The Balance
of Payments
The transactions in balance of payments are separated into
three categories; the Current balance, the Capital account and the Financial
account. The current account comprises of transactions in goods and services,
income payments and transfers. The capital account reflects transactions in
fixed assets and mainly related to migrants. The financial account records
transactions in financial assets.
Trades in goods and services reflect the balance between UK
exports and imports of goods and services. Income represents employment income
from abroad, as well as profits, dividends and interest receipts from UK
ownership of foreign assets. The 3rd component is international
transfers which is transfers made by the central government or by private
individuals. This includes transactions and grants with other international
organisations.
Overall, the balance of payments must always be zero, as we
have to pay for everything we consume and receive payments for everything that
is sold. But because the data collected isn’t entirely accurate the accounts
incorporate a Net errors and omissions item which balances the accounts. Since
the balance of payments is always 0 (balanced) if there is a deficit in the
current balance (more imports than exports) then we must be selling foreign
exchange or financial assets; i.e. a financial account surplus.
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