Balance of Payments Definitions

Question 1

Define Balance of Payments (1)

Answer 1

• A record of all the financial transactions between one country and the rest of the world

Question 2

Define a Current Account (3)

Answer 2

• This is a statement of the transactions relating to the balance of trade - goods and services
• Primary income - net investment income
• And Secondary Income - net current transfers

Question 3

Define a Capital Account (3)

Answer 3

• This is a very small component of the Balance of Payments. It typically includes transfers that are one-way flows
• Such as gifts as opposed to commercial exchanges
• For example, debt forgiveness to LEDCs is recorded in the capital account

Question 4

Define a Financial Account (5)

Answer 4

• This is the component of a country’s balance of payments that covers changes in ownership of financial assets
• It includes Direct investment - Buying a foreign firm
• Portfolio investments - Buying a foreign Share
• Other Investments - foreign ‘cash’ transactions
• And reserve assets - Governments buying their own currency

Question 5

Define the Balance of Trade (3)

Answer 5

• This forms the major component of the current account
• It is the differnce between the value of exports and imports
• Of goods and services

Question 6

Define a Trade Deficit (3)

Answer 6

• Sometimes referred to as a trade gap
• This is where the value of a country’s imports of goods and services exceeds the value of exported goods and services
• This is the same as a negative figure for net exports

Question 7

Define a Trade Surplus (3)

Answer 7

• Sometimes referred to as a trade gap
• This is where the value of a country’s exports of goods and services exceeds the value of imported goods and services
• This is the same as a positive figure for next exports

Question 8

Define Primary Income (4)

Answer 8

• This is a component of the Current Account
• It comprises of mostly investment income generated by owning assets abroad
• e.g profits earnt from owning shares in an overseas company
• Or compensation to an employeee working in one country by a firm from another country

Question 9

Define Secondary Income (4)

Answer 9

• This is a component of the Current account
• These are transfers that occur between countries with nothing recieved in return
• Good examples include international aid
• Or migrant workers sending wages home (remittances)