balance of payments

what is it linked to

Link this to TRADE

• All about measuring trade

• Goods and services coming in and out of a country

what is the balance of payments?

• The balance of payments is an important economic indicator that measures a country's transactions with the rest of the world

• In essence, it's a record of all the money coming into and going out of a country, including payments for goods, services, and financial transactions

• There are three parts of the balance of payments: the current account (trade flows), the capital account and the financial account (assets/one off)

• These three parts must balance out in the end

• The balance of payments for a country summarizes all transactions between residents of a nation and non residents during a period. It includes the value of trade flows, investment incomes and other financial transactions across national borders

• Technically, the balance of payments always balances

what is the current account?

The current account records payments for trade in goods and services plus net flow of primary and secondary income

• The current account is the sum of these four separate balances:

1. Net balance of trade in goods

2. Net balance of trade in services

3. Net primary income

4. Net secondary income

deficit 

- the value of imports is greater than the value of exports

• Value = price x quantity (revenue)

goods

tangible and can re-sell

services

can’t resell

primary income

Primary income measures the monetary flows generated from the owning of cross-border financial assets, known as investment income. It represents the yields from UK investments abroad and that of foreign owned investment in the UK. Primary income also includes pay for cross border workers such as migrants

which income flows appear in primary?

• Income on Direct Investment: this includes profits, dividends, and interest earned by residents from their direct investments in foreign companies and vice versa

• Income on Portfolio Investment: this is income such as dividends and interest earned by residents from portfolio investment in foreign securities and vice versa

• Compensation of Employees: this represents wages, salaries, and other compensation earned by foreign workers employed in a country and by residents working abroad

• Taxes on Income and Wealth: this includes taxes on income and wealth paid to foreign governments and taxes paid by foreign residents to the domestic government

dividends 

profit is 'divided' up among shareholders (owners)

interest

cost of borrowing + reward for saving

foreign securities

when a domestic investor decides to purchase ownership of an asset in a foreign company. It involves cash flows moving.

secondary income 

Secondary income is the context of the balance of payments is "current transfers between residents and non residents"- examples of secondary income transfers include foreign aid, and contributions to international organisations such as the United Nations and the European Union - which the UK has now left

which money flows appear in secondary?

This category includes a variety of transfers, such as:

• Remittances: money sent by foreign workers (migrant workers) back to their home countries

• Foreign Aid: grants, concessional loans, and other forms of assistance provided by one country to another for developmental, humanitarian, or other purposes

• Diaspora contributions: contributions made by a country's diaspora to support projects or family members in their home country

• Payments made to international institutions: when the UK was a member of the European Union, the UK was a net contributor to the EU budget. These payments were treated as a negative on the secondary income account

deficits and surpluses

• If X = M the current account is in balance

• If X>M there is a current account surplus and the economy is experiencing net injections into its domestic circular flow of income from its international sector: ceteris paribus, aggregate demand will increase

• If X<M there is a current account deficit and the economy is experiencing net withdrawals from its domestic circular flow of income from its international sector: ceteris paribus, aggregate demand will decrease

what might cause a deficit or a surplus on the Current Account 

• Uncompetitive exports

• Higher inflation

• Decline in export sector

• Overvalued exchange rate

• High consumer spending