The balance of payments

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The meaning of the balance of payments on current

  • The official records published by the government of all the currency flows into and out of the country

Current Account - includes exports and inports - it measures income generated in the current time period flowing into and out of the country

Capital flows - occur when residents of one country acquire capital assests such as factories and oil freineries, located in other countries

The acquasition of overseas-located assests leads to investment income (a current account item) flowing into the country in future years, and that capital flows affect monetary policy

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Current account surpluses, deficits and equilibriu

Current account of the balance of payments - onlt two items on the current account: exports and imports of goods and services

3 main posibilities:

  • When, Value of exports > value of imports - current account surplus
  • When, Value of exports < value of imports - current account deficit

  • When, Value of exports = value of imports - current account in equilibrium
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The different items in the current accounr of the

Exports and imports can be divided into:

  • exports and imports of goods (balance of trade in goods)
  • exports and improrts of services (balance of trade in services)

Non-trade items in the current account:

Net Income -  - profits flowing ot UK companies from their investment in other countries, MINUS net profit outflows repatriated to foreign companies from their investment in the UK. Also included are net interest payments, comprising interest received by British banks on loans they have granted overseas, MINUS interest payments flowing to overseas banks from their loan to clients in the UK

Net transfers - Outwards transfers from the UK are UK foreign aid and income sent overseas by immigrant workers in the UK to their families living in their countries of origin. An inwards transfer would be money paid by overseas government for the upkeep of their embassies in the UK

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Strengths and weaknesses in the UK current account


  • export earning of finacial services and insurance - reflects the competitiveness of the City of London in the world finacial markets


  • Uncompetitiveness of UK manufactured goods in world markets
  • Process known as deindustrialisation - manufactured goods now account for less than 15% of UK output and most manufactured goods are now imported
  • Energy sector - Uk in recent years has switched from being a net exporter of oil and gas to become and net importer in a world in which energy prices often rise and supplies can no longer be guaranteed
  • Considerable contraint on the UK's freedom to pursue domestic economic policy
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