2.1.4 Balance of payments

Question 1

What is the balance of payments (BoP)?

Answer 1

It is a record of all economic transactions between a country and the rest of the world.
It is divided into two main components: the current account and the capital and financial account.
Exports are positive in the balance of payments, because they are an inflow of money.
Imports are negative on the balance of payments, because they are an outflow of money.

Question 2

What is the balance of trade in goods?

Answer 2

It measures the difference between the value of a country’s exports and imports of tangible goods.
- A surplus occurs when a country exports more goods than it imports.
- A deficit occurs when a country imports more goods than it exports.

Question 3

What is the balance of trade in services?

Answer 3

It accounts for the value of services traded internationally, such as tourism, financial services, and consulting.
A surplus occurs when a country exports more services than it imports.
A deficit occurs when a country imports more services than it exports.

Question 4

What is an income balance?

Answer 4

It includes earnings from abroad (e.g. dividends, interest, wages) and payments made to foreign investors.
A surplus indicates that a country earns more from its foreign investments than it pays to foreign investors.

Question 5

What is a current transfer?

Answer 5

It includes foreign aid, remittances sent by migrant workers, and other unilateral transfers. It can be positive (inflows) or negative (outflows).

Question 6

What is a current account deficit?

Answer 6

It occurs when a country’s imports of goods, services, income and transfers exceed its exports in those categories.
It implies that a country is spending more than it is earning from the rest of the world.

Question 7

What is a current account surplus?

Answer 7

It occurs when a country’s exports of goods, services, income and transfers exceed its imports in those categories.
It implies that a country is earning more from the rest of the world than it is spending.

Question 8

What are the causes of an imbalance in the current account and how might these aid other macroeconomic objectives?

Answer 8

• Appreciation of the currency means imports are cheaper and exports are more expensive, which means the current account deficit would worsen. If this deficit is persistent, the currency may begin to depreciate again, making exports more competitive and imports more expensive. This can help to correct the deficit.
• A surplus can lead to higher savings and investment, potentially boosting economic growth. However, a persistent deficit may lead to unsustainable borrowing.
• A trade surplus may support job creation in export-oriented industries, while a deficit can lead to job losses in import-competing sectors.
• A depreciating currency (due to a deficit) can lead to imported inflation, affecting the domestic price level.
• Deindustrialisation in the UK might mean that the goods the UK previously made now have to be imported, which worsens the deficit.

Question 9

What are the links between international trade and the interconnectedness of economies?

Answer 9

• Many products involve components from multiple countries. Disruptions in one country can disrupt global supply chains.
• International trade allows countries to specialise in producing what they are most efficient at, leading to efficiency gains and a higher standard of living.