BoP

• Balance of Payments (BoP)

  A record of all of an economy's financial transactions with the rest of the world
• Deficit


  If outflows > inflows
• Surplus


  If inflows > outflows
• Sections of the BoP

  • Current Account
  • Capital Account
  • Financial Account
• Capital Account


  • Shows certain transfers of capital (money), including government investment and the purchase and sale of intangible fixed assets, such as patents and trademarks
• Financial Account


  • Shows flows of investment funds such as foreign direct investment by multinational companies, and international lending and borrowing
• Sections of the Current Account

  • Trade in goods
  • Trade in services
  • Primary income
  • Secondary income (transfers)
• Trade in goods (Balance of Trade)

  Can also be called visible trade+

  Xgoods – Mgoods

  
  

  X = exports (money flows in)

  M = imports (money flows out)
• Trade in services (Balance of Trade in Services)

  Can also be called invisible trade+

  Xservices - Mservices
• Net Exports


  X - M
• Primary Income


  Income flows that arise out of cross-border lending and investment, including profits, dividends, and interest+

  PRIMARY INCOME INFLOWS – PRIMARY INCOME OUTFLOWS
• Secondary Income (Transfers)


  Transfers that occur when money changes hands without any economic transaction taking place, such as aid flows and remittances
• The UK is likely to have a deficit in trade in goods, a surplus in trade in services, a surplus in primary income, and a deficit in secondary income
• Transactions on the UK's Current Account

  • Interest paid by a UK company to a French bank (OUTFLOW/PRIMARY INCOME)
  • An American tourist buying goods and services in the UK when on holiday (INFLOW/TRADE (GOODS & SERVICES))
  • The hiring of a UK oil-tanker by an Arab oil company (INFLOW/SERVICES)
  • A Polish immigrant sending part of their salary earned in the UK to Poland (OUTFLOW/SECONDARY INCOME)
  • UK Government funds (£295m) for healthcare and education projects in India (OUTFLOW/SECONDARY INCOME)
  • The sale of UK cars to America (INFLOW/GOODS)
  • An Italian pension company receives dividends from the shares that it owns in a UK company (OUTFLOW/PRIMARY INCOME)
  • Nissan repatriating the profits earned in the UK from its Sunderland plant (OUTFLOW/PRIMARY INCOME)
  • The purchase, by a UK company, of raw materials from Germany (OUTFLOW/GOODS)
  • UK citizens travelling on an Australian aircraft (OUTFLOW/SERVICES)
• The BoP therefore looks at all money flows into an economy (inflows) and  all money flows out of an economy (outflows).  It records them as:

  INFLOWS - OUTFLOWS
• Invisible trade: we cannot see what is being traded
• Together the first two sections of the Current Account show all international trade in goods and services.  We call this NET EXPORTS:

  X - M
• Profit = Total Revenue – Total Cost
• Total revenue = price x quantity sold
• Variable costs are those that change with output, such as raw materials or labour.
• Total cost = variable costs + fixed costs
• PRIMARY INCOME

  Income flows that arise out of cross-border lending and investment. 

  • 1. PROFITS - of multinational companies that are repatriated.
  • 2. DIVIDENDS - from shares bought in other countries.
  • INTEREST - paid on cross-border loans or earned on foreign governments' bonds
• Repatriated means sending something (e.g. money) back to its country of origin
• Dividends = part of a company’s profit that are given to shareholders
• SECONDARY INCOME (TRANSFERS)

  Transfers occur when money changes hands without any economic transaction taking place.  For example:

  • AID FLOWS - governments and charities may give money to other country's governments and organizations to help their economic development.
  • REMITTANCES - immigrants may send some of their earnings back to their families in other countries.

  The secondary income balance is:

  SECONDARY INCOME INFLOWS – SECONDARY INCOME OUTFLOWS