The Balance of Payments

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The Balance of Payments
AS Economics
tutor2u Mrs G
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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.

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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.

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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) (d) comprises the Current Account
• This is all that is required for your AS
  Economics course

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UKs Trade Balance 2009 latest figures!
Exam technique.
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Chinas trade balance
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What does the UK export?
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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

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UK Exports include
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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

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Trade Balance in Goods
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Components of the balance of trade in goods
Exam technique.
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Balance of trade in oil
Exam technique.
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A familiar story!
Take a look at your neighbours shirt label
here was it made?
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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

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Trade in Services

• Recent Data
• United Kingdom was the worlds second largest
  exporter of services in 2005
• The UK accounts for almost 8 per cent of global
  exports and 6 per cent of the worlds 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

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Trade in Services Extra Detail
Exam technique.
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Balance of Trade in Goods and Services
Exam technique.
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Trends in exports and imports
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What impact does Balance of Trade have?
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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)?

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Whiteboard activity.
What happens to UK Economy if our Exports
fall?
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Economic Effects of a Fall in Exports

• Negative impact on aggregate demand
• CIG(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)

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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

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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

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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)

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Your individual task.
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Questions.

• 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

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Homework

• Finish questions.