Define balance of payment.

The Balance of Payment (BOP) is a systematic record of all economic transactions between the residents of a country and the rest of the world over a specific period (usually a year). It is a double-entry accounting system that ensures that every transaction has a corresponding and opposite entry, maintaining the accounting identity:

$$\text{Total Credits}=\text{Total Debits}$$

The BOP is divided into three main accounts:

1. Current Account: Records trade in goods, services, income, and unilateral transfers.
2. Capital Account: Records capital transfers and acquisition/disposal of non-produced assets.
3. Financial Account: Records investments (direct, portfolio, reserve assets) and financial derivatives.

The overall balance of the BOP is determined by the sum of the current account, capital account, and financial account. If the sum is zero, it indicates balance; otherwise, it reflects a surplus or deficit. The BOP helps analyze a country’s international trade position, economic health, and foreign exchange reserves.