Edexcel A Level Economics A:复习笔记2.1.4 Balance of Payments

Components of the Balance of Payments

  • The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world
  • The BoP has two main sections:
    • The current account: all transactions related to goods/services along with payments related to the transfer of income
    • The financial & capital account: all transactions related to savings, investment and currency stabilisation
  • It is called the BoP as the current account should balance with the capital/financial account and be equal to zero
    • If the current account balance is positive, then the capital/financial account balance is negative (and vice versa)
  • Money flowing into the country is recorded in the relevant account as a credit (+) and money flowing out as a debit (-)

The Current Account of the Balance of Payments

  • The Current Account is often considered to be the most important account in the BoP
    • It records the net income that an economy gains from international transactions

An Example of the UK Current Account Balance For 2017

Component 2017
Net trade in goods (exports - imports) £-32.9bn
Net trade in services (exports - imports) £27.9bn
Sub-total trade in goods/services £-5bn
Net income (interest, profits & dividends) £-2.1bn
Current transfers £-3.6bn
Total Current Account Balance £-10.7bn
Current Account as a % of GDP 3.7%
  • Goods are also referred to as visible exports/imports
  • Services are also referred to as invisible exports/imports
  • Net income consists of income transfers by citizens and corporations
    • Credits are received from UK citizens who are abroad and send remittances home
    • Debits are sent by foreigners working in the UK back to their countries
  • Current transfers are typically payments at government level between countries e.g. contributions to the World Bank
  • The Current Account balance is often expressed as a % of GDP
    • This allows for easy international comparisons

Current Account Deficits and Surpluses

  • A Current Account deficit occurs when the value of the outflows is greater the value of the inflows
    • Usually occurs when the imports > exports
  • A Current Account surplus occurs when the value of the inflows is greater the value of the outflows
    • Usually occurs when imports < exports
  • The UK government has a macroeconomic aim to get their Current Account balance as close to equilibrium as possible
    • Most years it tends to run a small deficit
    • Export led economic growth would help it become positive
    • However, with increasing income and wealth in an economy, the value of imports rises
      • Consumers enjoy the variety of goods/services abroad
      • Rising imports push the balance towards a deficit

Exam Tip

Students sometimes confuse a UK Government Budget deficit with a Current Account deficit. Ensure that your understanding of the distinction between these two concepts is clear.

The Budget deficit occurs when: UK Government spending > UK Government revenue (tax receipts).

The Current Account deficit refers to the BOP.

The Relationship Between the Current Account Imbalances & Macroeconomic Objectives

  • The UK government has a range of macroeconomic objectives which they attempt to achieve
  • Setting policies to target one objective may complicate the possibility of achieving other objectives
    • There is a trade-off
  •  If the Current Account is running a deficit, this has a negative impact on aggregate demand (AD)
    • Net exports are a component of AD
    • If net exports are negative then AD decreases
  • To correct the current account deficit, the government could raise tariffs
    • This would likely decrease imports bought by households
    • Firms who rely on imports for raw materials used in production, would now face higher costs of production
    • These higher costs are likely to be passed on to consumers in the form of higher prices
    • Reducing the current account deficit has come at the expense of increased inflation in the economy - there has been a trade-off

The Interconnectedness of Economies Through Trade

  • The world is more connected than ever and there is a high level of interdependence between economies
    • Covid 19 and the Ukraine War demonstrated how disruptions in one part of the world cause widespread problems in others
  • One country's imports are another country's exports
  • Theoretically, the global value of exports will be equal to the global value of imports
  • Producers all over the world are often highly dependent on imported raw materials used in production e.g. a motor car has around 30,000 individual parts
    • Building a car is a global effort and requires a high level of interconnectedness between multiple economies