2.1.4 Balance of payments

Current assets

Assets that can be turned into cash within one year.

Fixed assets / Non-current assets

Long-term assets used in running the business; kept for more than a year.

Financial assets

Assets that are financial claims—someone owes you money or profits.

Produced non-financial assets

Man-made physical or intangible assets (buildings, machines, IP).

Non-produced, non-financial assets

Assets not created by humans (land, natural resources, rights).

capital account

The capital account records one-off capital transfers, such as debt forgiveness or migrant asset transfers, and transactions in non-produced non-financial assets, such as land, natural resources, or mineral rights.

financial account

records the flow of money for investment in financial assets between countries (e.g. FDI, portfolio investment)

what does the financial account include?

FDI, portfolio investment, financial derivatives, reserve assets

current account

records the flow of money for goods, services, income and current transfers between a country and the rest of the world

primary income

It is investment income from owning things abroad (like shares, factories, or loans) minus income foreigners earn from owning things in your country.

Secondary income

records one-way transfers of money between countries (such as foreign aid, remittances, and gifts) where nothing is received in return.

what is current account surplus

exports are greater than imports

balance of trade formula

exports - imports

factors that would affect the components of the current account

Exchange rates, interest rates, income levels, technology

Foreign Direct Investment (FDI)

a long term investment made by a foreign company in the economy of another country.

portfolio investment

Portfolio investment is the purchase or sale of financial assets, such as shares or bonds, in a foreign country without gaining control of the company (less than 10% ownership). It is recorded in the financial account of the Balance of Payments.

Reserve assets

Financial assets helped by the Bank of England to be used as when they are needed

Financial Derivatives

Financial assets that derive their value based on an underlying asset. Examples are options, futures, and forwards.