balance of payments is a record of all the financial dealings of the UK with
the rest of the world. It can be
split into two components:
The current account
The capital account
trading performance with other countries has a big effect on prospects for
the British economy. Over recent years we have tended to import more goods
and services than we have exported. This is shown in the chart below which
tracks the quarterly value of exports and imports since the mid 1980s.
The Current Account
current account is split into two sections itself:
Trade in Goods (VISIBLE
in goods includes:
Consumer and capital goods
table overleaf shows the annual deficit in UK trade in goods with other
countries since 1995
economy has run a trade deficit since
1983 with the gap widening considerably because of the excessive economic
growth in the mid-late 1980s. The deficit shrunk in the early 1990s recession
and during 3-4 years of exchange rate weakness between 1993-96. However the
trade gap has widened again in 1998-99. This is due to the slowdown in export
volumes caused by recession in other leading economies and the lagged effects
of a sustained appreciation in the exchange rate over the last three years.
Trade in Services (INVISABLE
in services includes:
Financial services, e.g., banking and insurance
Transport services, e.g., shipping and air travel
Transfers resulting from the loan of factors of
production abroad, e.g., interest received on a loan of capital to an
American firm and a civil engineer working in Brazil on a construction
long-term growth and development of service sector industries is reflected in
an improving trade balance for Britain with the rest of the world. This is
shown in the chart below. The UK has now over-taken France and Germany to
become the second biggest service exporter in the global economy.
this where our comparative advantage now
lies? The surplus in net exports of services has been on an up-ward path
since the downturn of the early 1990s as the chart makes clear. In 1997 the
surplus reached nearly £12 billion and in 1998 this grew to over £13
every service industry makes a net surplus in trade. The UK's main money
earner is in business and financial services. Travel and tourism has been in
deficit in recent years.
The Current Account For The Uk
recording small surpluses in the early 1980s, the UK balance of payments
deteriorated badly in the late 1980s following the consumption driven
economic boom. Recent years has seen a clear improvement in the figures
although 1999 is forecast to see a return to deficit.
the root cause of a current account deficit is cyclical. During a boom the
demand for imported goods and services rises strongly and if exports cannot
keep pace the trade figures move into the red. The economic recession of the
early 1990s caused the current account deficit to shrink. Then a boom in
exports in 1994-96 lead to small quarterly surpluses in the bop accounts.
UK has enjoyed current account surpluses in five of the last seven quarters.
This is despite a worsening of the balance of trade in goods. The main reason
for the improvement in the figures is the growing surplus in trade in
services and very strong net investment income from overseas assets.
the deficit is symptomatic of a lack of competitiveness in those sectors of
the economy exposed to international trade, then specific policy measures may
be required to help correct the deficit. In the UK's case, some economists
believe that there is a structural problem in trade in goods - with the
economy failing to export enough products to pay for the imports that we
a country has open capital markets where money can flow into and out of an
economy with ease, it should not be a problem to attract the capital inflows
needed to finance a balance of payments deficit on the current account.
However, in the long-term if imports are increasingly taking over from
domestic producers, this threatens economic growth, employment and living
standards in the deficit country.
The Capital Account
aid simplicity it can be split into two:
Short term money flows
Long term money flows
Short term money flows
we describe this money as hot money or speculative money.
Money is moved from country to country in the hope of making a profit,
whether it is from higher interest rates in one country or because changes in
the exchange rate are expected.
Long term money flows
are mainly associated with long term savings and investment.
Foreign companies may choose to invest in the UK by building a new
factory or widening its share portfolio by investing in the London Stock
The Balance of Payments Must Balance
the UK is experiencing a current account deficit, then we have to find the
money from somewhere to pay for it. We
could borrow money from abroad to pay for it, run down our savings from
abroad or sell some of the gold and foreign currency reserves.
a country safely ignore a persistent current account deficit?
answer depends in part on what is causing the net outflow of money from the
A current account deficit has to be financed. This
is normally done by attracting inflows of capital from other economies. The
UK has found few problems in achieving this in recent years.
If the deficit is due to excessive consumer demand
– a recession or slowdown should help to reduce the problem. Consumers
cannot go on spending in excess of their income for ever. Eventually they
have to control their spending and start saving again to improve their own