Balance of Payments

• What is the balance of payments?

  A record of money flows between countries
• What is an import?

  An overseas good/service purchased by UK citizens
• What is the effect of imports on the UK economy?

  They result in an outflow of income from the UK
• What is an export?

  A UK good/service sold overseas
• What is the effect of exports on the UK economy?

  They result in an inflow of income into the UK
• What does the current account on the balance of payments record?

  International trade in goods, services, and income
• What are the components of the current account?

  Goods, services, primary income, and secondary income
• What is the balance of trade in goods and services?

  Value of exports minus value of imports
• What indicates a trade surplus in the balance of trade?

  A positive balance of trade in goods and services
• What indicates a trade deficit in the balance of trade?

  A negative balance of trade in goods and services
• What are the implications of a trade surplus and trade deficit?

  • Trade surplus:
  • Indicates economic strength
  • Inflows of income increase national wealth
  • Trade deficit:
  • Indicates economic weakness
  • Outflows of income may lead to debt
• What does the current account record?

  Exports and imports for various categories
• What is included in trade in goods?

  Oil, energy, raw materials, food, manufactures
• What categories are included in the current account?

  • Trade in goods
  • Trade in services
  • Primary income
  • Secondary income
• What services are included in trade in services?

  Finance, insurance, business services, consulting
• What does primary income refer to?

  Net investment income from UK assets abroad
• How is primary income calculated?

  Inflow of interest, profits, dividends minus outflows
• What does secondary income include?

  Net current transfers between countries
• How is the current account balance calculated?

  Value of exports minus value of imports
• What does the current account balance reflect?

  Exports less imports for goods, services, income
• Causes of a current account deficit

  Cyclical causes • Overvalued exchange rate • Boom in domestic demand • Recession in key export industries • Slump in global prices of exports • Increased demand for imported technology • Increase in global energy/commodity prices (for net importers)

  Structural causes • Under-investment • Relatively low productivity • Persistently high relative inflation • Inadequate R&D, innovation • Emergence of low-cost competition (emerging markets) • Increase in global energy/commodity prices (for net exporter)