The Balance of Payments

What is the Balance of Payments?

 In economics, the balance of payments (BOP) measures the financial

transactions made by consumers, businesses and the government in
the UK with people across the rest of the World.
 It is used to summarize all international economic transactions for that
country during a specific time period, usually a year.
 It reflects all payments and liabilities to foreigners (debits) and all
payments and obligations received from foreigners (credits).
 Balance of payments is one of the major indicators of a country’s status
in international trade.

What is the current account balance?

 The current account balance is one of two key components of the

balance of payments, the other being capital account.
 The current account balance is calculated using the formula below:

 Current account is the sum of the balance of trade, net factor income
and net transfer payments.
 Balance of trade is exports minus imports of goods and services.
 Net factor income and net transfer payments are incomes from
overseas assets. Net factor income arises from interest payments,
profits and dividends from external assets located outside the UK.
 The current account balance is volatile from year to year because each
of the 4 component parts is subject to wide fluctuations.
 Below shows the current account balance of the UK from the period
1996-2008:

Balance of trade Balance of trade Net Investment Current transfers Current account
in goods in services Income balance
£ billion £ billion £ billion £ billion £ billion
2000 -33.0 13.6 4.5 -10.0 -24.8
2001 -41.2 14.4 11.7 -6.8 -21.9
2002 -47.7 16.8 23.4 -9.1 -16.5
2003 -48.6 19.2 24.6 -10.1 -14.9
2004 -60.9 25.9 26.6 -10.9 -19.3
2005 -67.3 17.9 29.9 -12.2 -26.6
2006 N/A N/A N/A N/A N/A
2007 -22.7 11.2 6.3 -3.5 -8.7
2008 -23.5 13.6 6.7 -3.4 -6.3
Source: Office of National Statistics
Surplus or deficit?

 A trade surplus is known as a favorable balance of trade and consists

of exporting more than is imported.
 Similarly an unfavorable balance of trade is known as a trade deficit or
a trade gap where more is imported than exported.
Cumulative Current Account Balance 1980-2008

 The balance of trade forms part of the current account, which includes
other transactions such as income from the international investment
position as well as international aid.
 If the current account is in surplus, the country's net international asset
position increases correspondingly.
 Equally, a deficit decreases the net international asset position.
 To tackle current account deficit a country would need to increase its
exports or decrease their imports. This is usually accomplished by
imposing import restrictions, quotas or duties or subsidizing exports.

The UK’s imports surpass its exports because of demand and supply. If there
is a demand for foreign goods, they will be imported. A considerable amount
of the food supplies necessary to meet the demands have to be imported from
abroad, because in the UK we don’t have the conditions to grow fruit and
vegetables that require a warmer climate. Also, if a good is cheaper abroad, it
will make sense to buy that rather than the same good in the UK. The UK
economy ranks 4th in the world in terms of volume of imports.
 “The UK is a net importer of goods.”

This could be a problem, as it could represent our market as being too

dependent on foreign products. It also shows that the price of UK goods
cannot compete with prices abroad. UK consumers are deciding to buy
products that are cheaper and of a higher quality. It can mean that there will
be a loss of jobs, as more products are imported rather than produced in the
UK. As well as a fall in business confidence, as there is a decline in capital
investment spending by the UK exporting firms.

Although being a net importer of goods can cause problems, there are also
some advantages of having such an economy.

As in the short term, a country importing a high level of goods and services
will gain a boost in the living standards, as it allows higher quality products to
be provided. The UK should not worry too much about being a net importer of
goods, as it has a high level of trade in services. Showing that most jobs in
the UK are provided due to the services trade and the economy is not
necessarily shrinking.