Y12-BOP Students

Chapter 24 discusses the balance of payments (BOP), focusing on the current account, which includes trade in goods and services, and primary and secondary income. It highlights recent trends in global trade balances, including surpluses and deficits in various countries, and explains the components and implications of current account imbalances. The chapter also emphasizes the importance of understanding the relationship between government borrowing and current account deficits.

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Y12-BOP Students

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Abdullah zahid

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Chapter 24: Balance Lesson Title:

of Payments Habitats
(BOPs)
(Page no 163, Textbook 1, Unit 2, specification 2.3.1- Year 12)

Learning Objectives:

➢ Explain the components of the current account of the balance of payments.

➢ Calculate the balance of trade in goods, in services, in goods and services and
overall current account balance.

➢ Analyse the causes of imbalance in the current account of the balance of

payments- Balance of payments deficits and surpluses on the current account.

➢ Discuss the consequences of imbalance in the current account of the balance of

payments for the domestic and external economy.
BOPs in news headlines Explain & Explore
• The GCC has registered a historically high current account surplus of around 16.0
percent of GDP in 2022, which is expected to decrease to a 9.6 percent of GDP in
2023, reflecting lower oil prices, slower global growth and trade, and accelerated
imports in line with the rebound in domestic demand.
• The UAE has once again returned to the positive in its balance of payments (BoP)
position, which stood at Dh4.73 billion in 2003 against a negative Dh1.52 billion in
2002, according to figures released by the UAE Central Bank.
• India recorded a trade deficit with nine of its top ten trade partners in the first seven
months of 2023-24, with the US being the only country with which exports exceeded
imports.
Explain & Explore
COUNTRIES WITH HIGHEST TRADE Surplus (2022)

Trade Balance, $ billion, source: IMF

0 100 200 300 400 500 600 700 800 900 1,000
China 877.6
Russia 291.5
Saudi Arabia 222.06
United Arab Emirates 173.98
Norway 144.26
Australia 103
Qatar 96.61
Germany 84.02
Kuwait 69.47
Ireland 68.14
Netherlands 66.98
Malaysia 58.07
Indonesia 54.53
South Korea 47.78
Switzerland 45.26
COUNTRIES WITH HIGHEST TRADE DEFICIT(2022)
What do economists mean by the Balance of payments?
The balance of payments is an important economic indicator that measures a
country's transactions with the rest of the world.
In essence, it's a record of all the money coming into and going out of a
country, including payments for goods, services, and financial transactions.
Balance of payments account can be split into two components:
• The current account where payments for the purchase and sale of goods and
services are recorded.

• The capital and financial accounts where flows of money associated with saving,
investment, speculation and currency stabalisation are recorded.

Note: Flows of money into the country are given a positive (+) sign on the accounts.
These inflows are recorded as a credit item. Flows of money out of the country are
given a negative (-) sign. These outflows are recorded as a debit items.
Current Account of the Balance of payments
The current account records payments for trade in goods and services plus net flows of
primary and secondary income.

The current account is the sum of these four separate balances:

1. Trade in goods
2. Trade in services
3. Primary & secondary income

Trade in goods
Trade Express
in goods is sometimes called trade in visible. This is trade in raw material, semi
55-60 Minutes
manufactured goods and finished manufactured goods. Visible exports are goods that are
sold to foreigners. Hence, result in an inflow of money and are recorded with a positive sign
on the balance of payments account. Visible imports are goods that are bought by domestic
residents from foreigners. The difference between the value of visible exports and visible
imports is know as the balance of trade in goods.
Trade in services:
A wide variety of services are traded internationally, including financial services such
as banking and insurance, transport services such as shipping and air travel, and
tourism. Trade in services is an example of trade in invisibles. Services are often
intangible or unable to be touched. Export of invisibles are bought by foreigners. The
difference between the value of invisible exports and invisible imports is known as the
balance of trade in services.
Primary and secondary income:
Not all flows of money result from trade in goods and services. For an economy,
primary income is generated from interest, profits and dividends on assets owned
Express
abroad. Secondary income is when income is transferred between countries. Money is
55-60 Minutes
received without a corresponding output. Examples include personal transfers and
government transfers between countries for international assistance.
WHICH MONEY FLOWS APPEAR IN SECONDARY?
This category includes a variety of transfers, such as:
Remittances: Money sent by foreign workers (migrant workers) back to their home countries.
Foreign Aid: Grants, concessional loans, and other forms of assistance provided by one country
to another for developmental, humanitarian, or other purposes.
Payments made to international institutions: When the UK was a member of the European
Union, the UK was a net contributor to the EU budget. These payments were treated as a
negative on the secondary income account.
Express
55-60 Minutes
REMITTANCES AND THE CURRENT ACCOUNT

Remittances are typically categorized as a credit item in the current account, contributing
positively to the current account balance.
In many lower-income countries, remittances can offset trade deficits or other current
account deficits, helping to achieve or maintain a current account surplus.

Exam Advice:
Technically, the balance of payments always balances.
Express
A balance of payments deficit in an exam normally refers to a current account deficit.
55-60 Minutes
Note: A consistent current account deficit indicates the country relies on foreign capital
& financial inflows.
Learning
Objectives
5 Minutes

Engage/Explore
20 Minutes