2.1.4 Balance of Payments

What are the balance of payments?

Balance of payments= a record of all financial dealings over a period of time between economic agents of one country and all other countries

What are the main 3 components of the balance of payments?

3 main components of the balance of payments=

1. current account (main focus in T2)

2. capital account

3. financial account

• balance of payments always balances! A balance of payments deficit in an exam normally refers to a current account deficit.

What does current account mean?

Current account= records payments for trade in goods and services, along with net flows of primary and secondary income.

What are the capital and financial accounts?

Capital and financial accounts= where flows of money associated with saving, investment, speculation and currency stabilsation are recorded

What sign are flows of money into the country and flows of money out of the country are given?

• flows of money into the country= positive sign

• flows of money out of the country= negative sign

What are the components of the current account?

Components of the current account=

• trade in goods

• trade in services

• income

• transfers

What are the trade in goods? (component of the current account)

Trade in goods= often called ‘visibles’/ this is the trade in raw materials (e.g. oil), semi-manufactured goods (e.g car components) and manufactured goods (e.g cars). 

• they have a negative sign as more money is flowing out of the country/ imports > exports

econplusdal→ Measures the exports and imports of physical goods.

Balance of trade- the value of visible exports minus the value of visible imports

What are the trade in services? (component of the current account)

Trade in services= often called ‘invisibles’ 

A holiday to Spain by a British family is an invisible import, as money leaves the UK and goes to Spain→ called debits

whilst a Japanese firm buying insurance from a city of London firm is an invisible export, as money enters the UK→ called credits

• they have a positive sign, as more money is flowing into the country/ exports > imports

econplusdal→ Measures the exports and imports of services.

What is balance of trade in goods and services?

Balance of trade in goods and services is= the balance of trade + balance of invisibles

What is income? (component of the current account)

Income= Wages, interest, profit or dividends can be repatriated (bringing something back to its home country) into the country.

For example, a Polish person could send the money they make in the UK back home to Poland, or a British person could take the profits from their overseas country back to the UK.

• they have a positive sign, as more money is flowing into the country/ exports > imports

primary and secondary income are examples of invisibles along with trade in services

What are transfers? (component of current account)

Transfers= (secondary income) when governments (usually) transfer money into or out of overseas organisations such as the EU or even aid given to developing countries

• they have a negative sign, as more money is flowing out of the country/ imports > exports

What is the current balance?

Current balance=

• It can be calculated by the difference between the value of total exports (visible and invisible) and total imports.

• It can also be calculated by adding the balance of trade, balance of invisibles + net income and current transfers.

What is a current account surplus?

Current account surplus= exports are greater than imports

• monies (plural of money) flowing into the country from trade in goods and services, as well as primary and secondary income, are greater than monies flowing out of the country from these transactions

What is a current account deficit? 

Current account deficit= imports are greater than exports

• monies flowing out of the country from trades in goods and services, as well as primary and secondary income, are greater than monies flowing into the country from these transactions

What are the key points of the current account?

Key points of the current account=

• The current account measures value, not volume. It's about money flows.

• A current account deficit or surplus isn't solely determined by trade in goods and services; income and transfers also play a role

What are the four major macroeconomic objectives?

4 major macroeconomic objectives=

• low unemployment, achieving full employment;

• low and stable inflation, avoiding deflation;

• economic growth on a par with similar economies;

• balance of payments equilibrium, including equilibrium on the current account.

However, achieving a balance of payment equilibrium can be affected by achieving other aims.

What is the conflict with high economic growth- achieving macroecnomic objective?

Conflict with high economic growth= tends to be associated with low unemployment but increased inflationary pressures- tends to mean that the current account becomes a deficit as there is increased imports due to increased demand, and it is during times of high unemployment etc. that the current account deficit tends to improve

What is the conflict with export led growth- achieving macroeconomic objective?

Conflict with export led growth= Governments would like to see export-led growth. This is a rise in economic growth due to a rise in exports. This would reduce unemployment and improve the current account balance on the balance of payments. The economic cost might be higher inflation. However, despite frequent export initiatives, successive UK governments have never achieved this.

What are the four key ways in which this process of globalisation/ interconnectedness of economies has been taking place?

There are four key ways in which this process of globalisation has been taking place.

• The proportion of output of an individual nation's economy which is traded internationally is growing.

• Many more people (or companies) own assets in other countries, such as shares, loans or businesses.

• Increasing migration between countries

• Technology is being shared between countries on a faster basis.