Study Notes
The balance of payments is a comprehensive record of economic transactions between a country and the rest of the world, divided into the current account, capital account, and financial account.
- Current Account — records trade in goods and services, primary income, and secondary income. Example: Includes exports and imports of goods like machinery and services like tourism.
- Trade in Goods — the value of a country's exports and imports of physical goods. Example: Machinery and raw materials.
- Trade in Services — accounts for the export and import of non-tangible services. Example: Financial services and consulting.
- Primary Income — earnings and payments related to factors of production. Example: Wages and investment profits.
- Secondary Income — records transfers like gifts and remittances. Example: Grants and unilateral transfers.
- Current Account Deficit — occurs when imports exceed exports, leading to more debit items. Example: A country importing more goods than it exports.
- Current Account Surplus — results from exporting more than importing, generating more credit items. Example: A country exporting more goods than it imports.
Exam Tips
Key Definitions to Remember
- Balance of Payments
- Current Account
- Trade in Goods
- Trade in Services
- Primary Income
- Secondary Income
Common Confusions
- Confusing current account deficit with a budget deficit
- Misunderstanding the difference between trade in goods and trade in services
Typical Exam Questions
- What is meant by a trade in goods surplus? The value of exports of goods exceeds the value of imports of goods.
- Which of the following would appear as a credit item in primary income? Earnings of some of the country’s residents who work for a few months in other countries.
- What might cause a reduction in the current account surplus of Botswana? A rise in the profits Indian multinational companies in Botswana send home to India.
What Examiners Usually Test
- Understanding of the components of the current account
- Ability to calculate the balance of trade in goods and services
- Analysis of causes and consequences of current account imbalances