The document discusses the balance of payments between Britain and other countries. It explains the current account, which records trade in goods and services, as well as net income flows and current transfers. The UK runs a current account deficit due to importing more goods than it exports, but it has a surplus in trade in services. The capital account records small capital transactions and the financial account records the movement of financial capital into and out of the UK through foreign direct investment, portfolio investment, and other capital inflows. Maintaining an open international capital market has both advantages like economic growth and disadvantages like vulnerability to financial crises.

1. Aquinas College Economics Department
The Balance of Payments
Financial Transactions between
Britain and the World
ECON4

2. Aquinas College Economics Department
Definition
You need to know about the
 Current Account
 Capital Account
 Financial Account
A record of the financial transactions between countries
and trading partners

3. Aquinas College Economics Department
Current Account
It contains the countries net income from trade
If the total imports exceeds the total exports
then the country is running a current account
deficit on the balance of payments
The part of the balance of payments that records trade in
goods e.g. Tangible products and services e.g. Financial
services

4. Aquinas College Economics Department
Trade in Goods
Visible Goods e.g. Tangible goods
Focused on imports – exports
UK consistently runs a deficit here due to the
decline in UK manufacturing – (possible impact
of globalisation?)

5. Aquinas College Economics Department
Trade in Services
Invisible Goods
Financial Services tend to fall under here
The UK runs a surplus here due to the large
service sector in the UK Economy.
The City of London is a good example of this
with large financial institutions

6. Aquinas College Economics Department
Net Income Flows
Interest
Profits
Dividends
All of these will come from UK Assets in other
countries e.g. RBS Branches in Malaysia
Equally foreign countries will take out of the UK
economy like EDF Energy profits go back to
France

7. Aquinas College Economics Department
Current Transfers
Mainly government transfers to international
organisations
 European Union
 International Monetary Fund
 United Nations
 World Bank
 World Trade Organisation
 NATO

8. Aquinas College Economics Department
The Capital Account
A small part of the total Balance of Payments
Includes
 Repatriation of Financial Capital
 Government Transfers
 Up keep of UK Diplomatic Missions
 Some Foreign Aid

9. Aquinas College Economics Department
The Financial Account
Records the movement of financial capital into
and out of the UK. Three main components
 Net Foreign Direct Investment
Outward FDI: UK companies investing in other
nations
Inward FDI: Foreign companies investing in the UK
 Net Portfolio Investment
 Other Capital Inflows – ‘hot money’

10. Aquinas College Economics Department
Short Term / Long Term
Short run capital flows are normally classed as
one year long. Arises normally from speculators
through financial institutions
Long term capital flows tend to be more
portfolio investments such as shares or other
financial assets.

11. Aquinas College Economics Department
Advantages and Disadvantages
Advantages Disadvantages
Promotes global economic growth Problems in one countries financial system
can impact on that of another e.g. Sub
Prime Mortgage Crisis
Generates more sources of finance FDI can lead to global dominance by a few
firms
FDI can bring about important Supply Side
reforms
Hot Money flows can destabilise a
currencies value if done in large enough
amounts
Of International Capital Flows

12. Aquinas College Economics Department
AS Level Revision Site (ECON1, ECON2)
• http://www.aquinaseconomicsas.co.uk
A2 Level Revision Site (ECON3, ECON4)
• http://www.aquinaseconomicsa2.co.uk
Aquinas Economics on Twitter
• http://www.twitter.com/aquinaseconomic
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