Balance of Payments
Balance of Payments = A record of the UK’s transactions with the rest of
the world in a given period of time.
What Makes up the BOP:
1) Current Account:
Current Account = Records national Income and Expenditure Flows,
primarily relating to trade in tangible and intangible goods.
- Current Account includes the Trade Account
- Current account DOES NOT MEASURE QUANTITY - it measures
VALUE
- Biggest Part of BOP
Trade Account = The trade in goods and services in an economy (Trade in
goods + Trade in Services)
- How much money is spent on imports and generated from export
revenue.
Income Account = Investments + Transfers = Net primary income + Net
secondary income.
- How much money is coming into the country and how much is
coming into the country.
Constituents of the Current Account:
1) Trade In Goods = Exports and Imports of Goods (X-M)
E.g foods, raw materials, manufacturers, semi-manufacturers
2) Trade In Services = Exports and Imports of Services (X-M)
E.g Finance, construction, transport, telecom, tourism
3) Net Primary Income = Incomes from interest,profits and dividends
generated from foreign Investment and migrant remittances.
E.g profit/interest/dividends from investments in other countries or migrant
remittances.
, 4) Net secondary income = Provision of an economic value by one party
without directly receiving a counterpart item of economic value.
‘Something for nothing’
E.g Payment of fees (EU), Contribution of Aid
- Current Account will be a net Negative or Net positive
Negative Current Account = Current Account Deficit
Positive Current Account = Current Account Surplus.
2) Capital Account: (don't need to know what is in it - Just that it
Exists)
- Sale/transfer of patents, copyrights, franchises and leases.
- Debt forgiveness.
3) Financial Account:
Financial Account = The transactions that result in a change of ownership
of financial assets and liabilities between Uk residents and non-residents.
Constituents of Financial Account:
1) Net balance of Portfolio Flows = Buying and selling of financial assets
- If overseas investors buy UK gov bonds = inflow into UK financial
accounts.
- If Uk individuals buy USA Shares - outflow of money from UK
financial accounts.
E.g Bonds, Shares
2) Net Balance of FDI
If a foreign firm sets up in UK - inflow into FDI part of financial account - hot
money inflows
If UK firms move to other countries - outflow of FDI part of financial account
- hot money outflows.
3) Balance of Currency Reserves = Reserves held by the central bank
of gold/ foreign currencies.
Balance of Payments = A record of the UK’s transactions with the rest of
the world in a given period of time.
What Makes up the BOP:
1) Current Account:
Current Account = Records national Income and Expenditure Flows,
primarily relating to trade in tangible and intangible goods.
- Current Account includes the Trade Account
- Current account DOES NOT MEASURE QUANTITY - it measures
VALUE
- Biggest Part of BOP
Trade Account = The trade in goods and services in an economy (Trade in
goods + Trade in Services)
- How much money is spent on imports and generated from export
revenue.
Income Account = Investments + Transfers = Net primary income + Net
secondary income.
- How much money is coming into the country and how much is
coming into the country.
Constituents of the Current Account:
1) Trade In Goods = Exports and Imports of Goods (X-M)
E.g foods, raw materials, manufacturers, semi-manufacturers
2) Trade In Services = Exports and Imports of Services (X-M)
E.g Finance, construction, transport, telecom, tourism
3) Net Primary Income = Incomes from interest,profits and dividends
generated from foreign Investment and migrant remittances.
E.g profit/interest/dividends from investments in other countries or migrant
remittances.
, 4) Net secondary income = Provision of an economic value by one party
without directly receiving a counterpart item of economic value.
‘Something for nothing’
E.g Payment of fees (EU), Contribution of Aid
- Current Account will be a net Negative or Net positive
Negative Current Account = Current Account Deficit
Positive Current Account = Current Account Surplus.
2) Capital Account: (don't need to know what is in it - Just that it
Exists)
- Sale/transfer of patents, copyrights, franchises and leases.
- Debt forgiveness.
3) Financial Account:
Financial Account = The transactions that result in a change of ownership
of financial assets and liabilities between Uk residents and non-residents.
Constituents of Financial Account:
1) Net balance of Portfolio Flows = Buying and selling of financial assets
- If overseas investors buy UK gov bonds = inflow into UK financial
accounts.
- If Uk individuals buy USA Shares - outflow of money from UK
financial accounts.
E.g Bonds, Shares
2) Net Balance of FDI
If a foreign firm sets up in UK - inflow into FDI part of financial account - hot
money inflows
If UK firms move to other countries - outflow of FDI part of financial account
- hot money outflows.
3) Balance of Currency Reserves = Reserves held by the central bank
of gold/ foreign currencies.
