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Aquinas College Economics Department
The Balance of Payments
Financial Transactions between
Britain and the World
ECON4
Aquinas College Economics Department
Definition
You need to know about the
 Current Account
 Capital Account
 Financial Account
A record of the financial transactions between countries
and trading partners
Aquinas College Economics Department
Current Account
It contains the countries net income from trade
If the total imports exceeds the total exports
then the country is running a current account
deficit on the balance of payments
The part of the balance of payments that records trade in
goods e.g. Tangible products and services e.g. Financial
services
Aquinas College Economics Department
Trade in Goods
Visible Goods e.g. Tangible goods
Focused on imports – exports
UK consistently runs a deficit here due to the
decline in UK manufacturing – (possible impact
of globalisation?)
Aquinas College Economics Department
Trade in Services
Invisible Goods
Financial Services tend to fall under here
The UK runs a surplus here due to the large
service sector in the UK Economy.
The City of London is a good example of this
with large financial institutions
Aquinas College Economics Department
Net Income Flows
Interest
Profits
Dividends
All of these will come from UK Assets in other
countries e.g. RBS Branches in Malaysia
Equally foreign countries will take out of the UK
economy like EDF Energy profits go back to
France
Aquinas College Economics Department
Current Transfers
Mainly government transfers to international
organisations
 European Union
 International Monetary Fund
 United Nations
 World Bank
 World Trade Organisation
 NATO
Aquinas College Economics Department
The Capital Account
A small part of the total Balance of Payments
Includes
 Repatriation of Financial Capital
 Government Transfers
 Up keep of UK Diplomatic Missions
 Some Foreign Aid
Aquinas College Economics Department
The Financial Account
Records the movement of financial capital into
and out of the UK. Three main components
 Net Foreign Direct Investment
Outward FDI: UK companies investing in other
nations
Inward FDI: Foreign companies investing in the UK
 Net Portfolio Investment
 Other Capital Inflows – ‘hot money’
Aquinas College Economics Department
Short Term / Long Term
Short run capital flows are normally classed as
one year long. Arises normally from speculators
through financial institutions
Long term capital flows tend to be more
portfolio investments such as shares or other
financial assets.
Aquinas College Economics Department
Advantages and Disadvantages
Advantages Disadvantages
Promotes global economic growth Problems in one countries financial system
can impact on that of another e.g. Sub
Prime Mortgage Crisis
Generates more sources of finance FDI can lead to global dominance by a few
firms
FDI can bring about important Supply Side
reforms
Hot Money flows can destabilise a
currencies value if done in large enough
amounts
Of International Capital Flows
Aquinas College Economics Department
AS Level Revision Site (ECON1, ECON2)
• http://www.aquinaseconomicsas.co.uk
A2 Level Revision Site (ECON3, ECON4)
• http://www.aquinaseconomicsa2.co.uk
Aquinas Economics on Twitter
• http://www.twitter.com/aquinaseconomic
Useful Links

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The Balance of Payments A2

  • 1. Aquinas College Economics Department The Balance of Payments Financial Transactions between Britain and the World ECON4
  • 2. Aquinas College Economics Department Definition You need to know about the  Current Account  Capital Account  Financial Account A record of the financial transactions between countries and trading partners
  • 3. Aquinas College Economics Department Current Account It contains the countries net income from trade If the total imports exceeds the total exports then the country is running a current account deficit on the balance of payments The part of the balance of payments that records trade in goods e.g. Tangible products and services e.g. Financial services
  • 4. Aquinas College Economics Department Trade in Goods Visible Goods e.g. Tangible goods Focused on imports – exports UK consistently runs a deficit here due to the decline in UK manufacturing – (possible impact of globalisation?)
  • 5. Aquinas College Economics Department Trade in Services Invisible Goods Financial Services tend to fall under here The UK runs a surplus here due to the large service sector in the UK Economy. The City of London is a good example of this with large financial institutions
  • 6. Aquinas College Economics Department Net Income Flows Interest Profits Dividends All of these will come from UK Assets in other countries e.g. RBS Branches in Malaysia Equally foreign countries will take out of the UK economy like EDF Energy profits go back to France
  • 7. Aquinas College Economics Department Current Transfers Mainly government transfers to international organisations  European Union  International Monetary Fund  United Nations  World Bank  World Trade Organisation  NATO
  • 8. Aquinas College Economics Department The Capital Account A small part of the total Balance of Payments Includes  Repatriation of Financial Capital  Government Transfers  Up keep of UK Diplomatic Missions  Some Foreign Aid
  • 9. Aquinas College Economics Department The Financial Account Records the movement of financial capital into and out of the UK. Three main components  Net Foreign Direct Investment Outward FDI: UK companies investing in other nations Inward FDI: Foreign companies investing in the UK  Net Portfolio Investment  Other Capital Inflows – ‘hot money’
  • 10. Aquinas College Economics Department Short Term / Long Term Short run capital flows are normally classed as one year long. Arises normally from speculators through financial institutions Long term capital flows tend to be more portfolio investments such as shares or other financial assets.
  • 11. Aquinas College Economics Department Advantages and Disadvantages Advantages Disadvantages Promotes global economic growth Problems in one countries financial system can impact on that of another e.g. Sub Prime Mortgage Crisis Generates more sources of finance FDI can lead to global dominance by a few firms FDI can bring about important Supply Side reforms Hot Money flows can destabilise a currencies value if done in large enough amounts Of International Capital Flows
  • 12. Aquinas College Economics Department AS Level Revision Site (ECON1, ECON2) • http://www.aquinaseconomicsas.co.uk A2 Level Revision Site (ECON3, ECON4) • http://www.aquinaseconomicsa2.co.uk Aquinas Economics on Twitter • http://www.twitter.com/aquinaseconomic Useful Links