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Macroeconomics II – The international economy

Balance of payments

4.1 Balance of payments

An account showing the financial transactions of one nation with the rest
of the world over a period of time.

 The balance of payments is split into three parts:

– current account (goods and services)

– capital account (e.g. buildings) and

– financial account (e.g. cash flows)

 Current account + capital account + financial account + balancing items = 0

4.2 The current account

This is composed of two parts.

 Visible trade This is trade in goods.

 Invisible trade Services, investment income and transfers of money
between individuals and national bodies.

Current account balance

 A deficit (surplus) on the current account will be balanced by a surplus (deficit),
that is a net inflow (outflow) on the combined capital and financial accounts.

 Generally a surplus balance is good, indicating a growing economy.

 However, a deficit means a decrease in spending power (and a net withdrawal
from the circular flow), which is deflationary.

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