Balance of Payments Flashcards
What is balance of payments
Balance of payments is a record of all the payments (or transactions) between one country and the rest of the world.
It is the record of all the money flowing in and out of the country
Name 2 sections of balance of payments
1) Current account
2) Capital and financial account
4 parts of current account
1) Trade in goods
2) Trade in services
3) Current transfers
4) Investment income
What are current transfers with an example
Current transfers are when money is transferred abroad without receiving any goods or services in exchange. Common examples are foreign aid and workers wages which are sent back home.
What is the meaning of remittance
A remittance is the transfer of money from one person to another such as foreign workers to family, invoice or bill payment, foreign income to the UK.
Current account deficit
When the outflows are greater than inflows
Current account surplus
When the inflows are greater than outflows
Current account equilibrium
When Total inflows=Total outflows
What is the Capital and Financial account
It is a part of the Balance of Payments. It tracks the INVESTMENTS flowing in and out of the country
Why the UK government would want to reduce the current account deficit and reach equilibrium? In detail
A current account deficit always needs to be balanced by a Capital and Financial account surplus. A capital and financial account surplus means that foreign investors are investing in UK assets such as buying shares or property. Any profit from these investments will then be sent to overseas to those foreign investors meaning even more money is withdrawn from the UK economy. By reducing a current account deficit, the capital and financial account surplus will be smaller. This means that there will be less foreign investment and so less future earnings leaking out of the country.
