The balance of payments records every transaction between a country and the rest of the world. Money in is a credit; money out is a debit.
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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