balance of payments

what is the balance of payments?

- The record of all financial transactions between one country and the rest of the world.

- Inflows of income from overseas are counted as a positive entry, e.g. exports sold overseas. Outflows of income to overseas are counted as a negative entry, e.g. imports bought from overseas.

what is the current account?

The record of trade in goods and services, income flows and transfers between one country and the rest of the world.

what is the balance of payments on current account?

- The total of net trade in goods and services, income flows and transfers between one country and the rest of the world.

what does trade in goods mean?

- balance of earnings from exports and spending on imports of goods.

what does trade in services mean?

- balance of earnings from exports and spending on imports of services

what does income flows mean?

Income flows are earnings on investments abroad, e.g. interest that foreigners earn in the UK, and that UK nationals earn on investments abroad.

what does transfers mean?

Transfers are the movement of money or goods and services without any requirement of payment, e.g. foreign aid or money sent 'home' by relatives, so no trade is involved.

what is a balanced current account?

Where the sum of exports plus the inflow of income and transfers is equal to the sum of imports plus the outflow of income and transfers.

The total negative entries match the total positive entries

what is a current account surplus?

Where the sum of exports plus the inflow of income and transfers is greater than the sum of imports plus the outflow of income and transfers.

It is a positive number

what is a current account deficit?

Where the sum of exports plus the inflow of income and transfers is less than the sum of imports plus the outflow of income and transfers

it is a negative number

what is the historical data of UK's balance of payments?

Between 1997 and 2017, the UK's trade deficit worsened, with imports of goods outpacing exports, despite growth in the services surplus. The overall trade balance shifted from a small surplus to a deficit of 1.3% of GDP. Exports to the EU fell due to weaker demand, while imports rose, driven by oil, gas, and consumer goods.

what are the causes of a current account surplus?

- The strength of the economy, e.g. products are of a high quality, sold at a low price, or reflect what households and firms at home and overseas want to buy.

- A lack of growth in the domestic economy: consumers within the economy may buy fewer imports, while domestic firms, finding it difficult to sell at home, compete more to sell exports abroad.

- A fall in the exchange rate, which may increase the quantity of exports if overseas consumers are responsive to the now lower export prices. It may similarly reduce imports.

-A net inflow of investment income: investments that foreign residents have made in the country earn less than the investments the country's inhabitants have made in other countries.

what are the causes of a current account deficit?

- Structural problems in the economy, e.g. firms overpricing goods, producing poor-quality goods or goods no longer in demand.

- Falling incomes overseas, which may lead to falling exports.

- Rising incomes in the domestic economy may lead to rising imports.

- A rise in the exchange rate, which may decrease the quantity of exports if overseas consumers are responsive to the higher export prices. It may similarly increase imports.

- A net outflow of investment income: the investments that foreign residents have made in the country earn more than the investments the country's inhabitants have made in other countries

why is a deficit bad?

If it is caused by problems in the economy, such as falling total demand for domestic goods, which can be caused by low international competitiveness and poor product quality.

If it is due to a factor that will take a long time to change, such as low productivity, as the deficit will last longer which is harder for the country to be able to finance.

If it is large in size as again this is harder for a country to be able to finance and increases national debt more significantly.

It also has bigger consequences such as higher unemployment.

The country may then need to take action that is harmful such as cutting other government spending, which could have an opportunity cost.

why may a deficit be good or not that much of a concern?

It is only temporary, e.g. due to importing more raw materials or capital goods to put into the production of goods that will eventually be exported and increase economic growth.

It reduces inflation within the domestic economy: imports are greater than exports, thereby decreasing total demand and reducing the upwards pressure on prices.

Over time, it leads to a fall in the exchange rate, which can increase the international competitiveness of UK goods and eventually increase exports.

It is only a small percentage of GDP so the debt can be paid for by the country with less difficulty.

why may a surplus be good?

It reflects rising total demand for domestic goods, which can be linked to decreased unemployment, more income tax revenue and lower benefit payments.

It decreases the debt of a country because more money is flowing into the country from greater spending on exports than money is flowing out to pay for imports.

why may a surplus be bad?

It causes rising inflation within the domestic economy: as exports are greater than imports, thereby increasing total demand for domestic products and putting upwards pressure on prices.

It hides the causes that have a negative impact on global economic growth such as protectionist policies that give domestic goods an artificial advantage.

It leads to a rise in the exchange rate, which can decrease the international competitiveness of UK goods and eventually decrease exports