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!