• The?Balance of Payments (BoP)?for a country is a record of all the financial transactions that occur between it and the rest of the world
• The?BoP?has two main sections:
  • The current account:?all transactions related to goods/services along with payments related to the transfer of income
  • The financial & capital account:?all transactions related to savings, investment and?currency stabilisation
• It is called the BoP as the?current account should balance with the capital/financial account?and be equal to zero
  • If the current account balance is?positive, then the capital/financial account balance is?negative?(and vice versa)
• Money flowing into the country is?recorded?in the relevant account?as a credit (+)?and money flowing out?as a debit (-)

The Current Account of the Balance of Payments

• The Current Account is often considered to be the?most important account?in the BoP
  • It records the?net income?that an economy?gains from international transactions

An Example of the UK Current Account Balance For 2017

• Goods?are also referred to as?visible?exports/imports
• Services?are also referred to as?invisible?exports/imports
• Net income?consists of income transfers by citizens and corporations
  • Credits are?received from UK citizens?who are abroad and send?remittances?home
  • Debits are?sent by foreigners?working in the UK?back to their countries
• Current transfers?are typically payments at?government level?between countries e.g. contributions to the World Bank
• The?Current Account balance?is often expressed as a?% of GDP
  • This allows for?easy international comparisons

• A?Current Account deficit?occurs when the?value?of the outflows is greater the value of the inflows
  • Usually occurs when the?imports > exports
• A?Current Account surplus?occurs when the?value?of the inflows is greater the value of the outflows
  • Usually occurs when?imports < exports
• The?UK government?has a?macroeconomic aim?to get their Current Account balance as close to?equilibrium?as possible
  • Most years it tends to run a?small deficit
  • Export led economic growth?would help it become positive
  • However, with?increasing income and wealth?in an economy, the?value of imports rises
    • Consumers enjoy the variety of goods/services abroad
    • Rising imports?push the balance towards a?deficit

• The UK government has a range of?macroeconomic objectives?which they attempt to achieve
• Setting policies?to target one objective may?complicate?the possibility of achieving other objectives
  • There is a?trade-off
• ?If the?Current Account?is running a?deficit,?this has a negative impact on?aggregate demand (AD)
  • Net exports?are a component of?AD
  • If net exports are negative then?AD decreases
• To correct the?current account deficit,?the government could raise?tariffs
  • This would likely?decrease imports bought?by households
  • Firms?who rely on imports for?raw materials?used in production, would now face?higher costs of production
  • These?higher costs?are likely to be passed on to consumers in the form of?higher prices
  • Reducing?the current account deficit has come at the expense of?increased inflation?in the economy - there has been a?trade-off

• The world is?more connected?than ever and there is a?high level of interdependence?between economies
  • Covid 19 and the Ukraine War demonstrated how?disruptions in one part?of the world cause?widespread problems?in others
• One country's?imports?are another country's?exports
• Theoretically, the global?value of exports?will be?equal?to the global?value of imports
• Producers?all over the world are often highly?dependent on imported raw materials?used in production e.g. a motor car has around?30,000?individual parts
  • Building a car is a?global effort?and requires a?high level of interconnectedness?between multiple economies