Balance of Payments: Introduction

Balance of payments shows the countries transactions with the rest of the world. The inflows and outflows of this are catagorized into different sections:

1. Current account(CA) balance of payments
2. Fiscal account (capital) balance of payments

Balance of payment problems

Trading goods and services forms the largest part of countries current account. It also includes primary (refering to international payments of factors of production i.e. investment income and compensation to employees) and secondary income(refering to transfer payments flowing between countries i.e pension payments and oversea aids) flows. 

Example of UK's current account balance:

The trade balance is a part of the current account and refers to trades in goods and services between the country and the world. UK's trade balance example:

The current account defecit can be a problem when:

1. There are no compensating inflows of investment income or inward capital account flows.
2. The economy has a poor record of repaying debt.
3. It is a persistent deficit that does not self-correct over time.
4. The deficit forms a large share of GDP.
5. The central bank has low reserves.