Balance of payments (Part I)
Yvonne Harvey, Contributor

Sixth form students taking a break at Camperdown High School. - Ian Allen Photo

HELLO. I will begin today's lesson by giving you the learning objectives for this topic. The candidate should be able to:

* Differentiate between balance of trade and balance of payments.

* Discuss the impact of balance of trade, balance of payments and devaluation.

* Discuss the internal measures which a country may adopt to address an adverse balance of payments problem.

* Discuss the external strategies which a country may adopt to address adverse balance of payments.

These objectives will be covered in the two lessons, starting today. Ready?

International trade refers to trade among different countries of the world. When countries trade with each other, a record is kept of the financial transactions between them. This record is known as the 'balance of payments'. It is a statement of the trade which takes place between a country's residents (individuals, businesses and the government) and the residents of all foreign countries. Therefore, Jamaica's balance of payments shows all the payments we receive from other countries and all payments which we make to them.

There are three components of the balance of payments account: the current account, the capital account and the official financing account.

Now, we are going to analyse each account in turn. Please note that in all parts of the balance of payments account, exports and income and are, therefore, given a plus (+) sign and imports and payments are given a minus (-) sign.

THE CURRENT ACCOUNT

This section of the balance of payments is divided into two parts: part (a), the visible trade account, and part (b), the invisible trade account.

The visible trade account records the tangible items, i.e., the imports and exports of goods only. The difference between the money value of goods imported and goods exported is known as the visible trade balance, or the balance of trade. This balance may be a plus (+) surplus or a minus (-) deficit. If exports exceed imports, the result will be a surplus or a favourable balance of trade. On the other hand, if imports exceed exports there will be a deficit, or unfavourable balance of trade.

The invisible trade account records the intangible items, i.e., the imports and exports of services, tourist expenditure and income, income from investments abroad and paid to investments abroad. The services include shipping, aviation and financial services. The balance on this account is known as the invisible balance and it will be a plus (+) favourable if exports (income) of the intangible items exceeds the imports. Now, you can work out for yourselves what will result in a minus (-) on this account.

The overall current balance is the difference between our exports of goods and services and the imports of goods and services. As with the visible and invisible balances, the overall current balance may be favourable or unfavourable.

THE CAPITAL ACCOUNT

This account records capital flows, i.e., loans and grants to and from other countries, investments bought and sold (note that the income from investments is recorded in the invisibles of the current account). As with the current account balance, the capital account balance may be favourable or unfavourable.

Now, we need to consider the overall balance of payments figure. This takes into account the current account balance and the capital account balance. If, overall, the exports exceed the imports, the overall balance of payments will be a surplus (+) and if overall the imports exceed the exports, the overall balance will be a deficit (-). This means that the country spent more than it earned.

THE BALANCE OF PAYMENTS MUST BALANCE

Ultimately, this must happen since every export becomes an import and every import was an export. Balancing the balance of payments means that there must neither be a surplus nor a deficit in the end. A way must be found to finance the surplus or deficit through external strategies which are shown in the official financing account. Next week, we will take a look at this part of the balance of payments account. We will also look at ways of financing an adverse balance of payments and ways of correcting an adverse balance of payments.

Now, for your assignment, to reinforce what we have covered. Try this question.

(a) Define the term 'balance of payments' (2 marks).

(b) (I) What is meant by a country's balance of trade? (2 marks).

(II) Calculate the balance of trade for the country shown below:

Visible trade in US$m

Exports ­ 26,000
Imports ­ 29,000
Invisible (net)
Exports ­ 20,000
Imports ­ 15,000 (2 marks).

(c ) Name two items that are regarded as invisibles (2 marks).

(d) Calculate the cucurrent account balance (2 marks).

Total: (10 marks).

I will give you the answers for the calculations in parts (b) (II) and (d) next week. A guide to the other parts of the question can be found in this lesson. Bye.

* Yvonne Harvey teaches at Glenmuir High School.