5. Balance of Payments

Question 1

Balance of Payments (BoP) Definition

Answer 1

A record of a country’s trade with the rest of the world

Question 2

Measuring BoP

Answer 2

The Current Account:
-Trade in Goods
-Trade in Services
-Investment income
-Transfers

Question 3

Surplus

Answer 3

When the sum of exports of goods, services, investment income and transfers is less than imports.

Question 4

Deficit

Answer 4

When sum of exports of goods, services, investment income and transfers is less than imports.

Question 5

Trade in Goods

Answer 5

Measure exports of visible goods.
UK traditionally run a large deficit on the Trade of Goods component of the Current Account

Reasons for this:
-An increase in demand for consumer goods, many of which have to be imported
-Decline in UK manufacturing sector as a secondary production is outsourced to low wage economies-UK now imports large quantities of primary materials from other countries
-A strong currency makes imports of goods more affordable but exports less attractive to foreign buyers

Question 6

Trade in Services

Answer 6

Trade in services of invisible items
UK has traditionally run a large surplus on the Trade in Services component of the current account

Reasons for this:
-UK seen shift away from primary and secondary sectors towards tertiary sector employment, thus specialising in the provision of services.
-This specialisation has meant that the UK is more competitive in the provision of these services, and can offer better services at lower costs.
-London has developed as one of the world’s prime financial centres and became a major source of income and wealth generation in the UK

Question 7

Investment Income

Answer 7

-Investment Income is generated by UK owned overseas assets, e.g. a UK firm might own a company abroad, or generate income from overseas investment.
-The profits and dividends that are received are sent back to UK, and count as a credit item of Investment Income on the current account
-However, debit items also occur as foreign investments into UK may yield profits which are sent back to the country of investment origin.

Question 8

Transfers

Answer 8

Transfers are payments made (or received), useful by the government, to or from other countries

Main 2 transfers i