what is the balance of payments bop 
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 investopedia paige mclaughlinunderstanding the balance of payments bop the balance of payments bop transactions consist of imports and exports of goods services and capital as well as transfer payments such as foreign aid and remittances a country s balance of payments and its net international investment position together constitute its international accounts the balance of payments divides transactions into two accounts the current account and the capital account sometimes the capital account is called the financial account with a separate usually very small capital account listed separately the current account includes transactions in goods services investment income and current transfers the capital account broadly defined includes transactions in financial instruments and central bank reserves narrowly defined it includes only transactions in financial instruments the current account is included in calculations of national output while the capital account is not 1if a country exports an item a current account transaction it effectively imports foreign capital when that item is paid for a capital account transaction if a country cannot fund its imports through exports of capital it must do so by running down its reserves this situation is often referred to as a balance of payments deficit using the narrow definition of the capital account that excludes central bank reserves in reality however the broadly defined balance of payments must add up to zero by definition in practice statistical discrepancies arise due to the difficulty of accurately counting every transaction between an economy and the rest of the world including discrepancies caused by foreign currency translations the sum of all transactions recorded in the balance of payments must be zero as long as the capital account is defined broadly the reason is that every credit appearing in the current account has a corresponding debit in the capital account and vice versa history of balance of payments bop before the 19th century international transactions were denominated in gold providing little flexibility for countries experiencing trade deficits growth was low so stimulating a trade surplus was the primary method of strengthening a nation s financial position national economies were not well integrated however so steep trade imbalances rarely provoked crises the industrial revolution increased international economic integration and balance of payment crises began to occur more frequently the great depression led countries to abandon the gold standard and engage in competitive devaluation of their currencies but the bretton woods system that prevailed from the end of world war ii until the 1970s introduced a gold convertible dollar with fixed exchange rates to other currencies 2as the u s money supply increased and its trade deficit deepened however the government became unable to fully redeem foreign central banks dollar reserves for gold and the system was abandoned 3since the nixon shock as the end of the dollar s convertibility to gold is known currencies have floated freely meaning that a country experiencing a trade deficit can artificially depress its currency by hoarding foreign reserves for example making its products more attractive and increasing its exports 4 due to the increased mobility of capital across borders balance of payments crises sometimes occur causing sharp currency devaluations such as the ones that struck in southeast asian countries in 1997 5during the great recession several countries embarked on competitive devaluation of their currencies to try to boost their exports all of the world s major central banks responded to the financial crisis at the time by executing dramatically expansionary monetary policy this led to other nations currencies especially in emerging markets appreciating against the u s dollar and other major currencies many of those nations responded by further loosening the reins on their monetary policy to support their exports especially those whose exports were under pressure from stagnant global demand during the great recession 6special considerationsbalance of payments and international investment position data are critical in formulating national and international economic policy certain aspects of the balance of payments data such as payment imbalances and foreign direct investment are key issues that a nation s policymakers seek to address while a nation s balance of payments necessarily zeroes out the current and capital accounts imbalances can and do appear between different countries current accounts the u s had the world s largest current account deficit in 2022 at almost 972 billion china had the world s largest surplus at 402 billion 7economic policies are often targeted at specific objectives that in turn impact the balance of payments for example one country might adopt policies specifically designed to attract foreign investment in a particular sector while another might attempt to keep its currency at an artificially low level to stimulate exports and build up its currency reserves the impact of these policies is ultimately captured in the balance of payments data 