Balance of Payments (BOP) – AS/A LEVELS/IB/IAL

Balance of Payments (BOP) – AS/A LEVELS/IB/IAL

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Balance of Payments (BOP)

The balance of payments (BOP) is a record of payments from one country to another.

Deficit

A balance of payment deficit occurs when payment outflows are greater than payment inflows.

Surplus

A balance of payment surplus occurs when payment inflows exceed outflows of payments.

The balance of payment consists of three accounts

  1. The current account
  2. The financial account
  3. The capital account

The current account

Trade in goods

These are tangible products that you can see or touch such as cars, food and cloths.

United Kingdom (UK) is a majority net importer of goods such as computers, machinery and oil.

Trade in services

These are intangible products such as accounting, law, finance and insurance. The UK is a net exporter of services.

Investment income (IPD) – Interest, profit & dividends

This account consists of any interest, profit or dividends earned from investments abroad.

Transfers

These are payments made abroad which aren’t for goods and services or investments abroad. Transfers include payments made to the European Union or payments made to family members abroad.

Causes of a balance of payments deficit

  • A strong pound would encourage more imports than exports
  • Quality of UK goods being poor would make UK exports less competitive
  • Higher rates of inflation would make the UK’s exports less competitive
  • Higher wages compared to other countries could make the UK’s goods more expensive and less competitive

Causes of a current account surplus

  • Lower wages compared to other countries could make UK products cheaper and more competitive
  • A weak pound could make UK’s exports more competitive
  • High quality products could make a countries exports more competitive e.g. German cars
  • Highly skilled workers could encourage more services being exported e.g. specialist lawyers & financial accountants
  • Low inflation rates could make UK goods cheaper than other countries
Tushar Depala

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