Balance of Payments A measure of the transactions between United Kingdom residents and the rest of the world.

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Presentation transcript:

Balance of Payments A measure of the transactions between United Kingdom residents and the rest of the world.

Economic transactions include: Exports and imports of goods such as oil, agricultural products and computers. Exports and imports of services, such as financial and business services. Income flows such as dividends Financial flows such as investment in shares and debt securities. Transfers, such as foreign aid

The Sections of the BOP 1) The CURRENT ACCOUNT 2) The CAPITAL AND FINANCIAL ACCOUNT 3) NET ERRORS AND OMSSIONS Current Account + Capital Account + NEO = 0

The Current Account TRADE IN GOODS: e.g. raw materials. Exports are goods sold to foreigners for which payment is received. There is therefore an INFLOW of money. TRADE IN SERVICES: e.g. insurance. INVESTMENT INCOME: Earnings from shares, companies and property on other countries and income earned by foreign residents from UK assets CURRENT TRANSFERS

The Capital and Financial Account DIRECT INVESTMENT: Records the flow of money across borders for the purpose of investing in a business. PORTFOLIO INVESTMENT: Records the flow of money across borders for the purpose of investing in shares and bonds. OTHER INVESTMENT: Hot money flows and government borrowing from foreigners. OFFICIAL RESERVES: Used to manipulate the value of the pound.

Net Errors and Omissions There are mistakes made in the collection of all the information and not all transactions are recorded.

The Balance of Payments must balance! If British residents buy more goods and services than they sell (current acc deficit), they must pay for them by selling financial assets or foreign exchange (financial acc surplus)

Current Account Deficit In the first quarter of 2005, the current account deficit widened to £5.8 billion. IN PAIRS: Make a list of WHY this might have happened. What can be done to correct it?