The Balance of Payments

tutor2ututor2u™ & Mrs ™ & Mrs GG

AS Economics

Syllabus aims:

To understand that the current account comprises: trade in goods, trade in services, investment income and transfers.

To understand the meaning of a deficit and a surplus on current account.

Note: a detailed knowledge of the structure of the balance of payments account is not required.

What is the Balance of Payments?

• The balance of payments (BOP) records all financial transactions between the UK and the Rest of the World.

• The BOP figures tell us about how much is being spent by British consumers and firms on imported goods and services, and how successful UK firms have been in exporting to other countries and markets.

What is the Balance of Payments?

• The balance of payments accounts include:

– (a) Trade in goods

– (b) Trade in services

– (c) The net flow of investment income from UK overseas assets

– (d) Transfers of money between people and governments

• (a) to (d) comprises the Current Account

• This is all that is required for your AS Economics course

UK’s Trade Balance 2009 latest figures!

Exam technique….

China’s trade balance…

What does the UK export?

UK Exports include

UK EXPORTS 2007 •Chemicals - £37.4bn

•Cars - £24.2bn

•Oil and gas - £22.7bn

•Food and drink - £10.6bn

•Underwear - £892m

•Wines - £209m

•Bicycles - £64m

UK Exports include

Taxi cars…Foreign students….i.e. Uni education

Trade in Goods

• Consumer durables

– Household goods (audio visual equipment, furniture etc)

– Motor vehicles

– Personal computers, DVD recorder, cameras

• Capital goods / technology /software

• Commodities (including oil, gas and other fuels)

• Components & basic raw materials (plastics, copper, tin, rubber, semi-conductors)

• Foodstuffs and Beverages

Trade Balance in goods

Components of the balance of trade in goods

Annual trade balance, £ billions

UK Balance of Trade in Selected Goods

Food, beverages and tobacco Semi-manufactures

Finished manufactures Crude oil

Source: Reuters EcoWin

80 82 84 86 88 90 92 94 96 98 00 02 04

GB

P (

billi

ons)

-50

-40

-30

-20

-10

0

10

Food, beverages & tobacco

Finished manufactures

Crude oil

Semi-manufactures

Exam technique….

Balance of trade in oilWhy is this

important to the economy?

A familiar story!Take a look at

your ‘neighbours’

shirt label – here was it made?

Trade in Services

• Tourism and Travel including Civil Aviation

• Insurance and Business Consultancy Services

• Banking and Accountancy services

• Data processing and other information services

• Music & Entertainment

• Shipping

Trade in Services

• Recent Data

– United Kingdom was the world’s second largest exporter of services in 2005

– The UK accounts for almost 8 per cent of global exports and 6 per cent of the world’s imports, making it also the fourth largest importer of services

– We run strong annual surpluses in trade in services

– In 2005, the surplus on trade in services declined by £2.7 billion to £18.7 billion

– This suggests that we have a comparative advantage in many service industries

Trade in Services – Extra Detail

Quarterly trade balance, seasonally adjusted

UK Balance of Trade in Services

Travel Communications

Financial Transportation

Royalties and license fees

Source: Reuters EcoWin

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

GB

P (

billi

ons)

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Royalties and license fees

Transportation

Travel

Communications

Financial services

Exam technique….

Balance of Trade in Goods and Services

Exam technique….

Balance of Payments – overall G & S

What impact does Balance of Trade have?

Whiteboard activity….

• 4 groups

• One to look at impact on households

• One to look at impact on businesses

• One to look at impact on govt

• One to look at impact on international standing

• What would be the impact of the UK exports falling (i.e. further growth of BoP deficit)?

Whiteboard activity….

Households Domestic Businesses

UK Govt International

Economic Effects of a Fall in Exports

– Negative impact on aggregate demand

• C+I+G+(X-M)

• Fall in national output – multiplier effect on incomes and spending

• Might trigger an economic slowdown / recession

• Actual GDP will fall below potential GDP (negative output gap)

Economic Effects of a Fall in Exports

– Negative effect on company profits and business confidence

• Less demand implies less capital investment• Can lead to plant closures / job losses /

cyclical unemployment

– Government finances will be affected

• Slower growth hits tax revenues + extra welfare spending

– Some regions are more dependent on exports than others (e.g. manufacturing industry)- might worsen the “north-south divide”

Importance of Exports for UK

• Export earnings are an injection of AD

– A rise in exports boosts national income

– Multiplier effects should also be considered – a rise in exports will lead to a bigger final increase in national income which may then affect investment demand

– Exports are important for UK manufacturing industry (where exports are a high % of total industrial production)

– Exports can help to ‘dampen’ or ‘cushion’ the volatility of our economic cycle – e.g. if there is a domestic economic slowdown / recession

Importance of Exports for UK

• Employment effects from exports

– Many thousands of jobs depend directly and indirectly on the export sector

– Changes in export demand have effects in other sectors further down the supply chain (e.g. component suppliers for manufacturers and also the distribution and marketing industries)

• Regional economy and exports

– Some regions are more dependent on exports than others (e.g. the North east and Wales)

Your individual task….

Further reading

• http://www.statistics.gov.uk/downloads/theme_economy/PB09.pdf

• For the latest statistics

• http://www.statistics.gov.uk/pdfdir/bop1209.pdf

Balance of Payment Questions….

1. What is meant by (2 marks each = 6 in total)

• A trade gap?

• A current account deficit?

• A current account surplus?

2. Explain why an economic boom may result in a current account deficit. (3 marks)

3. Explain why a recession may result in an improvement in the current account position. (3 marks)

4. To what extent might a current account deficit have an effect on

• Employment?

• Inflation?

• Growth?

• 4 marks each = 12 marks Total = 24 marks

Homework

Finish questions….