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Balance of Payments (Economics CIE A Level) Cheat Sheet (DRAFT) by

A guide to help my fellow Cambridge candidates understand this sub-chapter under International Trade

This is a draft cheat sheet. It is a work in progress and is not finished yet.

An introd­uction to BOP

Definition
It records all economic transa­ctions which take place internally and extern­ally; it shows the inflows and outflows of money.
Inflows = CR
Outflows = DR

Components (mainly)
- Current Account
- Capital Account
- Financial Account
BOP is used to analyse trade perfor­mance of a country and allow for comparison between countries.

Structure of BOP

 
CR $M
DR $M
BALANCES $M
Current Account
Trade In Goods
500
700
(200)
Trade In Services
800
600
200
Primary Income
75
50
25
Secondary Income
10
25
(15)
Current Account Balance
    
10
Capital Account
80
75
5
Financial Account
60
100
(40)
Total
    
(25)
Official Financing
    
24
Net Errors & Omissions
    
1
     
25
BOP should be zero.
Current, Capital and Financial should balance each other out.
Current + Capital + Financial + Balancing item = 0

Current Account Surplus

Defn -

Causes -

Conseq­uences
 

Capital Account

It records transa­ctions pertaining to the transfer of ownership, acquis­ition and disposal of assets.
For example, if a government obtains a capital for constr­uction of a college, it is recorded as an inflow of capital (CR)
The difference between inflows and outflows of capital is termed as the net capital flow

Financial Account

It records invest­ments made overseas by the residents of a country (domestic ownership of foreign assets) and those carried out by foreigners in the country (foreign ownership of domestic assets)

Official Financing

It refers to the borrowing and reserves of a country. Govern­ments borrow from financial instit­utions and existing reserves. The surplus arising from these is used for payment of external debts.

Net Errors and Omissions

It is simply a balancing item. The recording of transa­ctions in a BOP is a very complex exercise and therefore, author­ities need to cater for errors and omission that occur under this heading.

Current Account

It records the flow of goods and services in and out of a country.
Export = inflow = CR entry
Import = outflow = DR entry

The Current Account Balance is obtained from summation of Trade in Goods, Trade in Services, Primary income and Secondary income.
 

Current Account Components

1. Trade In Goods
It includes the import and export of tangible items. The difference between the two is the Balance of Trade - either Balance of Trade deficit or surplus. Eg an Indian firm paying a Canadian firm for supplying raw materials will be recorded as a DR entry in India and CR entry in Canada.

2. Trade In Services
It includes the export and import of intangible items such as education, accoun­tancy, health services. The difference between the two is the Balance of Invisible Trade. Eg a Canadian firm paying an Indian firm for accoun­tancy services will be recorded as a DR entry in Canada and a CR entry in India.

3. Primary Income
It covers income earned by indivi­duals and firms.

4. Secondary Income
Previously called Current Transfers,
Unlike the BOP (which should be equal to be 0), the Current Account balance is expected to theore­tically run at a surplus or deficit.

When value of inflows (CR entries) > value of outflows (DR entries), a Current Account Surplus is recorded.
When value of outflows (DR entries) > value of inflows (CR entries), a Current Account Deficit is recorded.

Surplus - positive balance
Deficit - negative balance