IGCSE Economics The Balance of Payments

IGCSE Balance of Payments

What is the balance of payments?

The balance of payments records of all international financial transactions BoP accounts includes:
Trade in Goods Trade in Services Net Flow of Investment Income from Overseas Assets Transfers of Money between people and governments Capital Flows
Direct investment (factories, mergers and acquisitions) Financial Investment savings in stocks & bonds Currency trading

IGCSE Balance of Payments

Balance of Payments Accounts This part is very important!

To calculate + Trade balance in goods (visibles + / - ) + Trade balance in services (invisibles + / - ) + Net investment income ( + / - ) + Transfers ( + / - ) = Current Account balance - You need to know this + Capital Account Flows (From savings and borrowing + / - ) = Balance of Payments You need to know this

IGCSE Balance of Payments

Trade in Goods - make sure you can give examples!

Consumer durables
Household goods (audio visual, furniture etc) Motor vehicles

Capital goods / technology /software Commodities (including oil and other fuels) Components & basic raw materials Foodstuffs and Beverages Semi-finished manufactured products

IGCSE Balance of Payments

Explaining an actual deficit (UK or USA) in the Trade in Goods

Demand Side Explanations (Cyclical)
Rising economic growth increased demand for inputs as we get richer cant produce all that we consume so we rely in imports to plug the gap. Strong growth of real consumer spending (as we get richer!) Effect of the strong exchange rate leading to a slower growth of export (+ expensive) and fast growth of imports (cheaper)

Supply Side Explanations (structural) - Extension only!

Insufficient productive capacity from suppliers - Linked to relatively low rate of capital investment in the longer term. Cant meet domestic demand. Inadequate non-price competitiveness in many markets. Goods are lower quality and less attractive e.g. cars. A research and development gap in key industries UK has smaller share of global patents than other comparable countries Changing comparative advantage in the global economy - emergence of new lower-cost competition (Asia and NICs)
IGCSE Balance of Payments

Trade in Services (Tertiary and quaternary)

Tourism Travel / Civil Aviation

Insurance
Consultancy Banking and Accountancy services

Data processing
Information services Music & Entertainment

Shipping

IGCSE Balance of Payments

A Structural Surplus for Services (in the UK HK as well?)

Britain enjoys a comparative advantage in many service industries

Highly developed financial system (City of London) Significant capital accumulation (including inward investment from overseas financial organisations. The UK is a good place to invest and made so by the Govt) Skilled labour force

Not all services in the UK enjoy a surplus

Tourism and Travel has a deficit Transport and communication

Surplus in services is not sufficient to offset the trade deficit in goods

IGCSE Balance of Payments

Net Investment Income

Investment income comes from interest, profits and dividends from foreign assets owned by UK residents and companies

The UK earns income from our external assets overseas

Net flow for the UK is positive
Reflect high level of investment overseas = Difference between GDP (generated domestically) and GNP (total)

Net investment income values are quite volatile difficult to predict from year to year. Nobody could predict SARS, 9 /11, IRAQ war ..
Fluctuations in global stock markets Fluctuations in exchange rates Changes in the world economic cycle
IGCSE Balance of Payments

Net Overseas Transfers

Transfers across countries

Government payments to the European Union Government spending on embassies & armed forces commitments

Private transfers between households Transfers account is negative for the UK

Largely the result of UK being a net contributor to the European Union. UK pays a huge amount to the EU! UK is one of the richer nations within EU15 and therefore is a net contributor to the EU budget

IGCSE Balance of Payments

The Current Account

Current account balance =

Balance of trade in goods + Balance of trade in services + Net Investment Income from External Assets + Transfers If inflows are greater than outflows, the UK is running a current account surplus. If outflows exceed inflows the UK is running a deficit Current account balance can be measured in $$$$s or as a share of national income (% of GDP)

IGCSE Balance of Payments