This paper examines the fundamental concepts of balance of payments (BOP) and capital flows within the framework of international finance. As globalization deepens economic interdependence among nations, understanding BOP and capital flow dynamics has become essential for macroeconomic policy. The paper systematically reviews the definition, functions, and components of BOP, analyzes the types and economic impacts of capital flows, and explores the interrelationship between these two concepts. Drawing on established international economics literature, the analysis highlights how BOP deficits can be financed through capital inflows, while excessive dependence on shortterm capital exposes economies to systemic risk and potential crises. The Indonesian case is used throughout as an illustrative example, particularly in reference to the 1997-1998 Asian financial crisis. The paper concludes that sound management of BOP and capital flows, supported by coherent monetary, fiscal, and trade policies, is essential for sustained economic stability in developing economies.