Balance of Payments

&
Current Account
Unit 15 - Lesson 1

Learning outcomes:
Outline the role of the balance of payments.
Distinguish between debit items and credit items in the balance of
payments.
Explain the four components of the current account, specifically the
balance of trade in goods, the balance of trade in services, income and
current transfers.
Distinguish between a current account deficit and a current account
surplus.

Balance of Payments
A list of all transactions of one country and the residents of all other
countries usually one year.
Shows all payments received from all other countries - CREDITS
Credits are the inflows from all other countries - injections
Shows all payment made by a country to all other countries DEBITS
Debits are the outflow of money from a country - leakages
In a year, all inflows (credits) into a country must be equal to the
outflows (debits) to all other countries.

Sum of all debits must equal all credits

Tanzania Balance of Payments records all transactions of Tanzania

with all other countries
Tanzania:

Debits - outflow of Tsh Leakages

All other
Countries

Tanzania

Credits - inflow of
currency - Injections

Balance of Payments - Supply/Demand Currency

Tanzania:
All inflows (Credits) into Tanzania represents:
Increased Supply of all currencies into the currency market
Increased Demand for the Tsh
All outflows (Debits) out of Tanzania represent:
Increased Supply of Tsh into the currency market
Increased Demand for all other currencies

Balance of Payments
Balance of Payments consist of three accounts:
1. Current Account
2. Capital Account
3. Financial Account
Plus sign (+)
Credits or inflows into the country
Minus sign (-)
Debits or outflows out of the country.

Deficit and Surplus

There can exist in any account:

Deficit:
Debits (outflows) are greater than the
Credits (inflows)
Represented by a negative number (-)
Surplus
Debits (outflows) are less than the
Credits (inflows)
Represented by a positive number(+)

http://www.sundaytimes.lk/100613/images/ecocartoon.jpg

Current Account
Four components:
1.
2.
3.
4.

Balance of trade in goods

Balance of trade in services
Income
Current Transfer

http://www.economicsguide.me/wpcontent/uploads/2013/10/Economics_Topic_2
_The_Structure_of_The_Current_Account.
png

Current Account - Balance of Trade in Goods

Value of all exports and imports into a country
Exports (line 1):
Credit - Inflow of Money - Plus sign (+)
Imports (line 2):
Debits - Outflow of Money - Minus sign (-)
Balance of Trade in Goods = Imports Exports
(Line 3)

Tragakes, pg. 396

Current Account - Balance of Trade in Services

Balance of Trade in Services = Import
(services) - Export (services)
(line 5)
Exports (line 3):
Credit - Inflow of Money - Plus sign (+)
Imports (line 4):
Debits - Outflow of Money - Minus sign (-)
Tragakes, pg. 396

Current Account - Balance of Trade Goods & Services

Balance of Trade in Goods & Services is
also referred to as the Trade Balance or
Balance of Trade
This is how the component of GDP (X - M) is
calculated.
This is the sum of lines 1 - 4.
Negative (-) - Deficit - Debits > Credits
Trade deficit
Positive (+) - Surplus - Credits > Debits
Trade surplus

Tragakes, pg. 396

Current Account - Income

Consists of: wages, rents, interest, & profits
Income flowing into a country - Credit (+)
Income flowing out of the country - Debit (-)
Income = Inflows (Credit) - Outflows (Debit)
Positive (+) - Surplus
Credits (inflows) > Debits (outflows)
Negative (-) - Deficit
Tragakes, pg. 396

Debits (outflows) > Credits (inflows)

Current Account - Current Transfers

Consist of gifts, pensions and foreign aid
Current Transfer = inflows (credits) outflows (debits)
(line 6)
Positive (+) - Surplus
Debits (inflows) > Credits (outflows)
Negative (-) - Deficit
Credits (outflows) > Debits (inflows)

Tragakes, pg. 396

Balance of Current Account

Sum of Lines 1 - 6
Positive (+) - Surplus Current Account
Debits (inflows) > Credits (outflows)
Negative (-) - Deficit Current Account
Credits (outflows) > Debits (inflows)

Tragakes, pg. 396