2.1.4 - balance of payments

define the balance of payments for a country

a record of all the financial transactions that occur between it and the rest of the world

2 main sections of the balance of payments

current account

financial + captial account

how is money classed as positive and negative in these accounts

into the country = ‘credit’ (positive)

out of the country = ‘debit’ (negative)

current account

trade in goods

trade in services

investment income

current transfers

other name for goods/services

goods = visible exports/imports

services = invisible exports/imports

what is investment income

(aka primary income)

income transfers by citizens + corporations when they make returns on their investments

how would investment income be negative

credits = dividends received by UK citizens from foreign investment

debits = dividends sent by UK companies to investors living overseas

what are current transfers (and tell me about the 2 main types)

(aka secondary income)

money sent abroad where no good/service is recieved in exchange

types:

FOREIGN AID: payments at government level between countries (eg. contributions to world bank, aid)

REMITTANCE (most common): sending money back home after earning it abroad

how would current transfers be positive/negative

credits = income repatriated by UK citizens from abroad

debits = income sent by foreigners working here to other countries

financial + capital account

investment transactions BACK INTO the UK economy

process:

• imports, negative investment income + negative current transfers happen

• lots of random ppl around the world have pounds

• they don’t want pounds

• they invest the pounds back into the UK economy

• this comes in the form of a surplus on the financial + capital account

• balance of payments achieved, as the financial + capital account balances out the current account

which account is considered the most important in the balance of payments

the current account

because it records the net income that an economy gains from international transactions

aim of balance of payments

current account + capital/financial account should BALANCE at zero

UK current account balance in 2017 - good application (no need to memorise but have a general gist)

Component	2017
Net trade in goods (exports - imports)	£-32.9bn
Net trade in services (exports - imports)	£27.9bn
Sub-total trade in goods/services	£-5bn
Net income (interest, profits and dividends)	£-2.1bn
Current transfers	£-3.6bn
Total Current Account Balance	£-10.7bn
Current Account as a % of GDP	-3.7%

ev. point - at least it’s not much of our gdp

how is the current account balance often expressed

as a % of GDP

allows for easy international comparisons

when does a current account deficit occur

value of outflows > value of inflows

current account surplus = vice versa

how does a current account deficit usually come about

debits from imports > credits from exports

whats the uk’s current account looking like

have run a DEFICIT since 1985…

how to help it become less negative

export-led economic growth

unlikely tho bc wealth + incomes are increasing so more imports are being made (normal goods)

what is difficult ab tryna set policies to fix the current account

trade-offs/conflicts btw other macroeconomic objectives

current account impact on AD

deficit = lower AD

because (X-M) is net negative

one way the gov could correct the current account deficit

raise tariffs (protectionism)

because it would…

…decrease imports (more expensive)

potential negative impact of tariffs

higher costs of production for firms importing raw materials

=

higher prices for consumers

=

increased inflation in the economy

TRADEOFF