What is the balance of payments
A record of a country’s trade and transactions with the rest of the world
What is the balance of payments made up of
Current account, capital account, financial account
What is the current account
A record of a country’s trade in goods and services, investment income and transfers with the rest of the world
What is the capital account
Transfers of the ownership of fixed assets
What is the financial account
Involves investment: portfolio investment and direct investment
What is the difference between direct investment and portfolio investment
Direct investment is over 10% of capital invested and portfolio investment is under 10% of capital investment
How is the current account calculated
- X-M (balance of trade)
- Interest, profits and dividends
- Foreign aid, gift flows
1+2+3 = current account balance
What is a current account surplus
When exports are greater than imports
x>m
What is a current account deficit
When imports are greater than exports
M>X
What are visibles
trade in goods
What are invisibles
trade in services
Why has UK traditionally run in a large deficit of goods
- Increase in demand of consumer goods
- Decline in secondary sector
- Lower production of primary materials such as oil and gas
- strong currency makes imports more affordable
Why has UK traditionally run in a large surplus of services
- Shift in focus to tertiary sector - specialising in services
- London is one of the world’s prime financial centres leading to a major source of wealth and income
What is Primary income
Results from the factors of production abroad, mainly generated by interest, profits and dividends
What is secondary income
A range of mainly government transfers to and from overseas organisations. Includes: foreign aid and gift flows
What does a BOP deficit suggest about an economy
It is uncompetitive
What are the consequences of a BOP deficit
- Higher import prices, leading to inflation
- Job losses, as more goods are being imported rather than produced domestically
What does a BOP surplus suggest about an economy
It is competitive
What are the consequences of a BOP surplus
- Low economic growth due to a low domestic demand
