The balance of payments - A-Level Economics Revision - XtremePapers

The balance of payments

[X=exports, M=imports, FX=foreign exchange, b of p= balance of payments]

What is the balance of payments?

It is a record of a country’s economic transactions with all other (foreign) countries. It lists the trade in goods and services, how we pay for this (or what we owe if we did not pay), and some other financial flows, like foreign investment and company dividend payments.

There are four categories within the UK balance of payments. In 1998, everything changed to this new method of presenting our international situation.

1. Current account
2. Capital account
3. Financial account
4. International investment position.

The current account includes: The trade in goods
The trade in services.

Income from working abroad, and from investments abroad. Current transfers: both central government and private.

NB Do not learn the numbers; just get an idea of what items are included and which are
the biggest and smallest – and the negative ones (which means we import more than we export). The “*” means the item or sign is worth noting. If you should get a question on
the balance of payments which supplies data and then asks you about it, look for:

The items asterisked here in particular. Any negative items.
Any really big figures.

If two or more years’ data are supplied for you to analyse, check to see if there are any large changes, using your calculator, as these will be important. You can quote the percentage changes in your answer.

The UK Balance of Payments, 2003 in £ millions – Current Account

	CREDITS (Exports)	DEBITS (Imports)	BALANCE
GOODS
Food, beverages & tobacco	10,826	21,085	-10,259
Basic materials	3,322	6,128	-2,806
Oil	14,589	10,479	4,110
Semi-manufactures	54,323	55,889	-1,566
Finished manufactures	102,006	138,973	-36,967*
Other goods	2,780	2,582	198
Total Goods	187,846	235,136	-47,290*

SERVICES
Transportation	12,958	17,194	-4,236
Travel	13,928	29,740	-15,812*
Financial services	13,417	3,481	9,936
Other services	49,390	24,661	24,729
Total services	89,693	75,076	14,617*

INCOME
Employment from abroad	1,116	1,057	59
Income from investments	125,224	103,186	22,038*
Total income	126,340	104,243	22,097

CURRENT TRANSFERS
Central government transfers	4,199	10,939	-6,740
Other transfers	8,964	12,078	-3,114
Total current transfers	13,163	23,017	-9,854

CURRENT ACCOUNT TOTAL	417,042	437,472	-20,430

Some points to know – you may be able to use some of these in questions about the balance of payments:

Goods: we import a lot more than we export – especially finished manufactures and food. The balance is always negative.

Services: We export a lot more than we import - although transportation and travel are usually negative (poor weather in the UK so we take holidays abroad?!).

The balance on services has been positive every year since 1966 and helps us to pay for all the goods we import. The surplus on services has increased substantially since the mid 1990s.

Income: we earn a huge amount in profits and dividends from investments that we have made abroad in the past; income from working abroad used to be a small negative item but became positive in the late 1990s although it is relatively small.

Current transfers: This account has been in deficit every year since 1960. The government generally runs at a surplus but large deficits elsewhere ensure that the whole item is in deficit. The transfers to EU institutions go into the “other” category.

The current account as a whole: a deficit was recorded in each year 1984-2003. It is most exceptional to be in surplus

THE CAPITAL ACCOUNT = THE 2ND OF 4 PARTS OF WHOLE BALANCE OF PAYMENT

This is not central to our interests for the exam: there is only ownership of fixed assets and what migrants bring in with them when they arrive (a credit item) or take out when leave (debit item).

THE FINANCIAL ACCOUNT = THE 3RD PART OF WHOLE BALANCE OF PAYMENTS

This is not central to our interests for the exam either.

This account has expanded rapidly with the globalisation of the international economy and large increase in financial investment flows.

When a UK resident buys assets abroad, e.g., shares in a French company, it goes in here as a debit item.

When foreign residents buy assets in the UK, it goes in as credit item.

THE INTERNATIONAL INVESTMENT POSITION – 4th AND FINAL PART OF BALANCE OF PAYMENTS

Also not important for us for the exam – it just shows the value of the total assets that the
UK owns abroad, and assets here owned by foreigners. It is a stock figure, not a flow.

THE 10 ECONOMIC GOALS AND THE EFFECTS ON THE BALANCE OF PAYMENTS

If the economy grows faster	The B of P worsens, as growth sucks in imports to sustain production + higher incomes mean consumers buy more foreign goods/services (*they are income elastic!).
If the standard of living rises	The B of P worsens as consumers buy more foreign goods and services (again, income elastic).
If resource allocation improves	The B of P probably improves, because the country is doing what it is best at.
If income distribution becomes more equal	The B of P probably improves, as the rich reduce their purchases of foreign goods/services; but average incomes do not rise enough to suck in many new imports.
If inflation increases	The B of P worsens, as our X’s fall and M’s rise.
If unemployment increases	The B of P probably gets a bit better, because incomes are lower, so consumption falls and M’s reduce.
Value of the pound	If pound gets weaker it encourages our X’s and discourages M’s, so the B of P probably improves. NB The currency may be weak because the B of P is already poor!