What are the three components of a country's balance of payments?

1 Answer | Add Yours

justaguide's profile pic

justaguide | College Teacher | (Level 2) Distinguished Educator

Posted on

Balance of payment is a record of all the transactions that a nation makes with entities outside its borders. The data collected while creating the balance of payments can be divided into three components. These are current account, capital account and differences in foreign exchange reserves.

Under the current account section, a record is made of transactions related to funds coming into the nation and leaving the nation due to sale and purchase of goods and services. The current account also contains entries of funds that leave the nation when citizens spend abroad and the funds that foreigners bring into the nation.

The sale and purchase of foreign securities and the bilateral transfer of funds as investments is recorded in the capital account. These funds can be used to invest in industries across the border, transact in securities of other nations, etc.

The final component of the balance of payment is all changes in foreign exchange reserves. This is actually dependent on the current and capital account. If the total funds entering a nation are more than the funds that leave, the foreign exchange reserves rise; else there is a drop in the foreign exchange reserves.

We’ve answered 317,505 questions. We can answer yours, too.

Ask a question