Balance of payment

One of the ways that a government keeps a record of how the economies are connected is the balance of payments account

The balance of payment is a record of all financial deals over a period of time between economic agents of one country and all other countries , it can be split into two parts :

  • the current account , where payments for the purchase and sale of goods and services are recorded. It is made up of the trade in goods acc , trade in services acc , the primary income acc , and the secondary income acc ( in short , export imports and factor spending )

  • the capital and financial account where flows of money associated with savings , investment , speculation and currency stabilisation are recorded

ELABORATION ON CAPITAL AND FINANCIAL ACC :

  • Capital Account: It records transactions involving the transfer of ownership of assets. This includes capital transfers, such as debt forgiveness or the transfer of assets related to emigration or immigration.

  • Financial Account: This is more extensive and includes direct investment (foreign direct investment and domestic investment abroad), portfolio investment (transactions in stocks and bonds), and other investments (including loans and currency deposits).

Balance of payment = balance of current account + balance of capital account + balance of financial account

COMPONENTS OF CURRENT ACCOUNT :

  • trade in goods ( visible ) : related to the buying and selling of physical goods.

    visible export : physical goods sold to foreigners like cars

    visible imports : physical goods bought from foreigners by domestic residents like clothes

    the difference between these two are known as balance of trade in goods

  • trade in services ( invisible ) : it involves the exchange of services

invisible exports : sale of services to foreigners

invisible imports : purchases of services from other countries

the difference between these two are known as balance of trade in services

  • primary income

    they are incomes that are the result of from the loan of factors of production abroad ; land labour capital and enterprise. For example dividends or profits from businesses operated by nationals abroad

  • secondary income

    this is when income is transferred between countries , money is received without a corresponding output. For example personal transfer like remittances.

TRADE DEFICIT VS TRADE SURPLUS:

  • a deficit in the trade in goods and services implies : imports > exports

  • a surplus in the trade in goods and services implies : exports > imports

  • the terms ‘narrowing or widening’ are often used in trade deficit or surplus