OF

Who Is This

Balance of Payments

What is the balance of payments The balance of payments is a record of all economic transactions between the residents of a country and the rest of the world There are two main parts to the balance of payments Overall, the balance of payments must balance – This means all the deficits in any of the accounts will be balanced by surpluses in others – In the UK we have a large current account deficit – Globally surpluses and deficits must also balance Current account – the trade in goods and services account, plus the primary income account and secondary income account (new terminology) Financial account and capital account – refers principally to net purchases of financial and other assets.

Current Account Net trade in goods (sometimes called visibles) – exports of goods minus imports of goods Net trade in services (sometimes called invisibles) – exports of services minus imports of services Primary income flows – From the net lending of factors of production overseas Earnings being transferred to a workers home country (small for UK) Net interest, profits and dividends from overseas assets Secondary income flows – When the payment is not as a result of an economic transaction, so transfers Mostly government transfers, such as our payments to the EU

The UK’s current account £ billion Trade in goods and services Trade in goods Trade in services Total trade Primary income Compensation of employees Investment income Other primary income Total primary income Secondary income General government Other sectors Total secondary income Current balance (current account) The current account deficit in 2014 was equivalent to 5.2% of GDP – too big

What goods do we export and import? Services? £ billion, 2014ExportsImportsTrade balance Food, beverages and tobacco Basic materials Total oil Total semi-manufactured goods Total manufactured goods Total goods Transportation Travel Financial services including insurance Royalties and fees Other business Total services Other business includes law, management consulting, engineering, research and development, advertising etc.

Primary and secondary income £ billion 2014CreditDebitNet Primary income Investment income Total primary income Secondary income Central government Other sectors Total secondary income

Financial and capital accounts Capital account is small, made up of transfers including government debt forgiveness and money brought into and out of the country by emigrants/immigrants Financial account is large, and includes the flows of financial assets into and out of the country: – Foreign direct investment This means the purchase of a controlling interest in an overseas company, measured as more than 10% of the shares, or Establishing/growing an overseas subsidiary. This is where the concept of building factories comes from, and what we concentrate on – Portfolio investment This means purchase of shares and bonds (such as government bonds), but less than 10% of the shares in a company – Other investments Other types such as loans and deposits – Reserves

Financial Account £ billion a Current balance b Capital balance Financial account Direct investment Portfolio investment Other investment c Net financial transactions d Net errors and omissions Balance a+b+d+c0.0

Balance of payments “A useful way to think about the balance of payments is that it is an account that records purchases and sales of sterling by those making international transactions. Purchases of sterling are recorded as positive items, sales as negative ones. Since it is not possible for someone to buy a pound without someone else selling them one, the balance of payments must add up to zero.”

Financial account – UK selling assets In the past, UK investors bought overseas assets, and UK held net assets – This meant a surplus in primary income – Income from investments held overseas greater than payment to overseas holders of UK assets Last 15 or so years UK has been a net seller of assets – This means the surplus on primary income has shrunk, and is now negative – And we have borrowed money