Balance of payments on the current account

The current account refers to just one part of the balance of payments; the other parts, which you will learn about at A2, are known as the capital account and the financial account.

 

The current account is split into four parts:

  1. Trade in goods
  2. Trade in services
  3. Investment income flows
  4. Current transfers of money

 

The following table shows an example balance of payments on current account for the UK.

Slide01

 

The Balance of Trade in Goods

This section records all of the imports and exports of physical goods.  This section used to known as the visible sector.  Exports result in an inflow of money into the UK and imports result in an outflow of money.

 

The balance of trade in goods is the difference calculated by:

exports of goods minus imports of goods

 

If the UK exports more goods than it imports then it will have a trade surplus and the balance of trade will have a + sign.  The more likely scenario for the UK in recent years is it for it to have a trade deficit, this means that it imports more than it exports and the balance of trade figure will be shown with a – symbol.

 Slide02

The chart below shows the balance on trade in goods from 1980 to 2007.

Slide03

Germany and China both have large surpluses on the balance of trade in goods, however the reasons for the surpluses are very different.  China’s surplus is a result of being able to mass produced low technology products at a very cheap cost.  Germany, on the other hand, has created its surplus based upon highly skilled workers producing high quality goods.

Slide04Slide05

The UK experienced a fall in exports in goods during a number of years.  This decline in the manufacturing industry is called deindustrialisation.

 Slide07

Why is our trade balance important?

Exports of goods are an injection into the circular flow of income.  An increase in exports would lead to AD shifting to the right, thereby increasing both national income and the price level.

 Slide5

This would lead to an increase in the number of jobs in the UK manufacturing sector.  Unfortunately the decline in exports has led to fewer jobs being required.  Some regions of the UK have particularly suffered due to the fall in exports in goods and associated deindustrialisation; this has widened the regional income gap.

 

Trade in Services

This section records all of the imports and exports of services.  This section used to known as the invisible sector.  In the UK the two most important groups of services are financial and tourism.  In addition to these sectors, shipping, insurance and UK individuals working abroad also count as trade in services.

 

Remember that when there is an inflow of money to the UK it will be deemed to be an export and conversely when there is an outflow of money from the UK it is an import.

 Slide14

The service sector has generally seen an increase in the balance on trade in services.

Slide15

Although the performance of different sectors varies.

Slide17

 

By adding the balance of trade on goods and the balance of trade on services we can see the UK has been in deficit for the past 15 years.

 Slide18

Investment Income Flows

Investment income flows are mainly interest and profits flowing between countries.  Money that leaves the UK would be counted as an import (debit), whilst money flowing into the UK is an export (credit).

Slide19

 

Current Transfers of Money

Transfers of money are one-sided transactions; money that flows out of the UK would be counted as an import (debit), whilst money flowing into the UK is deemed to be an export (credit).

Slide21

Increasing globalisation and mobility of labour has led to an increase in transfers of money, for example, in 2007 Polish workers in the UK sent £1.6 billion back to their families in Poland.

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