Revision:Economics - The Balance of Payments and the Exchange Rate

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The main elements of the balance of payments are the current account, the capital and financial accounts and net errors and omissions.

Visible and Invisible

Trade in goods is known as visible balance whereas trade in services is known as invisible balance. Trade in services [invisible goods], for example, include tourism, the music industry and technology. The UK performs well in services.

Trade Deficit

A deficit occurs when a country is importing foreign goods more than it is exporting goods to other countries; imports are higher than exports. For a long time now, the UK has been in a trade deficit.

Trade Surplus A surplus is the complete opposite of a deficit, and occurs when a country's exports are higher than its imports.

Income The income part of the current account mainly covers investment income. The UK usually has a surplus on income.

Transfers The transfers part includes money made and received by the government and individuals.

Net Errors and Omissions The last section, net errors and omissions, is added to ensure that the balance of payments does balance.

Connection with Economic Growth Economic growth can occur due to an increase in aggregate demand. There may be consumption-led growth, which may be caused by, for instance, a cut in income tax or a rise in consumer confidence.

Net investment pushes up the macroeconomic equilibrium.