Every country needs to maintain a balance in their inflow or outflow of money. Conventionally all financial influx is treated as a credit to the Balance Of Payments. A BOP is the term used to denote the cash balance of a country and does not refer to the balance sheet . The BOP is always maintained in tune with the rest of the world. The BOP must equilibrate except for abnormal circumstances like the bankruptcy of a country. Precisely the BOP must be ‘zero’ denoting that equal amount of inflow and outflow has taken place.
The BOP is usually split up in three parts. They are:
Therefore the overall Balance of Payment acts to be a good indicator of the pressure that goes into the valuation that is appreciation or depreciation of the currency.