Balance of payments (BoP) is the record of the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period typically a year. There are two main accounts in the balance of payments viz., the current account and the capital account.

1. BoP surplus and deficit: The essence of international payments is that just like an individual who spends more than his her income, must finance the difference by selling assets or by borrowing, a country that has a deficit in its current account must finance it by selling assets or by borrowing abroad.

Similarly, the country could engage in official reserve transactions running down its reserves of foreign exchange in case of a deficit by selling foreign currency in the foreign exchange market.

The increase in the official reserves is called the overall balance of payments surplus and the decrease in official reserves is called balance of payments deficit.

The basic idea is that the monetary authorities are the ultimate financiers of any deficit in the balance of payments (or the recipients of any surplus). The balance of payments deficit or surplus is obtained after adding the current and capital account balances.

Therefore, a country is said to be in equilibrium balance of payments when the sum of its current account and its non-reserve capital account equal to zero. Here, the total value of exports of goods and services is equal to value of imports of goods and services.