6.4 - Current account of balance of payments
6.4.1 Structure
Balance of payment: A record of an economy’s international transactions
Current account
Current account: A section of balance of payments which records international
transactions relating to goods and services, incomes, and transfers
1) Each quarter, govt will collect statistics of the BOP on current account
2) Govts do this so that they can monitor how well/badly the country is performing
in international trade/income transfers with other countries
3) Every year, govts will publish a report on their current account, showing a deficit
or a surplus
● Money flowing into the country is recorded in the relevant account as a credit (+)
and money flowing out as a debit (-)
● Current account surplus occurs when the credits (money in) are higher than the
debits (money out)
○ Net receipts > net payments
● Current account deficit occurs when the credits (money in) are less than the
debits (money out)
○ Net receipts < net payments
Components
1) BOP in goods - visible trade balance
● Value of exported goods < value of imported goods
2) BOP in services - invisible trade barriers
● Value of exported services < value of imported services
3) Primary income (net income flows)
4) Secondary income (current transfers)
Primary incomes (net income flows)
● This records Y received or made in payments for the use of FOP w/ other
countries
● Consists of income transfers by citizens and corporations
Income debits ($$ leaving the country)
1) Wages paid to overseas residents (remittance)
, 2) Profit + dividends paid to overseas residents
3) Profits + dividends from FDI
● E.g
○ Credits are received from UK citizens who are abroad & send remittances
home
○ Debits are sent by foreigners working in the UK back to their countries
○ Income credits - Income debits = net primary income
Income credits ($$ coming into the country)
1) Wages paid to nationals working abroad
2) Profits and dividends earned by nationals abroad
3) Profits and dividends from FDI into other countries
Secondary incomes (current transfers)
● This records payments between govts for international cooperation and other
transfer payments
● Receives income without production (it’s like an UE benefit)
Debits ($$ leaving the country)
1) Donations, gifts + pension paid to overseas residents
2) Taxes + excise duties paid by nationals on G/S purchased overseas
3) Aid/grants given to other countries (e.g LDC)
Credits ($$ entering the country)
1) Donations, gifts, pension receive by nationals from overseas
2) Taxes + excise duties paid by overseas residents on G/S purchased locally
3) Aid/grants received from countries/EU/UN/IMF (e.g LDC)
Factors that cause a change in the value of exports and imports
1) Inflation rate ↓
● When there is an ↑ inflation rate → sell more exports + buy more imports
● When there is an ↓ inflation rate → sell less exports + buy less imports
2) ER
● ↓ ER → more exports
○ Sell more to depreciate currency until other countries’ firms close
down
3) Productivity
4) Quality - need a lot of R/D and innovation
5) Marketing
6.4.1 Structure
Balance of payment: A record of an economy’s international transactions
Current account
Current account: A section of balance of payments which records international
transactions relating to goods and services, incomes, and transfers
1) Each quarter, govt will collect statistics of the BOP on current account
2) Govts do this so that they can monitor how well/badly the country is performing
in international trade/income transfers with other countries
3) Every year, govts will publish a report on their current account, showing a deficit
or a surplus
● Money flowing into the country is recorded in the relevant account as a credit (+)
and money flowing out as a debit (-)
● Current account surplus occurs when the credits (money in) are higher than the
debits (money out)
○ Net receipts > net payments
● Current account deficit occurs when the credits (money in) are less than the
debits (money out)
○ Net receipts < net payments
Components
1) BOP in goods - visible trade balance
● Value of exported goods < value of imported goods
2) BOP in services - invisible trade barriers
● Value of exported services < value of imported services
3) Primary income (net income flows)
4) Secondary income (current transfers)
Primary incomes (net income flows)
● This records Y received or made in payments for the use of FOP w/ other
countries
● Consists of income transfers by citizens and corporations
Income debits ($$ leaving the country)
1) Wages paid to overseas residents (remittance)
, 2) Profit + dividends paid to overseas residents
3) Profits + dividends from FDI
● E.g
○ Credits are received from UK citizens who are abroad & send remittances
home
○ Debits are sent by foreigners working in the UK back to their countries
○ Income credits - Income debits = net primary income
Income credits ($$ coming into the country)
1) Wages paid to nationals working abroad
2) Profits and dividends earned by nationals abroad
3) Profits and dividends from FDI into other countries
Secondary incomes (current transfers)
● This records payments between govts for international cooperation and other
transfer payments
● Receives income without production (it’s like an UE benefit)
Debits ($$ leaving the country)
1) Donations, gifts + pension paid to overseas residents
2) Taxes + excise duties paid by nationals on G/S purchased overseas
3) Aid/grants given to other countries (e.g LDC)
Credits ($$ entering the country)
1) Donations, gifts, pension receive by nationals from overseas
2) Taxes + excise duties paid by overseas residents on G/S purchased locally
3) Aid/grants received from countries/EU/UN/IMF (e.g LDC)
Factors that cause a change in the value of exports and imports
1) Inflation rate ↓
● When there is an ↑ inflation rate → sell more exports + buy more imports
● When there is an ↓ inflation rate → sell less exports + buy less imports
2) ER
● ↓ ER → more exports
○ Sell more to depreciate currency until other countries’ firms close
down
3) Productivity
4) Quality - need a lot of R/D and innovation
5) Marketing
