Balance of Payments, Put Simply

 

Economics terms are thrown about by those in-the-know all too regularly. Frankly, its baffling for those of us without expert knowledge in the subject, and “put simply” explanations are infrequent, to say the least. #LetsTalkPolitics and challenge this.

The balance of payments is a record made up of two accounts, the capital (financial account) and the current account. Essentially the balance of payments means that revenue from selling both goods and services abroad equals expenditure on imports of goods and services overall. Countries such as the UK aim to keep revenue greater than expenditure.

The current account is made up of payments such as:

  1. Trade in services (Tourism, Finance)
  2. Trade in goods (Both the import and export of finished goods such as cars or laptops, or semi-finished goods such as car parts and finally commodities like oil or tea)
  3. Investment income (Dividends, interest from UK loans abroad)
  4. Financial transfers (Gifts, overseas aid)

Essentially the current account can be viewed as Exports minus imports of goods and services.

The capital account is made up of payments such as:

  1. Foreign investment (UK setting a firm up abroad)
  2. When an official bank sells or buys currencies

The United Kingdom currently has a net current account deficit, it is persistent and a large percentage of our Gross Domestic Product (GDP, the total value of goods and services produced in a select country during one year). Currently it is a staggering £25.4 Billion (3rd Quarter of 2016).

This can lead to a variety of issues to the government and us in both the short run and long run. It can cause a loss of confidence to foreign investors. Hence investment in the UK can be lost which leads to a lowering of our living standards. Furthermore if the trade deficit is financed through borrowing it is said to be unsustainable, therefore countries policies can be burdened by high interest payments and may not be able to pay them back, like Russia in 1998.

Many of us have no knowledge of these issues, should we be more aware?

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