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The Balance of Payments
What are open and closed economies?
-An open economy is one that exports and imports goods and services.
-A closed economy is one that does not export or import any goods or services.
What is the balance of payments?
The balance of payments is the record of the country's transactions with the rest of the world. There
are two main sections of the balance of payments and they are the current accounts and the capital
and finance accounts.
The BoP is the total amount of exports minus the amount of imports.
If the BoP is positive, the UK are exporting more and importing less.
If the BoP is in a surplus the UK exports more than it imports.
If the BoP is negative, the UK is exporting less than they are importing.
If the BoP is in deficit, the UK imports more than it exports.
What is the capital (Finance) account?
This records the flow of money relating to savings, investment and speculation, for example financial
services and transportation services. This includes foreign direct investment, portfolio investment
and other investment.
What is the current account?
This records the payments for purchases and sales of goods and services such as energy, raw
materials and manufactured goods. The current account itself has four sections: trade in goods, trade
in services, Investment income and transfers.
The Current Account of Balance of Payments:
Trade in Goods: this includes anything visible or tangible, such as food or electrical goods.
Trade in services: this includes invisible services such as banking, insurance or transportation
Investment Income: Consumers in the UK put their money into assets abroad and over time
receive interest and profits.
Transfers: Money sent from foreigners working in the UK to relatives abroad. This includes
aids; aid is money given by one country to another. The government transfers between
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The Capital Account of the Balance of Payments:
Foreign investment: E.g. funds coming into a country from abroad to finance a takeover.
Portfolio Investment: this includes money flow to buy shares and buying bonds and debt
issued by firms and the government.
The exchange rate is the price of one currency in terms of another. If the exchange rate goes up it
means the domestic currency (£) is worth more, for example, you can buy more dollars for your