Balance of Payments, International Business Video Lecture | International Business - B Com

hi there in this topic video we're going
to focus on the balance of payments the
balance of payments is essentially a
record all of the trade and financial
transactions made between consumers
businesses and the government in one
country with others and these balance of
payments figures tell us quite a bit
about day for example the level and
pattern of trade in goods and services
across national borders the bounce
payments or B OPP short is simply a
financial record in flows of foreign
currency are counted as a positive entry
say for example if the UK sells oil
overseas that's an inflow of currency
outflows of currency are counted as a
negative entry for example imports or
capital outflows now at a 2 we need to
make a distinction between the current
account and the financial account of the
balance of payment and in this short
topic video will take you through the
main account the current account of the
bounce of payments is the main measure
of a nation's external trade performance
whereas the financial account measures
the value of inflows and outflows of
financial capital across national
borders so in this topic video we're
just going to work away through the
basic balance of payments account the
first account is the current account and
that is made up of four separate
balances first of all the balance of
trade in goods tangible things such as
cars and washing machines and computers
the balance of trade in services such as
health education tourism and transport
and if we add one or two together we get
the balance of trade in goods and
services our third aspect is net primary
income and this is the net inflow or
outflow of items such as interest from
savings held overseas profits from
subsidiary businesses owned and operated
overseas and also crucially my group
immittance --is the inflow
come from people who have left their
country of birth and are living and
working in another nation that's primary
income net secondary income used to be
called net transfers and in the UK's
context that involves for example our
net payments to the European Union
spending on military aid and assistance
and our overseas development budget so
if we add one two three and four
together we get the country's current
account balance there's a couple of
items on the capital account and they
basically involve the value of the sale
of items such as patents franchises
leases and other items of sort of
capital value but the main focus is the
current account and the second main
focus is the financial account now the
financial account is essentially big
inflows and outflows of financial money
across borders changes the ownership of
assets and liabilities for example
between British residents and
non-residents three aspects in
particular stand out one is the value of
the inflows and the outflows hence the
net balance of foreign direct investment
such as building physical manufacturing
capacity in the country the second
financial flow is portfolio flow and
this is the inflow and the outflow of
debt so loans taken out example from a
bank in another nation portfolio flows
coming into the property market and
people buying and selling shares across
national Stock Exchange stock-exchange
bounders so foreign investment flows and
portfolio flows are two key sources of
external capital there's also the
balance of banking flows the banking
flows are very short-term money often
known as hot money which come in and out
of the banking system looking for the
best risk adjusted rate of return so for
example if the UK has lower interest
rates than let's say another country the
United State
we might expect to see an outflow of
banking money or hot money from the UK
towards the United States where there
could be a better rate of interest so we
have basis mostly the account in frontof
at the moment have the current account
of the financial account the key point
is that the balance of payments must
balance we have a balancing item in the
figures and that's there to incorporate
estimated errors and emissions from the
data and countries at the end of the day
have to make some adjustments via the
IMF to the value of their reserves of
gold and foreign currency and when they
do that that helps the balance of
payments overall to sum to zero so
what's the key point from this quite
complex and detailed table I think the
main point to take is that if a country
is running a current account deficit at
the top there to balance their payments
up they have to they have to run a
financial account surplus for countries
running a current account deficit they
have to run a financial account surplus
on the other hand if a nation is running
a current account surplus this means
there's a net inflow of foreign currency
into that economic system and that would
allow a nation to run a deficit on their
financial account so for example surplus
foreign currency could be used to fund
investment in assets located overseas
the balance of payments however must
balance if we include the balancing item
and adjustments to the gold and foreign
currency reserves the balance of
payments in a given year will balance
now from the UK point of view we run a
trade deficit in goods and services of
around 2 to 3 percent of our national
income and what we include the the
primary income and the secondary income
that we've mentioned in this topic video
our current account deficit is
significantly higher than that indeed in
2015 we run a deficit of just over 5% of
our nationally
and we'll do a separate topic video on
why countries operate current account
deficits you know one of the underlying
causes so the British economy runs a
current account deficit and therefore
will need to learn a financial account
surplus here are some other countries
that are running huge you could say
significantly an unsustainable current
account deficits some of these figures
are astronomically high and on the other
hand the country is much bigger
economies it turns out that are running
enormous sustained current account
surpluses measure there's a GDP so I
measure there's a percentage of GDP so
for example Singapore in 2015
run a current account surplus of
one-fifth of its national output taiwan
12% current account surplus and three
big countries that I've picked out here
are all big current account surplus
countries Germany the world's biggest
manufacturing exporter South Korea is
using successful exported nation and
China whose current account surplus is
smaller as a share of GDP three point
one percent in 2015 but of course it's
the world's second largest economy so
that translates into a surplus of
hundreds of millions of dollars again
we'll do a separate topic video on the
reasons why countries when current
account surpluses and some of the
consequences of that but this has just
been an introduction to the balance of
payments and in particular the
difference between the current account
and the financial account