The balance of payments: credits (inflows) and debits (outflows) with the rest of the world.
Three accounts
Current account
Trade in goods and services, income from abroad, and transfers.
Capital account
Capital transfers, such as debt forgiveness, and sales of non-produced assets such as land rights.
Financial account
Investment in and out: FDI, portfolio investment, reserve assets, official borrowing.
The points to remember
- A surplus on an account: credits exceed debits. A deficit: debits exceed credits.
- Ask: does money come in (credit) or go out (debit)?
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The current account is the one asked about most.
The current account: one row per part
| Part of the current account | A credit (money in) | A debit (money out) |
|---|---|---|
| Trade in goods | Copper sold abroad | Cars bought from abroad |
| Trade in services | Foreign tourists' spending | Residents' holidays abroad |
| Income | Profits from a firm owned abroad | Interest paid to foreign lenders |
| Current transfers | Remittances from workers abroad | Foreign aid given |
The points to remember
- Remittances are current transfers: on the current account, not the financial account.
- Profits and interest are income, not trade.
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The financial account records investment flows.
The financial account
Foreign direct investment
Building or buying a firm abroad: a Japanese car maker builds a factory here.
Portfolio investment
Buying shares, bonds or deposits abroad for a return.
Reserve assets
The central bank's foreign currency and gold.
Official borrowing
Loans to the government from abroad.
The points to remember
- FDI and portfolio investment into the country are credits; out of it, debits.
- A Japanese factory here: a credit on our financial account.
Paper 2 asks one of these definitions in almost every paper, for 2 marks.
Definitions Paper 2 asks
| Term | Define it like this |
|---|---|
| Balance of payments | A record of all transactions between a country and the rest of the world over a year: credits and debits. |
| Current account | The flows from trade in goods and services, plus income and current transfers. |
| Balance of trade | The value of exports of goods and services minus the value of imports. |
| Current account deficit | When debits (money out) on the current account exceed credits (money in). |
| Portfolio investment | Buying financial assets such as shares and bonds to earn a return. |
| Remittances | Money sent home by people working abroad. |
| Reserve assets | Foreign currency and gold held by the central bank. |
Text C reports a fall in portfolio investment into the country.
Define the term portfolio investment.
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