2.1.4 Balance of payments

• Balance of payments


  A record of all financial transactions made between consumers, firms and the government from one country with other countries
• Exports


  Goods and services sold to foreign countries, positive in the balance of payments as they are an inflow of money
• Imports


  Goods and services bought from foreign countries, negative in the balance of payments as they are an outflow of money
• Components of the balance of payments

  • The current account
  • The capital account
  • The official financing account
• For the AS course, only the current account is focussed on
• Current account


  The balance of trade in goods and services
• Current account surplus


  A net inflow of money into the circular flow of income
• UK's current account


  Deficit, the UK spends more on imports than it earns from exports
• Large and long-running current account deficit


  Could lead to financial difficulties with financing the deficit
• UK government's macroeconomic objectives


  • Full employment
  • Low, stable inflation
  • A sustainable current account on the balance of payments
  • Sustainable economic growth
• Selling more exports to foreign countries

  Increases AD and improves the rate of economic growth
• During economic decline or recessions

  The current account deficit falls due to lower consumer spending
• During periods of economic growth

  The current account deficit increases as consumers have higher incomes and can afford more imports
• Imported raw materials are expensive

  Could lead to cost-push inflation in the UK due to higher production costs for firms
• In theory, the sum of all countries' trade balances should be zero, since what one country exports will be imported by another country
• UK's main export market, such as the EU, faces an economic downturn


  Demand for UK goods and services will fall as EU consumers are less able to afford imports
• International trade has meant countries have become interdependent, so the economic conditions in one country affect another country through changes in the quantity they export or import