Balance of Payments - The Financial Account

In this revision video we look at the financial account of a country's balance of payments.

The financial account includes transactions that result in a change of ownership of financial assets and liabilities between a country’s residents and non-residents. This includes:

1.Net balance of foreign direct investment (FDI)

2.Net balance of portfolio investment flows (e.g. inflows/outflows of debt and equity)

3.Balance of banking flows (e.g. hot money flowing in/out of a country’s commercial banks)

4.Changes to the value of a country’s reserves of gold and foreign currency

Examples of inflows of money on the UK financial account:

• An overseas company announces an inward investment project into the UK renewable energy industry
• Expectations of higher monetary policy interest rates leads to an inflow of hot money into a country’s banking system
• Overseas investors bid to buy new issues of government debt
• A domestic UK company sells one of their foreign subsidiaries and raises several billions of £s as a result which flow back to the UK