Balance Of Payments
The balance of payments records all trade between one country and all other countries
It includes:
- Trade in goods
- Trade in services
- Net flow of investment income
- Money transfers
Current Account
The current account records all trade in goods and services for a countries economy
This includes
- Imported goods
- Exported goods
- Imported services
- Exported services
Capital Account
The capital account records all capital flows into and out of a country including:
- Financial investment
- Direct investment
- Currency Trading
Payment Deficits
Payment deficits result where more is imported than exported. This causes an imbalance in the balance of payments.
In recent years the UK has run a large current account deficit.The government have been less worried about this deficit because of the following:
- Investment and capital inflows mean the capital account balances the current account
- There will be some automatic correction with changes in demand due to the business cycle
- Some of the deficit could be caused by importing capital goods which will increase productivity of the economy in the longer term
However there are also issues concerned with payment deficits including:
- Falling exchange rate caused by excess supply of £s
- Structural weaknesses – may be a symptom of a lose of comparative advantage / competitiveness
- May be a sign of too much consumption and rising personal debt
- Can lead to a loss in output and employment as consumers purchase goods from abroad decreasing domestic demand
- Problems associated with funding a current account deficit
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