Explain the concept of ‘deficit' in the balance of payments.

The balance of payment is the systematic record of all monetary transactions of the country with the rest of the world of the country with the rest of the world. It is a statement of the country's total economic and monetary transactions with all other countries. It is the list of receipts and payments of all the international transactions. The important components determining the deficit and surplus in BOP are the current account and capital account.

The BOP is said to be in deficit when the payments to the rest of the world are greater than the receipts from the world of the world. Deficits in BOP can be a deficit in the current account or the capital account.

The current account is the statement of the country's trade in the visible and invisible goods and services Current account deficit is the situation in which the imports of goods and services exceed the exports. It can be a deficit in the merchandise trade and invisible trade. This situation implies that sales for the domestic goods in the market are very less. The country has a huge import bill to be paid to the foreign countries. It can be in terms of goods or international services.

The capital account is the record of all the capital inflows and outflows in the country. It can be both short-term and long-term capital. It reflects the changes in the financial claims and liabilities of the country over a period of time. A deficit in the capital account can occur when the capital outflows to the rest of the world are greater than the capital inflows to the country.