A-Level Economics Knowledge Organiser: The Balance of
Payments (BoP)
Introduction to the Balance of Payments (BoP)
The Balance of Payments (BoP) is one of the four main macroeconomic
objectives and is a comprehensive record of a country's economic
interactions with the rest of the world. It records all financial transactions
made between economic agents (consumers, firms, and the government)
in one country (e.g., the UK) with all other nations.
Synoptic Links
Macroeconomic Objectives: A persistent deficit conflicts with the
objective of a 'sustainable balance of payments'. Policies to fix a
deficit often create a trade-off with other objectives like economic
growth or low inflation.
Aggregate Demand (AD): The trade balance (Net Exports, X-M) is
a component of AD. A worsening deficit acts as a leakage, reducing
AD and potentially leading to slower economic growth.
Exchange Rates: A sustained current account deficit can lead to a
depreciation of the currency, as the demand for the country’s
currency (to buy its exports) is less than the supply of its currency
(to buy imports).
1. Components and Definitions of the BoP
The BoP is generally split into the Current Account, the Capital Account,
the Financial Account, and Errors and Omissions.
Key Definitions
Term Definition
Balance of
Payments (BoP)
A record of all financial transactions between a country and
the rest of the world.
Export
(Credit/Injection)
A financial transaction that results in an inflow of money
into the domestic country.
Import
(Debit/Leakage)
A financial transaction that results in an outflow of money
out of the domestic country.
Current Account
The section of the BoP that records the trade in goods and
services, primary income (investment earnings), and
secondary income (transfers).
Components of the Current Account
The Current Account is made up of four main components.
Component Description Examples
Trade in
Goods (Visible
Balance)
Imports and exports of
physical, tangible
products.
Credit/Export: UK sells North Sea oil
to France. Debit/Import: Indian
mangoes bought in UK supermarkets.
Trade in
Services
(Invisible
Balance)
Imports and exports of
intangible products.
Credit/Export: Lloyds of London sells
shipping insurance to a Dutch
company. Debit/Import: You
subscribe to Netflix (a US company).
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