Measuring the Balance of Payments | tutor2u Economics
Study notes

Measuring the Balance of Payments

  • Levels: A Level
  • Exam boards: AQA, Edexcel, OCR, IB

What is the balance of payments?

The balance of payments (BOP) records all financial transactions made between consumers, businesses and the government in one country with others

Short revision video on the UK current account (balance of payments)

Chart shows the annual trade balance for the UK

  • The BOP figures tell us about how much is being spent by consumers and firms on imported goods and services, and how successful firms have been in exporting to other countries.
  • Inflows of foreign currency are counted as a positive entry (e.g. exports sold overseas)
  • Outflows of foreign currency are counted as a negative entry (e.g. imported goods and services)

What is the basic structure of the balance of payments accounts?

Current Account

  1. Balance of trade in goods
  2. Balance of trade in services
  3. Net primary income (this includes incomes from interest, profits, dividends generated from foreign investment and also migrant remittances i.e. payments from people living and working overseas)
  4. Net secondary income (this includes (for the UK) our annual contributions to EU, spending military aid, overseas development aid etc.)

Capital account

  • Sale/transfer of patents, copyrights, franchises, leases and other transferable contracts, and goodwill
  • Transfers of ownership of fixed assets

Financial Account

This includes transactions that result in a change of ownership of financial assets and liabilities between UK residents and non-residents

  • Net balance of foreign direct investment flows (FDI)
  • Net balance of portfolio flows (e.g. inflows and outflows of debt and equity)
  • Balance of banking flows (e.g. hot money flowing in/out of banking system)

Balancing item (estimated errors & omissions)

Changes to the value of reserves of gold and foreign currency

Overall balance of payments = zero

The annual UK trade balance in goods and services

The quarterly UK trade balance in goods and services and the quarterly current account balance - both measured as a % of GDP

The chart below shows the components of the UK current account on the balance of payments measured as a % of GDP

Explaining the balance of payments accounts

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