AS Macroeconomics - all you need to know about the Balance of Payments

Everything you need to know for AS about the Balance of Payments. Covers both the Current and Capital Account, deficit and surplus, as well as the solutions (both demand side and supply side) to a Current Account deficit :)

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Balance of Payments
A balanced Balance of Payments is another of the Governments four major macroeconomic objective
­ although it has taken the backseat for a few years now. This should be everything you need to
know for this section.
What is it?
The Balance of Payments is a record of all the financial dealings that the UK has with the rest of the
world. It can be split into the Current Account and the Capital Account
Current Account
Exports Imports Balance Description
(£million) (£million) (£million)
Trade in goods 245,000 322,000 -72,000 Imports and
(visible trade) exports of goods
Trade in services 125,000 95,000 30,000 Imports and
(invisible trade) exports of
services, including
financial services
and tourism
Investment 240,000 221,000 19,000 Inflows and
income flows outflows from
businesses
/governments
past investment
Current transfers 16,000 28,000 -12,000 Transfers by
of money individual
businesses and
government
Current Account -35,000
Balance
As you can see the UK exports a lot of services, in fact we are the 2nd biggest exporter of services in
the world.
However, we don't export nearly as many goods as we import- we have a large deficit in this area
which, because it is so large leads to an overall deficit on the current account (we have more money
leaving the country than coming in essentially)

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Solutions to a Current Account Deficit
If the problems are Demand Side (that is caused by excess demand in our
economy meaning that consumers are likely to buy a high level of imports:
Raising interest rates ­ lessens overall demand and hence demand for imports
Devaluation of the Exchange Rate ­ a weak Pound means Imports are more expensive and
exports are cheaper so level of imports decreases whereas the level of exports increases
Higher direct taxes ­ this causes a fall in disposable income…read more

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