Cambridge International as and a level Economics Ebook

The balance of payments
Changes in a country’s price level can aff ect its balance 
of payments position which, in turn, can aff ect its 
exchange rate.
A country’s 
balance of payments
is a record of all the 
economic transactions between residents of that country 
and residents in other countries. Th
ere is a standard 
presentation of the balance of payments account that is 
recommended by the International Monetary Fund (IMF). 
It consists of the current account, the capital account, 
the fi nancial account and net errors and omissions (also 
sometimes known as the balancing item). Money coming 
into the country creates credit items, which have a positive 
sign. Money going out of the country gives rise to debit 
items and is recorded with a negative sign.
Balance of payments: 
a record of a country’s economic 
transactions with the rest of the world over a year.
KEY TERM
Components of the balance of payments
The current account
Th
e 
current account
consists of:
■
 
Trade in goods: As its name suggests, this covers the 
exports and imports of goods such as cars, TVs and clothing. 
Exports give rise to credit items while imports give rise 
to debit items. The trade in goods balance is the revenue 
earned from exports of goods minus the expenditure on 
the imports of goods. The trade in goods balance can also 
be called the balance of trade, the visible balance and the 
merchandise balance. A trade in goods surplus arises when 
export revenue is greater than import expenditure.
■
 
Trade in services: This covers the trade in exports and 
imports of services, which may be referred to as ‘invisibles’. 
Services include shipping, tourism, banking and insurance. 
A trade in services deficit occurs when revenue from the 
export of services is less than the expenditure on services 
bought from other countries.
Figure 4.10 
Good deflation
Price level
P
0
Real GDP
AD
AD
AS
1
AS
1
AS
Y
1
Y
AS
P
1
Figure 4.11 
Bad deflation
Price level
P
0
Real GDP
AD
AD
AD
1
AD
1
AS
Y
1
Y
AS
P
1