Economics
Study Notes
Measuring the Balance of Payments
- Level:
- A Level, IB
- Board:
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 14 Nov 2020
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
Key terms to know when studying the balance of payments
Balance of payments
Records all financial transactions made between consumers, businesses and the government in one country with others
Balance of Payments Account
It consists of goods and services account, primary income account, secondary income account, capital account, and financial account.
Balance of trade
The value of exports of goods and services minus (-) the value spent on imported goods and services
Capital account
Sale/transfer of patents, copyrights, franchises, leases and other transferable contracts, and goodwill
Current account
The overall balance of trade in goods and services and net balance for primary and secondary income
Current account deficit
A deficit occurs when the value of imports of goods/services / investment incomes / secondary incomes is greater than the value of exports
Current account surplus
A surplus occurs when the value of exports of goods/services / investment incomes / secondary incomes is greater than the value of imports
Financial account
Includes transactions that result in a change of ownership of financial assets and liabilities betwen
Foreign direct investment
An investment made by a firm or individual in one country into business interests located in another country
Hot money (short term capital) flows
Money that moves rapidly around the global financial system seeking the best "risk-adjusted" rate of return
Investment income
The most common types of investment income are income on equity (dividends) and income on debt (interest)
Portfolio investment
Inflows and outflows of debt and equity
Primary income
Includes incomes from interest, profits, dividends generated from foreign investment and also migrant remittances i.e. payments from people living and working overseas
Remittances
Transfers of money across national boundaries by migrant workers
Secondary income
Includes spending on military aid, overseas development aid
Trade deficit
When the value of imported goods and services is higher than the value of a country's exports (M>X)
Trade surplus
When the value of exported goods and services is higher than the value of a country's imports (X>M)
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