IGCSE Economics
The Balance of Payments
IGCSE Balance of Payments
What is the balance of payments?
The balance of payments records of all international financial
transactions
BoP accounts includes:
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Trade in Goods
Trade in Services
Net Flow of Investment Income from Overseas Assets
Transfers of Money between people and governments
Capital Flows
Direct investment (factories, mergers and acquisitions)
Financial Investment – savings in stocks & bonds
Currency trading
IGCSE Balance of Payments
Balance of Payments Accounts – This part is very important!
To calculate
+ Trade balance in goods (visibles + / - )
+ Trade balance in services (invisibles + / - )
+ Net investment income ( + / - )
+ Transfers ( + / - )
= Current Account balance - You need to know this
+ Capital Account Flows (From savings and borrowing + / - )
= Balance of Payments – You need to know this
IGCSE Balance of Payments
Trade in Goods - make sure you can give examples!
Consumer durables
 Household goods (audio visual, furniture etc)
 Motor vehicles
Capital goods / technology /software
Commodities (including oil and other fuels)
Components & basic raw materials
Foodstuffs and Beverages
Semi-finished manufactured products
IGCSE Balance of Payments
Explaining an actual deficit (UK or USA) in the Trade
in Goods
Demand Side Explanations (Cyclical)
 Rising economic growth – increased demand for inputs as we get richer can’t produce all that we consume so we rely in imports to plug the gap.
 Strong growth of real consumer spending (as we get richer!)
 Effect of the strong exchange rate – leading to a slower growth of export
(+ expensive) and fast growth of imports (cheaper)
Supply Side Explanations (structural) - Extension only!
 Insufficient productive capacity from suppliers - Linked to relatively low
rate of capital investment in the longer term. Can’t meet domestic
demand.
 Inadequate non-price competitiveness in many markets. Goods are
lower quality and less attractive e.g. cars.
 A research and development gap in key industries – UK has smaller
share of global patents than other comparable countries
 Changing comparative advantage in the global economy - emergence
of new lower-cost competition (Asia and NIC’s)
IGCSE Balance of Payments
Trade in Services (Tertiary and quaternary)
Tourism
Travel / Civil Aviation
Insurance
Consultancy
Banking and Accountancy services
Data processing
Information services
Music & Entertainment
Shipping
IGCSE Balance of Payments
A Structural Surplus for Services (in the UK – HK as well?)
Britain enjoys a comparative advantage in many service
industries
 Highly developed financial system (City of London)
 Significant capital accumulation (including inward investment from
overseas financial organisations. The UK is a good place to
invest and made so by the Govt)
 Skilled labour force
Not all services in the UK enjoy a surplus
 Tourism and Travel has a deficit
 Transport and communication
Surplus in services is not sufficient to offset the trade deficit in
goods
IGCSE Balance of Payments
Net Investment Income
Investment income comes from interest, profits and
dividends from foreign assets owned by UK residents and
companies
The UK earns income from our external assets overseas
Net flow for the UK is positive
 Reflect high level of investment overseas
 = Difference between GDP (generated domestically) and GNP
(total)
Net investment income values are quite volatile – difficult to
predict from year to year. Nobody could predict SARS, 9 /11,
IRAQ war ..
 Fluctuations in global stock markets
 Fluctuations in exchange rates
 Changes in the world economic cycle
IGCSE Balance of Payments
Net Overseas Transfers
Transfers across countries
 Government payments to the European Union
 Government spending on embassies & armed forces
commitments
Private transfers between households
Transfers account is negative for the UK
 Largely the result of UK being a net contributor to the
European Union. UK pays a huge amount to the EU!
 UK is one of the richer nations within EU15 and therefore is a net
contributor to the EU budget
IGCSE Balance of Payments
The Current Account
Current account balance =
Balance of trade in goods
+ Balance of trade in services
+ Net Investment Income from External Assets
+ Transfers
If inflows are greater than outflows, the UK is running a current
account surplus.
If outflows exceed inflows – the UK is running a deficit
Current account balance can be measured in $$$$s or as a share of
national income (% of GDP)
IGCSE Balance of Payments