balance of payments
Definition:
A systematic record of all economic transactions during a given period between residents of a given country and residents of other countries. It can be likened to a company's profit and loss statement. It involves a variety of international accounts which show the types of payments and receipts. There are four main types: (1) Visible imports and exports. These are all the recorded transactions between residents of Britain and non-residents which involve the exchange of merchandise. Visible exports are receipts from sales to people in other countries of goods produced in, or re-exported from Britain. Visible imports are payments to people in other countries for the goods exported to Britain. Until the discovery and export of North Sea oil, Britain did not manage to export sufficiently to pay for its imports. This situation was common throughout the 19th century and the period up to 1945. After the Second World War the trade gap narrowed, earnings from exports paying more of the import bill. By the mid-1980s oil exports were creating a surplus on current account, but, by the end of the decade, Britain's balance of trade in manufactured goods had deteriorated significantly. This was partly due to the depletion/running down of oil reserves which had been evident since 1985. (2) Invisible imports and exports, often referred to as the 'invisibles'. These involve payments between residents and non-residents for transactions where there is no exchange of physical goods. Major categories of transactions include government expenditures (overseas military and political expenditure), transport (shipping, freight earnings, civil aviation), travel (tourism), other services (e.g. banking, insurance) and interest, profits and dividends. These above two categories ('visibles' and 'invisibles') together form the current account transaction. Debits and credits need not balance either individually or as a total. The general balance of invisible trade is an excess of invisible export earnings, over invisible expenditure. The current account may have a surplus or a deficit. If it has a surplus a country is seen to be 'paying its way'. Developing countries may have deficits for longer periods if they have to import significantly before exports rise. However, for a mature economy like Britain's a persistent deficit would tend to suggest the economy was not fully competitive. (3) A movement of capital for other motives than paying for imports and exports. Referred to as the capital account (or the finance and investment account), it includes (a) loans between Britain and other governments, and (b) long-term and short-term private investment by British citizens in other countries and by them in the UK. This account, too, may not balance. Some countries tend to be net exporters of capital, thus incurring a debt, others are net importers of capital, incurring a credit. Britain tends to export capital. If there is a credit on the current account, this can be used on the capital account to balance out the debit created by its surplus exporting of capital. Britain's requirements on the capital account are relatively heavy. (4) Transfer of gold and convertible currency, called 'accommodating movements'. Because the balance of payments must technically balance (like any balance sheet) and because totals of the current and capital accounts do not equal each other even when taken together, monetary movements become essential. However, surpluses or deficits on the total balance of payments cannot continue indefinitely for no country has infinitely large reserves. Eventually a country in deficit must take action to stop the outflow of its reserves. This may be done through devaluation of the exchange rate, which tends to stimulate exports and reduce imports. This is a successful method if the domestic economy can produce enough exports and substitute for imports without causing inflation. Another method which is often attempted is internal deflation.
Cross-References:
Links:
Figures:
© Westburn Publishers Ltd 2002, The Westburn Dictionary of Marketing edited by Michael J Baker, ISBN 978-0-946433-01-8. www.themarketingdictionary.com. Entry: [Joanna Kinsey and Michael J. Baker], [1998].