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The balance of payments
Edexcel IAL Economics · WEC14 Developments in the Global Economy
The balance of payments records all transactions between a country's residents and the rest of the world. Unit 4 builds on the AS work, adding the capital and financial accounts in more detail.
The current account
- Trade in goods (visibles): exports minus imports of goods.
- Trade in services (invisibles): tourism, finance, transport, education.
- Primary income: income from investment abroad (profits, interest, dividends) and pay of workers abroad, minus the same paid to foreigners.
- Secondary income: current transfers such as remittances from migrants, foreign aid and contributions to international organisations.
Current account balance = goods + services + primary income + secondary income.
| Component | $ bn |
|---|---|
| Trade in goods | -48 |
| Trade in services | 30 |
| Primary income | -12 |
| Secondary income | 7 |
| Current account balance | -23 |
A worked current account
The capital and financial accounts
- Capital account (small): capital transfers such as debt forgiveness, and buying or selling non-produced assets like patents.
- Financial account: flows of FDI, portfolio investment (shares and bonds), other investment (bank loans and deposits) and changes in reserve assets held by the central bank.
In principle the balance of payments balances: a current account deficit must be matched by a net inflow on the capital and financial accounts (borrowing from or selling assets to foreigners). A net errors and omissions item makes the accounts balance in practice.
Interpreting
A current account deficit means the country spends more abroad than it earns: it is a net borrower or is selling assets. Whether that matters depends on size (as a % of GDP), how it is financed (long-term FDI is more stable than short-term 'hot money') and what it is used for (imports of capital goods can raise future output).
Worked example
Using the table, calculate the current account balance and state how it must be financed.
- -48 + 30 + (-12) + 7 = -23
Answer: A deficit of $23 bn, matched by a net inflow of $23 bn on the capital and financial accounts.
Check yourself
- Trade in goods -20, services +35, primary income -8, secondary income -4 ($ bn). Calculate the current account balance (negative for a deficit).
Show answer
$3 bn. -20 + 35 - 8 - 4 = +3 ($3 bn surplus).
- A current account deficit is $45 bn and GDP is $900 bn. Calculate the deficit as a percentage of GDP.
Show answer
5 %. 45 / 900 x 100 = 5%.
- Remittances sent home by migrant workers are recorded in
- primary income
- trade in services
- secondary income
- the financial account
Show answer
secondary income. Remittances are current transfers: secondary income.
- Dividends paid by a UK-based firm to shareholders in Japan are, for the UK,
- a credit in secondary income
- a debit in primary income
- a debit in trade in services
- a credit in the financial account
Show answer
a debit in primary income. Investment income paid abroad is a primary income outflow.
- A foreign firm builds a factory in Country M. In M's balance of payments this is
- an export of goods
- a credit in primary income
- a capital transfer
- an inflow on the financial account (FDI)
Show answer
an inflow on the financial account (FDI). Inward FDI is recorded in the financial account.
- Explain why a current account deficit financed mainly by FDI is less risky than one financed by short-term portfolio flows.
Show answer
FDI is long term and hard to withdraw quickly, while short-term 'hot money' can leave suddenly, causing a sharp fall in the exchange rate or a financial crisis.. The stability of financing matters.
- Current account balance is -15, services +22, primary income -6, secondary income -3 ($ bn). Calculate the trade in goods balance.
Show answer
$-28 bn. Goods = -15 - 22 - (-6) - (-3) = -28.
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.