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Balance of payments
Balance of Payments
balance of payments
balance of paymentsA record of a country's trade and financial transactions with the rest of the world over a particular period of time, usually one year. Fig. 8 shows the UK's balance of payments account for 2003. The account is divided into two main sections, the current account and the investment and other capital transactions account. The current account shows the country's day-to-day dealings in goods and services, together with various short-run income flows such as profit, dividend, and interest payments and receipts. The current account is split into two main components:
- the balance of trade in goods, i.e. sterling receipts from the EXPORTS of UK goods, and foreign currency payments for IMPORTS of overseas goods (referred to as ‘visible’ trade, as flows of goods are measured by the CUSTOMS AND EXCISE authorities as they physically enter or leave the country);
- sterling receipts from the provision (export) of UK services and from the repatriation of profits, dividends and interest on UK-owned foreign assets, and foreign currency payments for the provision (import) of services by foreign businesses and from the repatriation abroad of profits, dividends and interest on foreign-owned UK assets (referred to as ‘invisible’ trade since such transactions can only be measured indirectly).
The investment and other capital transactions account embraces a number of capital items including:
- the purchase of overseas physical assets (the establishment of a new factory or acquisition of a company);
- the purchase of financial assets (stocks and shares, government bonds, etc.) by UK individuals, companies, financial institutions and the government;
- the purchase of UK physical and financial assets by foreigners;
- banking and money market transactions in financial instruments and lending and borrowing in sterling and foreign currencies;
- various intergovernment transfers, for example UK payments to, and receipts from the European Union, and
- the provision of economic aid to less developed countries. Included also in the capital transactions account are movements in the UK's stock of INTERNATIONAL RESERVES of gold and FOREIGN EXCHANGE, an overall balance of payments deficit being financed by a fall in the reserves (and/or increased borrowing), and a surplus leading to an addition to the reserve position (and/or increased lending).
Broadly speaking, governments aim to maintain a balance of payments equilibrium over a run of years, avoiding in particular a build-up of deficits. The external payments position of the country often acts as a major constraint on the government's ECONOMIC POLICIES and in consequence the general economic climate in which businesses operate. For example, balance of payments deficits are usually rectified by a combination of domestic DEFLATION and DEVALUATION/DEPRECIATION of the country's EXCHANGE RATE, which can pose difficulties for domestic firms as well as providing opportunities for the more enterprising of them. Deflationary measures which reduce domestic demand may limit sales potential in the home market, but by damping down INFLATION can make a firm's exports more competitive and thus increase its overseas sales. A devaluation can be even more helpful since it works to increase the prices of foreign products in the home market, and by lowering export prices serves, like deflation, to make exports more price competitive. See FIXED EXCHANGE RATE SYSTEM, FLOATING EXCHANGE RATE SYSTEM, INTERNATIONAL TRADE, FOREIGN EXCHANGE MARKET, FOREIGN EXCHANGE CONTROLS.
balance of paymentsA statement of a country's trade and financial transactions with the rest of the world over a particular time period, usually one year. Fig. 13 (a), shows a summary presentation of the UK balance of payments for 2003. The account is divided into two main parts:
- current account
- capital and financial account.
The current account shows the UK's profit or loss in day-to-day dealings. It is made up under two headings. The ‘visible’ trade balance (BALANCE OF TRADE) indicates the difference between the value of merchandise EXPORTS and IMPORTS of goods (raw materials, foodstuffs, oil and fuels, semi-processed and finished manufactures). ‘Visibles’ are so called because they consist of tangible goods that can be seen directly and recorded by the country's CUSTOMS AND EXCISE authorities as they move into or out of the country. The second group of transactions make up the ‘INVISIBLE’ TRADE BALANCE. These transactions include earnings from, and payments for, such services as banking, insurance, transport and tourism. It also includes interest, dividends and profits on investments and loans, and government receipts and payments relating to defence, upkeep of embassies, etc., and transfers to the European Union budget. (See Fig. 62 (a)).
‘Invisibles’ are so called because basically they represent transactions that cannot be seen directly and can be compiled only indirectly from company returns, government accounts, foreign currency purchases and sales data from banks. Traditionally, the UK has incurred deficits on ‘visibles’ largely because of the need to import basic foodstuffs, raw materials and (until the 1980s) oil. What are worrying to some economists, however, are the large deficits in manufactures, where seemingly the UK has been losing international competitiveness. (See DEINDUSTRIALIZATION.) The service sector has traditionally been in surplus thanks to the City of London's banking and insurance business, Source: UK Balance of Payments, Office for National Statistics (Pink Book), 2004.