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Balance of Payments

  • The balance of payments for a country is a record of the country’s trade transactions with the rest of the world, measured in terms of receipts and payments: a receipt represents sterling flowing into the country, or any transaction that requires the exchange of foreign currency for sterling;
  • a payment represents sterling flowing out of the country, or any transaction that requires the conversion of sterling into some other currency.
  • The balance of payments consists of two offsetting components:
     – current account, which deals with imports and exports of goods (visible trade) and
    services(invisible trade);
     – capital account, which deals with foreign investments in the UK and UK investment abroad,
    as well as loans.

Questions - Use Your Note Taker To Jot Down Ideas / Calculations

If the UK were to export large quantities of crude oil, this would have a:

a) positive impact on the balance of payments current account.
b) negative impact on the balance of payments capital account.
c) positive impact on the balance of payments capital account.
d) negative impact on the balance of payments current account.

A)

The current account consists of transactions in goods and services, whereas the capital
account records all the movement of money into and out of the country for investment. Crude oil is a good and therefore trade in crude oil would impact the current account. As the UK is exporting there will be a positive impact on the current account.

  • Further Study Text: Pages 126 - 127