Economics > Introductory Macroeconomics > Balance Of Payments

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Balance of Payments (BoP) systematically summarise, the economic transactions of an economy with the rest of the world, over a given period of time. The BoP can be broadly divided into two accounts namely: current account, capital account. The current account measures the transfer of goods, services, income and transfers between an economy and rest of the world. The current account may be sub-divided into merchandise account and invisible account. Merchandise account consists of transactions related to export and import of goods. In the invisible account, there are three broad categories: Non-factor services such as travel, transportation, insurance etc., Transfer which do not involve any value in exchange., Income which includes compensation of employees and investment income. The capital account reflects the net changes in financial claims on rest of the world. The capital account can be broadly broken up into two categories: Non-debt flows such as direct and portfolio investments. Debt flows such as external assistance, commercial borrowings, non-resident deposits etc. The sum of the two accounts indicates the overall balance, which could be either be in surplus or deficit. The movement in overall balance is reflected in changes in international reserves of the country.

On the basis of the given text and common understanding, answer the following questions : (a) Define Balance of Payments. (b) Differentiate between the two accounts of Balance of Payments. (c) Give the meaning of Balance of Payments deficit with formula.