Balance of Payments

Balance of Payments

includes the balance of trade in goods, the balance of trade in services, (investment or factor) income (interest, dividends, profit), and (current or net) transfers. This could be referred to as “exports of goods and services” and “imports of goods and services” but cannot be referred to as simply imports and exports.

Current account (balance)

a record of the revenues earned from the export of goods and services and the expenditure on imports of goods and services.

Current account deficit

occurs when the value of total imports of goods and services plus net income flows are greater than the value of total exports of goods and services.

Current account surplus

occurs when revenues from the exports of goods and services plus net income flows are greater than the spending on the imports of goods and services.

Credit

any transaction that results in currency coming into the country. Credit items are awarded a positive value on the balance of payments.

Debit

any international transaction which results in money leaving the nation. Debit items are awarded a negative value on the balance of payments.

Balancing item

the difference between debits and credits. It is the amount that a country requires in order to make their debits and credits balance.

Visible trade balance

measures the trade in physical goods.

Invisible trade balance

measures the trade in services.

Net factor income from abroad

the difference between income earned from abroad by normal residents of a country (from rent, interest, wages e.t.c.) and the income earned by non-residents (foreigners) in that country.

Current transfers

transfers of money between countries for non-investment purposes e.g. a payment by the British government in the form of AID or a parent sending their child living expenses when studying overseas.

Capital account

the transfers of money, into and out of a country for investment purposes and is divided into capital transfers and transactions of intangible non financial assets e.g. the international purchase of patents, copyrights, franchises or rights to natural resources.

Financial account

this measures the net change in ownership of financial assets and consists of a record of the number of domestic assets purchased by overseas purchasers, as well as foreign assets purchased by domestic residents.

Elements of the financial account

Direct investment

Portfolio investment

Reserve assets

Direct investment

A measure of the purchase of long term assets, where the purchaser is aiming to gain a lasting interest in a company in another economy. E.g.

• Buying of property

• Purchasing of a business or stocks/shares

Portfolio investment

A measure of stock and bond purchases which are not direct investment since they do not lead to a lasting interest in a company. This includes:

• Buying and Selling of things such as treasury bills and government bonds.

• Savings account deposits

Reserve assets

The reserves of gold and foreign currencies which all countries hold and which are itemized in the official reserve.