the outflow of foreign exchange). Because every entry is matched this way, the sum of all credits must equal the sum of all debits for the BOP taken as a whole — even though individual sub-accounts (like the Current Account) can, and usually do, show a surplus or a deficit.
BOP is the comprehensive, double-entry record of all of a country's economic transactions with the rest of the world; it always balances overall because each transaction's debit entry is matched by an equal credit entry, even though its individual components (Current, Capital, Reserve Accounts) can separately show a surplus or deficit.
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