1. The Balance of Payments
Balance of Payments Intro
The Balance of Payments
AS Economics
tutor2u™ & Mrs G
Mrs Gordon's notes

2. Syllabus aims:
To understand that the current account comprises: trade in goods, trade in services, investment income and transfers.
To understand the meaning of a deficit and a surplus on current account.
Note: a detailed knowledge of the structure of the balance of payments account is not required.

3. What is the Balance of Payments?
Balance of Payments Intro
What is the Balance of Payments?
The balance of payments (BOP) records all financial transactions between the UK and the Rest of the World.
The BOP figures tell us about how much is being spent by British consumers and firms on imported goods and services, and how successful UK firms have been in exporting to other countries and markets.
Mrs Gordon's notes

4. What is the Balance of Payments?
Balance of Payments Intro
What is the Balance of Payments?
The balance of payments accounts include:
(a) Trade in goods
(b) Trade in services
(c) The net flow of investment income from UK overseas assets
(d) Transfers of money between people and governments
(a) to (d) comprises the Current Account
This is all that is required for your AS Economics course
The balance of payments (BOP) records all financial transactions between the UK and the Rest of the World. The BOP figures tell us about how much is being spent by British consumers and firms on imported goods and services, and how successful UK firms have been in exporting to other countries and markets.
Mrs Gordon's notes

5. UK’s Trade Balance 2009 latest figures!
Exam technique….

6. China’s trade balance…

7. What does the
UK export?

8. UK Exports include UK EXPORTS 2007 Chemicals - £37.4bn Cars - £24.2bn
Oil and gas - £22.7bn
Food and drink - £10.6bn
Underwear - £892m
Wines - £209m
Bicycles - £64m

9. UK Exports include
Foreign students….i.e.
Uni education
Taxi cars…

10. Balance of Payments Intro
Trade in Goods
Consumer durables
Household goods (audio visual equipment, furniture etc)
Motor vehicles
Personal computers, DVD recorder, cameras
Capital goods / technology /software
Commodities (including oil, gas and other fuels)
Components & basic raw materials (plastics, copper, tin, rubber, semi-conductors)
Foodstuffs and Beverages
Trade in goods includes exports and imports of oil and other energy products, manufactured goods, foodstuffs, raw materials and components. Until recently this was known as visible trade – i.e. exporting and importing of tangible products. Since 1986 the net balance of trade in goods has been in deficit.
Mrs Gordon's notes

11. Balance of Payments Intro
Trade Balance in goods
The British economy has a structural deficit in trade in goods shown by the fact that the deficit has remained persistently above £11 billion since 1995 and expanded to £33 billion in 2000 and over £46 billion in 2002 and again in 2003 and The UK still manages to achieve a surplus in trade in oil, although North Sea Oil production is now well past its peak level. The biggest deficit comes in finished manufacturing products (including cars and household durables) and net imports of food beverages and tobacco. The vast majority of the UK trade deficit in goods is with South East Asian countries
Mrs Gordon's notes

12. Components of the balance of trade in goods
Balance of Payments Intro
Components of the balance of trade in goods
Exam technique….
Mrs Gordon's notes

13. Balance of Payments Intro
Balance of trade in oil
Why is this important to the economy?
Mrs Gordon's notes

14. Balance of Payments Intro
A familiar story!
Take a look at your ‘neighbours’ shirt label – here was it made?
Mrs Gordon's notes

15. Balance of Payments Intro
Trade in Services
Tourism and Travel including Civil Aviation
Insurance and Business Consultancy Services
Banking and Accountancy services
Data processing and other information services
Music & Entertainment
Shipping
Overseas trade in services includes the exporting and importing of intangible products – for example, Banking and Finance, Insurance, Shipping, Air Travel, Tourism and Consultancy. Britain has a strong trade base in services with over thirty per cent of total export earnings come[HB1] from services. The balance of trade in services has been positive for over fifteen years.  [HB1]“coming”
Mrs Gordon's notes

16. Balance of Payments Intro
Trade in Services
Recent Data
United Kingdom was the world’s second largest exporter of services in 2005
The UK accounts for almost 8 per cent of global exports and 6 per cent of the world’s imports, making it also the fourth largest importer of services
We run strong annual surpluses in trade in services
In 2005, the surplus on trade in services declined by £2.7 billion to £18.7 billion
This suggests that we have a comparative advantage in many service industries
Overseas trade in services includes the exporting and importing of intangible products – for example, Banking and Finance, Insurance, Shipping, Air Travel, Tourism and Consultancy. Britain has a strong trade base in services with over thirty per cent of total export earnings come from services. The balance of trade in services has been positive for over fifteen years.
Mrs Gordon's notes

17. Trade in Services – Extra Detail
Balance of Payments Intro
Trade in Services – Extra Detail
Exam technique….
The current account balance comprises the balance of trade in goods and services plus net investment income from overseas assets. Net investment income comes from the net flow of interest, profits and dividends from external assets located outside the UK. We add in the net balance of private transfers between countries and government transfers (e.g. UK government payments to help fund the various spending programmes of the European Union).
Mrs Gordon's notes

18. Balance of Trade in Goods and Services
Balance of Payments Intro
Balance of Trade in Goods and Services
Exam technique….
Mrs Gordon's notes

19. Balance of Payments – overall G & S
Balance of Payments Intro
Balance of Payments – overall G & S
Mrs Gordon's notes

20. What impact does Balance of Trade have?

21. Whiteboard activity…. 4 groups One to look at impact on households
One to look at impact on businesses
One to look at impact on govt
One to look at impact on international standing
What would be the impact of the UK exports falling (i.e. further growth of BoP deficit)?

22. Whiteboard activity…. Households Domestic Businesses UK Govt
International

23. Economic Effects of a Fall in Exports
Balance of Payments Intro
Economic Effects of a Fall in Exports
Negative impact on aggregate demand
C+I+G+(X-M)
Fall in national output – multiplier effect on incomes and spending
Might trigger an economic slowdown / recession
Actual GDP will fall below potential GDP (negative output gap)
Mrs Gordon's notes

24. Economic Effects of a Fall in Exports
Balance of Payments Intro
Economic Effects of a Fall in Exports
Negative effect on company profits and business confidence
Less demand implies less capital investment
Can lead to plant closures / job losses / cyclical unemployment
Government finances will be affected
Slower growth hits tax revenues + extra welfare spending
Some regions are more dependent on exports than others (e.g. manufacturing industry)- might worsen the “north-south divide”
Mrs Gordon's notes

25. Importance of Exports for UK
Balance of Payments Intro
Importance of Exports for UK
Export earnings are an injection of AD
A rise in exports boosts national income
Multiplier effects should also be considered – a rise in exports will lead to a bigger final increase in national income which may then affect investment demand
Exports are important for UK manufacturing industry (where exports are a high % of total industrial production)
Exports can help to ‘dampen’ or ‘cushion’ the volatility of our economic cycle – e.g. if there is a domestic economic slowdown / recession
An increasing share of Britain’s national output is exported overseas as the nation becomes ever more integrated into the global economy. Export earnings are an injection of AD into the circular flow. If British companies can successfully sell goods and services overseas, the rise in exports boosts national income and should have a positive multiplier effect on national income, output and employment.
Mrs Gordon's notes

26. Importance of Exports for UK
Balance of Payments Intro
Importance of Exports for UK
Employment effects from exports
Many thousands of jobs depend directly and indirectly on the export sector
Changes in export demand have effects in other sectors further down the supply chain (e.g. component suppliers for manufacturers and also the distribution and marketing industries)
Regional economy and exports
Some regions are more dependent on exports than others (e.g. the North east and Wales)
Export sales are particularly important for manufacturing industry where exports are a high % of total production. The slump in manufacturing exports in recent years has been a key reason why this sector has experienced a recession and the loss of over 400,000 jobs between 1998 and Thousands of jobs depend directly on the performance of the export sector and even more are affected in supply industries.
Mrs Gordon's notes

27. Your individual task….

28. Further reading
For the latest statistics

29. Balance of Payment Questions….
What is meant by (2 marks each = 6 in total)
A trade gap?
A current account deficit?
A current account surplus?
2. Explain why an economic boom may result in a current account deficit. (3 marks)
3. Explain why a recession may result in an improvement in the current account position. (3 marks)
4. To what extent might a current account deficit have an effect on
Employment?
Inflation?
Growth?
4 marks each = 12 marks Total = 24 marks

30. Homework
Finish questions….