2.1.4: Balance of Payments

• Balance of Payments: A record of all the flows of money between residents of one country and the rest of the world
• Import: A good or service bought into the country from a foreign country
• Export: A good or service sold by a country to a foreign country
• The Balance of payments is made up of the current, capital and financial accounts
• Current account: Made up of trade in goods and services, primary and secondary income
• Balance of trade in goods and services: Value of exports minus value of imports
• If imports > exports, there is a deficit in trade in goods and services, and if exports > imports, there is a surplus
• Primary income: profits and dividends on UK assets which are held abroad
• Secondary income: Transfers between countries such as foreign aid and gifts
• Effect of a current account deficit: Withdrawals from the circular flow of income
• Effect of a current account deficit: Implies lack of international competitiveness