24. Balance of Payments

Question 1

What are the Balance of Payments?

Answer 1

The balance of payments is a set of accounts that records the payments and receipts between consumers, businesses and the government in one country and the rest of the world.

Divided into 3 sections:
Current
Financial
Capital

Question 2

What is the Current account?

Answer 2

The current account identifies transactions in goods and services, together with some income payments and international transfers.

Question 3

What is the Financial account?

Answer 3

The financial account measures transactions in financial assets, including investment flows and central government transactions in foreign reserves.

Question 4

What is the Capital account?

Answer 4

The capital account, contains capital transfers.

Question 5

What are the 4 components of the Current account?

Answer 5

1. Trade in goods
2. Trade in services
3. Primary income
4. Secondary income

Question 6

1. Trade in Goods

Answer 6

The UK still manufacturers goods, but we have become a net importer.

Question 7

2. Trade in services

Answer 7

This deficit in goods, is partly offset by a surplus in services (e.g. insurance, financial services and business services and finance.

Question 8

3. Primary Income

Answer 8

Wages:
If UK companies pay UK workers abroad, this leads to money leaving the UK and is a debit on the current account. Currently, outflows to UK workers are greater than inflows to foreign workers in UK.

Investment incomes:
This is income received on direct investment. UK companies making profits overseas is a credit; foreign companies making profits in the UK is a debit. More and more UK companies have foreign ownership leading to a deficit in this component.

Question 9

4. Secondary Income

Answer 9

is a transaction representing “something for nothing”.
Transfers can be in the form of money or of goods or services provided
without the expectation of payment.

Remittances (Polish workers sending money back to Poland)
Charitable Donations