UK Balance Of Payments
The Balance of Payments is a record of a country’s transactions with the rest of the world. It shows the receipts from trade. It consists of the current and financial account
Current account
This is a record of all payments for trade in goods and services plus income flow it is divided into 4 parts
- Balance of trade in goods (visibles)
- Balance of trade in services (invisibles) e.g. tourism, insurance
- Net income flows (wages and investment income)
- Net current transfers (e.g. govt aid)
- Financial account
This is a record of all transactions for financial investment. It includes
- Net investment from abroad (e.g. A UK firm buying a factory in Japan would be a debit item)
- Net financial flows - These are mainly short term monetary flows such as “hot money flows” to take advantage of exchange rate changes
- Reserves
(note the Financial Account used to be called the Capital Account)
- Capital Account
This refers to the transfer of funds associated with buying fixed assets such as land
- Balancing Item
In practice when the statistics are compiled there are likely to be errors therefore the balancing item allows for these statistical discrepancies
Balance of Payments Equilibrium
- In a floating exchange rate the supply of currency will always equal the demand for currency, and the balance of payments is 0.
- Therefore if there is a deficit on the current account there will be a surplus on the financial account.
- If there was an increase in interest rates this would cause hot money flows to enter into the UK, therefore there would be a surplus on the financial account
- UK Balance of Payments at National Stats office
Revision Notes - Balance of Payments
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