Short Balance of Payments Deficit Question

Hey,

I understant that a BoP deficit normally refers to the current account. Also, a deficit (from textbook) occurs if exports X< imports M. Are investment income, net current tranfers excluded when mentioning a "BoP deficit"? Some sources overlook all components of current account other than X, M when mentioning deficit; but some mention this. Would appreciate a clarification.

Thanks.

(edited 11 years ago)

Microeconomics Notes A2.pdf861.9KB

Reply 1

coffeewithpeaches

Balance of payments has three parts: the current account, the capital account and the financial account.

Current transfers are part of the current account but is not considered a resource that affects economic performance. For instance 'aid' given to other countries is part of current transfers. These would not be excluded when mentioning a BoP deficit however in an exam I would not focus on this. If you have looked at the formula for calculating a current account position you will however see it included.

Investment income is included after long term loans are made by the government to invest in the future. At the time that the investment is made it would be counted for as a debit in the financial account of the balance of payments , but hen returns are made they are entered as investment income and are credited.

The formula for current account balance is:

CAB = X - M + NY + NCT

X = exports of goods and services
M = imports of goods and services
NY = net income abroad
NCT = net current transfers

Reply 2

twig

OP

Original post by coffeewithpeaches

Balance of payments has three parts: the current account, the capital account and the financial account.

Current transfers are part of the current account but is not considered a resource that affects economic performance. For instance 'aid' given to other countries is part of current transfers. These would not be excluded when mentioning a BoP deficit however in an exam I would not focus on this. If you have looked at the formula for calculating a current account position you will however see it included.

Investment income is included after long term loans are made by the government to invest in the future. At the time that the investment is made it would be counted for as a debit in the financial account of the balance of payments , but hen returns are made they are entered as investment income and are credited.

The formula for current account balance is:

CAB = X - M + NY + NCT

X = exports of goods and services
M = imports of goods and services
NY = net income abroad
NCT = net current transfers

Thank you for the response. Some books just relate a BoP to when X<M (and neglecting the other components mostly to discuss a "deficit"), hence my confusion. So X<M is NOT a BoP deficit (as we do not know the total net current account)?

Reply 3

coffeewithpeaches

If imports exceed exports there'll be a trade deficit that is for sure. You are right in that a countries BoP is unknown if you do not know the net current account but for the majority of developed countries like the UK it will be negative, thus if before you add NCT you have a deficit you will have a greater deficit afterwards. NCT wont be positive because we give more in aid than we receive.

For the majority of a-level questions focusing on NCT when discussing BoP is risky because it is difficult to achieve analysis and evaluation marks on.

Short Balance of Payments Deficit Question

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