The Balance of Payments (BoP)
- The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world
- The BoP has two main sections:
- The current account: all transactions related to goods and services, along with payments related to the transfer of income
- The financial and capital account: all transactions related to savings, investment and currency stabilisation
- Money flowing into an account is recorded in the relevant account as a credit (+) and money flowing out as a debit (-)
- If more money flows into an account than out of it, there is a surplus in the account
- If more money flows out of an account than into it, there is a deficit in the account
The Current Account
- The Current account comprises trade in goods, trade in services, primary income and secondary income
- The Current Account is often considered to be the most important account in the BoP
- This account records the net income that an economy gains from international transactions
An Example of the UK Current Account Balance for 2017
Component |
2017 |
Balance of trade in goods (exports - imports) |
£-32.9bn |
Balance of trade in services (exports - imports) |
£27.9bn |
Sub-total trade in goods/services |
£-5bn |
Net income (interest, profits and dividends) |
£-2.1bn |
Current transfers |
£-3.6bn |
Total Current Account Balance |
£-10.7bn |
Current Account as a % of GDP |
3.7% |
- Goods are also referred to as visible exports/imports
- Services are also referred to as invisible exports/imports
- Net income consists of income transfers by citizens and corporations
- Credits are received from UK citizens who are abroad and send remittances home
- Debits are sent by foreigners working in the UK back to their countries
- Current transfers are typically payments at government level between countries, e.g. contributions to the World Bank
The Capital Account
- The Capital Account records small capital flows between countries and is relatively inconsequential
- The capital account is made up of two sections:
1. Capital transfers
- Smaller flows of money between countries
- E.g. Debt forgiveness payments by the government toward developing countries
- E.g. Capital transfers by migrants as they emigrate and immigrate
2. Transactions in non-produced, non-financial assets
- Small payments are usually associated with royalties or copyright, e.g. royalty payments by record labels to foreign artists
The Financial Account
- The Financial Account records the flow of all transactions associated with changes of ownership of the country’s foreign financial assets and liabilities
- It includes the following subsections:
1. Foreign Direct Investment (FDI)
- Flows of money to purchase a controlling interest (10% or more) in a foreign firm. Money flowing in is recorded as a credit (+) and money flowing out is a debit (-)
2. Portfolio Investment
- Flows of money to purchase foreign company shares and debt securities (government and corporate bonds). Money flowing in is recorded as a credit (+) and money flowing out is a debit (-)
3. Official Borrowing
- Government borrowing from other countries or institutions outside of their own economy e.g. loans from the International Monetary Fund (IMF) or foreign banks
- When the money is received, it is recorded as a credit (+) and when the money (or interest payments) are repaid, it is recorded as a debit (-)
4. Reserve Assets
- These are assets controlled by the Central Bank and available for use in achieving the goals of monetary policy
- They include gold, foreign currency positions at the International Monetary Fund (IMF) and foreign exchange held by the Central Bank (USD, Euros etc.)