Measuring Balance of Payments

Question 1

The balance of payments refers to international flows of money

Answer 1

the balance of payment records:
1. flow of money out of a country, e.g. to pay for imported goods
2. the flow of money into a country, e.g. payments from exported goods
The value of exports and imports that’s calculated in the balance of payments, not the volume. So if price changes, but volume remains the same, then the value of exports and imports will change

Question 2

Four sections to the Current Account

Answer 2

The main part of the balance of payments you need to know for your exam is the current account, which records the international exchange of goods and services. It consists of 4 sections:

1. Trade in goods (‘visible trade’) - goods will either be visible imports or visible exports e.g. cars, food.
2. Trade in services (‘invisible trade’) - these can be imported or exported too e.g. tourism, insurance
3. International flows of income earned as salaries, interest, profit and dividends. Examples: interest on an account held in a foreign country
4. Transfers of money from one person or government to another. Examples: foreign aid

Question 3

The balance of payments isn’t always balanced

Answer 3

1. the flows of money coming into a country may not balance the flows of money out
   - if the money flowing in exceeds the money flowing out, there’s surplus
   - if the money flowing out exceeds the money flowing in, there’s a deficit
2. In recent years, the UK has had a deficit in its balance of payments. Although the UK has usually had a surplus in invisible trade, it also had a large deficit in visible trade.
3. Deficit isnt necessarily a bad thing - might be a sign that the country is uncompetitive
4. governments want to avoid a large, long-term deficit - could cause bigger problems e.g. job losses