What is meant by the balance of payments?

The balance of payments is a comprehensive record that details all economic transactions between a country and the rest of the world over a specific period. This includes trade in goods and services, investment income, and financial transfers. By keeping track of these transactions, the balance of payments serves to provide insights into a country's economic standing, showing how much it is earning from abroad compared to how much it is spending.

This record is crucial for understanding a nation's economic relationships with other countries and can influence monetary policy and exchange rates. Components typically include the current account (which reflects trade balance and income) and the capital and financial accounts (which show investment flows). Recognizing the balance of payments' role helps to grasp how a country's economic activities affect its financial health and foreign exchange reserves.