CIMA BA1 Syllabus A. Macroeconomic And Institutional Context Of Business - The Balance Of Payments - Notes ^{1 / 5}

= all international trade and financial transactions made between a country and the rest of the world

The balance of payments accounts have three parts:

1. Current account

2. Capital account

3. Financial account

Current account

The current account mainly records:

• Trade in goods

  - relates to exports and imports of tangible (visible) goods
  - such as oil, electrical goods, cars, clothing etc.

• Trade in services

  - relates to exports and imports of services (invisibles)
  - such things as international travel, financial and other services.

• Income earned or paid out on international investments

  - Income relates to income from employment of overseas 
  - Income from capital investment overseas (eg dividends and interest).

The overall balance of exports and imports is referred to as the current account balance

In the UK in 2018, the Current account Deficit was £92bn or 4.3% of GDP

Balance of trade

The  surplus or deficit on trade in goods & services Only is also known as the  Balance of trade (BOT)

Calculating a Country's BOT

For example, if the UK imported £1.50 trillion in goods and services, but exported only £1.12 trillion to other countries.

Then the UK had a trade balance of -£38 billion, or a £38 billion trade deficit.

The UK has a trade deficit

• Meaning the value of imports (M) exceeded the value of exports (X)  

  M > X

• In 2018, the UK’s trade deficit was -£38 billion, equal to -1.8% of GDP.

Capital account

- is made up of public sector flows of capital into and out of the country
- such as government loans to other countries.

Financial account

- is made up of flows of capital to and from the non-government sector
- such as direct investment in overseas facilities, shares, bonds.
- movements on government foreign currency reserves

Overall balance

The sum of the balance of payments accounts (current, capital and financial accounts) will be zero.

The reason is that every credit appearing in the current account has a corresponding debit in the capital account, and vice-versa. 

If a country exports an item (a current account credit), it effectively imports foreign capital when that item is paid for (a capital account debit).