the balance of payments

The Balance of payments (BoP) records economic activity between a country and its trading partners. It is a record of all trade and financial transactions between a country and the rest of the world during a specific period. 

  • The Balance of payments provides a systematic tool for each country to record its international transactions. 

  • This information can be used to inform economic planning and trade policy. 

  • Policymakers can use the Balance of payments to set economic goals and make strategic decisions regarding export and import policy. 

  • The Balance of payments is also a useful way of identifying long-term trends that could harm a country's economy. 

If trade and financial inflows are greater than outflows, this indicates a Balance of payments surplus.

The Balance of payments consists of three accounts:

  • The current account

  • The capital account

  • The financial account

The current account records international transactions that relate to production, expenditure and income. It provides a record of receipts and payments from trade, transfer payments and income inflows over a specific period.

  • Merchandise (goods)

  • Gold

  • Services

  • Income

  • Current transfers

The capital transfer account

The capital transfer account (capital account) is a record of all capital transfers between a country and other countries. It records inflows and outflows of investment and loan funds.

Only the net balance of the capital transfer account is displayed in the Balance of payments. The individual items that are used to calculate the balance are not reflected.

The financial account

The financial account is a record of investments made by South Africans in other countries and by non-residents in South Africa

These items are taken into account when calculating the balance of the financial account:

  • Direct investment 

  • Portfolio investments

  • Other investments

  • Derivatives

  • Reserve assets

Unrecorded transactions are also known as the balancing item. 

The formula for the Balance of payments is given by the following expressions:

Balance of payments  = Balance of current account + Balance of capital account + Balance of financial account + balancing item

The terms of trade refer to an index used to compare a country's export and import prices.

An improvement in the terms of trade occurs when export prices increase or when import prices decrease. When export prices increase, the volume of exports will decrease. Lower import prices increase the volume of imports. A decrease in the volume of exports, all other things remaining equal, will increase the current account deficit. An improvement in the terms of trade is likely to reduce the current account balance.