What is the balance of payments?
The balance of payments is a record of all the money flowing into and out of a country from its transactions with the rest of the world over a period of time. The part studied most at IGCSE level is the current account.
Key idea
The current account records: trade in goods (visible trade), trade in services (invisible trade), income from investments, and transfers such as aid.
Trade balances
The balance of trade in goods equals the value of visible exports minus the value of visible imports. Services such as tourism, banking and insurance are invisible trade.
- If exports are greater than imports, there is a current account surplus.
- If imports are greater than exports, there is a current account deficit.
Example
A country exports goods worth RM 80 billion and imports goods worth RM 100 billion. Its balance of trade in goods is a deficit of RM 20 billion.
Causes and cures of a deficit
A deficit can be caused by strong domestic demand pulling in imports, or by exports that are uncompetitive on price or quality. To reduce a deficit a government may use tariffs or quotas, allow the currency to depreciate, or reduce domestic spending (deflationary policy). Each cure has drawbacks: tariffs risk retaliation, depreciation raises the price of imports, and deflation can slow growth and raise unemployment. A deficit that lasts for years must be financed by borrowing from abroad or by running down the country's foreign reserves.
Remember
- Deficit: imports exceed exports. Surplus: exports exceed imports.
- Visible = goods; invisible = services.