Balance of Payments

Macroeconomics: Balance of Payments

Note: getrevising would not allow me to attach the pictures of the graphs

The Current Account

-     What is the Current Account?

The Current account records payments for imports and exports of goods and services, as well as incomes flowing into and out of the country. The current account is normally divided into four subdivisions.

-      What divisions are there in the Current Account?

•        Trade in Goods: value of goods exported minus the value of goods imported.

The trade in Goods may also be referred to as visible trade. This has shown a deficit for the UK. The UK has been a net imported of oil since 2004, this has resulted from the depletion of North Sea oil reserves. Also, the imports of cars and other consumer goods exceed exports.

I.         Exports result in an inflow of money, this makes them a credit item

II.    Imports  result in an outflow of money, this makes them a debit item.

Causes of a Surplus (e.g. Canada, China, Germany, India)

Causes of a Deficit (e.g. UK, USA, most countries)

-   Relatively low labour costs – this will mean that the country is more competitive, e.g. in China.

-   High quality goods, e.g. German cars.

-   Undervalued currency, e.g. the Chinese Yuan.

-   Ownership of a vital raw material, e.g. oil in Saudi Arabia.

-   Low domestic demand – export market is the only option.

-   High productivity (output per worker), such as Japan – linked to the quality of the workforce.

-   Lax relaxation, e.g. low health and safety rules in China.

-   Relatively low rates of inflation.

-   Access to the market, e.g. transport links.

-   Relatively low productivity.

-   High relative inflation.

-   UK – more service based – most services traded domestically.

-   Overvalued currency.

-   High MPM (marginal propensity to import).

-   Low investment in human capital.

-   High labour costs.

•        Trade in Services: value of services exported minus the value of services imported.

Examples of imports of services: transport, tourism and insurance. These are debit items because they are outflows of money.

Examples of exports of services: insurance, financial services, computer and information services. These are credit items as they are inflows of money.

The trade in Services may also be referred to as invisible trade. The trade in services has recorded a surplus every year since 1966, The largest deficit in terms of trade in services are transportation and travel due to the increasing number of UK residents travelling abroad. This is more than compensated for by surpluses in financial services and computer and information services. Also, there has been significant contribution to the surpluses by trade-related services.

•        Income balance: income flows into the country from non-residents minus income flows out of the country…