2.1.4 balance of payments

What is the balance of payments?

A record of all financial transactions between residents of one country and the rest of the world over a period of time.

What does the balance of payments show?

All flows of money into and out of a country, including trade, investment and financial transfers.

What are the main components of the balance of payments?

• Current account

• Capital account

• Financial account

What does the current account record?

Trade in goods and services, plus income and transfers.

What is the balance of trade?

The difference between exports and imports of goods and services.

What are exports?

Goods and services sold to other countries.

What are imports?

Goods and services bought from other countries.

What are invisible exports?

Exports of services, such as banking, tourism or insurance.

What are invisible imports?

Services purchased from other countries.

What is included in income and current transfers in the current account?

• Investment income (profits, dividends, interest)

• Remittances and government transfers

What is a current account surplus?

When exports exceed imports.

What is a current account deficit?

When imports exceed exports.

What is the current account balance formula?

Current account balance =
Balance of trade + Balance of invisibles + Net income and transfers

Why are economies interconnected through international trade?

Because countries:

• trade goods and services internationally

• invest in other countries

• transfer money between economies