Balance of payments — Edexcel A-Level Economics A
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Balance of payments explained
The balance of payments records all financial flows between residents of one country and the rest of the world over a period.
Read the full explanation
It has two main accounts. The current account covers trade in goods, trade in services, primary income (earnings on investments and compensation of employees) and secondary income (transfers such as remittances and aid). The financial account records flows of financial assets and liabilities, including direct investment, portfolio investment and reserve assets. The capital account is small and covers capital transfers and acquisition of non-produced, non-financial assets. The balance of trade in goods and services is the goods and services components of the current account only; a deficit means import spending exceeds export earnings.
Your focus
- Identify the components of the balance of payments, especially the current account.
- Define the balance of trade in goods and services and distinguish it from the current account.
- Explain how the current account and financial account are linked so the accounts balance overall.
Balance of payments exam tips
Marking Points
- States that the balance of payments records all financial flows between residents and the rest of the world.
- Identifies the current account components: trade in goods, trade in services, primary income and secondary income.
- Identifies the financial account as recording flows of financial assets and liabilities, including direct and portfolio investment.
- Defines the balance of trade in goods and services as the goods and services components of the current account.
- Explains that the accounts must balance overall, so a current account deficit is offset by a financial account surplus.
Examiner Tips
- 💡Name each current account component in order so no part is missed.
- 💡Use a numerical example, such as goods exports of £200bn and imports of £250bn giving a goods deficit of £50bn.
- 💡Link a current account deficit to the matching financial account surplus to show the accounts balance.
Common Mistakes
- Confusing the balance of trade with the whole current account: correction — the balance of trade covers goods and services only, while the current account also includes primary and secondary income.
- Treating the balance of payments as only the current account: correction — it also includes the financial account and the small capital account.
- Assuming a current account deficit is always harmful: correction — it is matched by a financial account surplus and may reflect strong investment inflows.
- Mixing up primary and secondary income: correction — primary income is earnings from work and investment, while secondary income is transfers such as remittances and aid.