The UK Balance of Payments

What is it?

BOP is a detailed record of a country’s economic activities with other countries

Why is it important?

It gives an indication of how competitive an economy is in G&S and other

financial assets, but also is a component of AD and therefore driver/
reflection of Ec Growth
Balance of Payments Structure : Part 1

i) Current Account (most important and well known, day to day transacs)
1.Trade in goods
(known as visibles. Cr item (+) would be export of car to
US, Dr item (-) import of DVD player from HK)
2.Trade in services
(known as invisibles. Selling insurance to
French Co. is export, buying holiday from Air France is import)

BALANCE OF TRADE (1+2 or X-M)

3. Income
(mainly wages, investment income, profits, dividends, interest earnt
by UK Co’s o/s e.g BP in US, less income earnt here by foreign
Co’s.)
4. Current Transfers
(govt transfers: EU budget, aid flows
I inidividual transfers: transfers between bank accounts

BALANCE ON CURRENT ACCOUNT (1+2+3+4)

 Any deficit in the current account is funded by……..

ii) Capital Account

a) Capital Transfers – debt forgiveness, investment grants, non –life
insurance claims
b) Non-financial assets - Records the buying and selling of non-
produced and non-financial assets e.g patents, fishing rights
(v.small part)
BALANCE ON CAPITAL ACCOUNT

iii) Financial Account

a) Direct Investment: inv in physical K by o/s inv less FDI by UK inv o/s
b) Portfolio Investment: UK stocks, bonds etc.bought by o/s inv less those
Based overseas bought by UK investors
c) Reserve Assets: foreign curr reserve transacs by Central Bank
BALANCE ON FINANCIAL ACCOUNT

iv) Net Errors and Omissions

Current a/c + Capital a/c + Financial a/c should = zero
But v. complicated so this figure used to make sure it does balance
across borders
Long Term picture – what is it?
 BALANCE OF TRADE IN GOODS
Long Te rm B alan ce of Tra de in G ood s
10

-5

-10
£ billion

-15

-20

-25

-30

-35
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
B a lance of Pa y m e nts Cop yright Tu tor2u
Source: Office for National Statistics
 BALANCE OF TRADE IN SERVICES
Long Te rm B alan ce of Tra de in Serv ices
16

14

12

10
£ billion

0
B a lance of Pa y m e nts Cop yright Tu tor2u
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
 Balance of Trade in Goods and Services
UK BALANCE OF TRADE IN GOODS AND SERVICES

Trade in goods Trade in services

20

10

0
£ billion

-10

-20

-30

-40
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Does a Balance of Payments deficit matter?
Worrying – but does it matter?
 Britain’s Net Trade in Goods

(£ Million) 1994 1995 1996 1997 1998 1999 2000

Food, beverages and -3786 -4143 -5497 -5120 -5985 -7941 -8145
tobacco

Basic materials -2973 -3507 -3757 -3527 -3114 -3145 -3706

Oil 3941 4331 4823 4549 3045 4233 6628

Other fuels -788 -542 -516 -371 -420 53 505

Semi-manufactures 367 -1763 -1482 -915 -1658 -2178 -2195

Finished manufactures -8167 -6311 -6846 -6709 -12499 -18241 -22949

Unspecified goods 315 211 189 183 94 -305 -161

Total trade balance -11091 -11724 -13086 -11910 -20537 -27524 -30023

Balance of Payments Copyright Tutor2u

Britain’s Net Trade in Services

Trade Balance in
Services
(£ Million) 1994 1995 1996 1997 1998 1999 2000

Transportation -836 -533 -1096 -2112 -2217 -2617 -2451

Travel -3846 -2803 -2959 -3638 -6800 -8870 -10939

Communications -272 -319 -247 -201 -198 -251 90

Insurance 1654 2340 1517 2619 2643 3468 3267

Financial 4132 4283 4744 6087 6273 7943 10413

Computer & 517 502 757 852 1134 1735 1733

Information
Other business 5340 5346 7189 8758 10302 10928 10887

Total trade in 6528 8915 8897 12414 12582 11660 13779

services

Balance of Payments Copyright Tutor2u

 Where would the following appear in the
Balance of Payments?
1) UK Co. buys machinery from the Republic of Ireland
2) A US Co. buys its Scottish rival
3) Tesco’s profits on its’ stores in the Channel Islands
4) An Indian Co. selling customer support operations to
Standard Life UK
5) Department of Foreign International Development sending
urgent food parcels to Sudan
6) UK money used to purchase illegal Turkish cigarettes

7) i) What is the Current a/c balance for the following?

ii) What must Financial a/c balance be to balance the BOP?

Export goods £35m Net income £30m

Imports services £15m Exports services £45m
Imports goods £95m Reserves £-9
Capital transfers £-3m Portfolio inv £27
Non-prod assets £8m Net Transfers £-25
NEO £2m Direct inv £
How the Current a/c and Financial a/c are interdependent – part a)

Trade Deficit, consumption beyond PPC

x How can we afford

Good A
this, where does the
money come from and
A why is this controversial?

B
Good B
How the Current a/c and Financial a/c are interdependent – part b)

Trade Surplus, consumption within PPC

What does this leave us with?

What can we do with this and
why is this controversial?
Good A A

B
Good B
What is the link btwn type of ERS and why BOP balances?
i.e what does the Central Bank have to do (if anything) with the
exchange rate to get the BOP to balance?

Floating ERS

Managed ERS

Fixed ERS
 Causes of Curr a/c deficit on the BOP

Factors affecting Trade in G&S?

•Changes in income at home (Imp) and o/s (Exp)
•Changes in the Exch rate. What happens to Exp if £ v $ stronger?
•Structural changes in econ affecting Exp (pr, quality, lack of D)
•Productivity – weakens relative to other competitors, so pr up
•Protectionism – increases for X markets, if PED elastic, value X down
•Input prices – M prices rise, and also may neg affect X if used in process
e.g. Oil

Factors affecting Income a/c

•Income earnt on Investments made by Foreign owned Co’s.
overseas Fiscal policy limiting profits made
Exchange Rate, if not hedged
Political instability
Current Transfers
Immigration
 Causes of Curr a/c Surplus on the BOP

Factors affecting Trade in G&S?

•Changes in income at home (Imp) and o/s (Exp) – recession?
•Changes in the Exch rate. What happens to Exp if £ v $ weaker?
•Structural changes in econ affecting Exp (pr, quality, increase in D)
•Government Policy – China, Taiwan

Factors affecting Income a/c

•Income earnt on Investments made by FDI < those made by UK
Companies overseas.
•Indicator of competitiveness of UK firms?
•Likely to occur at what stage of the econ?

What are the potential consequences of

a Curr a/c Surplus?
UK Balance of Payments position…………
UK Balance of Payments

Rem: Current a/c has been in deficit since the early 80’s

Quickly evaluate the 2 views below about this:

i) Deficit needs cutting, services will not keep growing

fast enough to meet the shortfall
ii) Deficit is fine as it is, we have enough FDI to cover it
and relatively it’s not that big.