Harry Bindloss

BALANCE OF PAYMENTS

Balance of payments: A set of accounts showing the transactions conducted between residents of a country and the rest of the world. Exports: Goods and services produced domestically but sold abroad. Imports: Goods and services produced abroad but purchased domestically. Balance of payments: Composition 1. Current account 2. Capital account 3. Financial account

Current Account The current account is split into four main components. 1. Trade in goods this covers visible trade the export and import of physical products. Visible exports Visible imports = Balance of (visible) trade 2. Trade in services sometimes known as invisible trade. Trade in services such as tourism, shipping, banking, insurance and other financial services. Invisible exports Invisible imports = Balance on invisible trade 3. Income this covers the incomes from profits, dividends and interest receipts from abroad minus the profits, dividends and interest paid abroad. 4. Current transfers Transfers of money take place when money changes hands without any necessary economic transaction taking place. For example, governments may give money to other governments in the form of aid.

Capital Account The capital account shows transfers of capital, including government investment. This refers to the purchase and sale of fixed assets, such as land or a major construction project, as well as non-tangible assets such as patents and trademarks.

Harry Bindloss Financial Account This section looks at the various flows of investment into and out of the UK. There are many forms that this investment can take; the purchase and sales of companies, investment in the form of purchase and sale of shares in foreign companies etc.

Effects of Surpluss and Deficits The causes of a balance payments deficit on the current account: Increase in exchange rates exports will be more expensive and imports cheaper, demand for imports will rise leading to deficit Cheap imports from low wage countries Boom in domestic economy, increased disposable income leading to imports increasing

Costs of a balance of payments deficit on the current account: Increased unemployment Loss in confidence Fall in foreign reserves Fall in value of the pound.