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Balance of Payments

The balance of payments is a comprehensive record of all transactions between a country, such as Trinidad and Tobago, and the rest of the world, detailing inflows and outflows. It consists of three accounts: the Current Account, Capital Account, and Official Financing Account, with the Current Account further divided into trade in goods, trade in services, investment incomes, and transfers. The balance can result in a surplus, deficit, or equilibrium, reflecting the country's economic interactions globally.

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4 views11 pages

Balance of Payments

The balance of payments is a comprehensive record of all transactions between a country, such as Trinidad and Tobago, and the rest of the world, detailing inflows and outflows. It consists of three accounts: the Current Account, Capital Account, and Official Financing Account, with the Current Account further divided into trade in goods, trade in services, investment incomes, and transfers. The balance can result in a surplus, deficit, or equilibrium, reflecting the country's economic interactions globally.

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kharmony665
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Balance of Payments

• What type of transactions/trade does Trinidad and Tobago have with the
rest of the world?
• Should the transactions be recorded?
Balance of Payments Definition
• The balance of payments is a record of all transactions between a country
and the rest of the world.
• It shows a country’s payments to (outflows) and receipts from (inflows)
foreign countries.
• Therefore it is a balance sheet indicating all the international transactions
between a country and the rest of the world.
3 Possible positions of the Balance of Payments

• The balance of payments can either have:


1) A surplus (inflows more than outflows)
2) A deficit (outflows more than inflows) OR
3) Be in equilibrium.
• Balance of payments disequilibrium is a situation where a deficit or surplus
exists in a country’s balance of payments.
3 Accounts in the Balance of Payments
• The balance of payments consists of three accounts:
1) Current Account
2) Capital Account
3) Official Financing Account
Current Account
• 1) THE CURRENT ACCOUNT
• The current account is part of the balance of payments account that
measures the inflow and outflow of goods, services, investment incomes and
transfer payments.
• Therefore it is divided into four parts:
Trade in Goods
• a) The trade in goods (exports and imports) / Merchandise
balance/visible balance
• These are items that can be seen and touched eg) banana, oil.
• **The difference between visible exports and visible imports is the
BALANCE OF TRADE.
• The balance of trade is the difference between the values of a country’s
exports and imports in goods. If exports exceed imports, there is a surplus
and if imports exceed exports there is a deficit on the balance of trade.
Trade in Services
• b) The trade in services(exports and services) / Service balance/ Invisible
balance
• These are intangible exports and imports such as transport, banking,
insurance, tourism and other services. If inflows exceeds outflows then there
is a surplus on the invisible trade account. If outflows exceed inflows then
there is a deficit on the invisible trade account
Investment Incomes/Net property Income
from Abroad
• c) Investment Incomes/ Net property income from abroad
• Income from abroad can be in the form of profits, interest and dividends.
Residents can receive investment incomes from investments abroad (inflows) and
likewise foreigners can earn investment incomes from your country (outflows).
• For example if a Trinidadian sets up business in the United States, the profit is
income to Trinidad. Dividends on shares held in foreign companies, interest on
foreign bank accounts and rent received from foreign properties also come under
income to your country and flow out of your country. If outflows exceed inflows
there is a deficit and if inflows exceeds outflows there is a surplus.
Transfers
• d) Transfers- These are money sent back to your country by private
individuals, often to their families as gifts eg)gifts, grants, remittances. Also
the government make transfers when they make payments to international
bodies. A negative transfer figure means outflows exceed inflows and
positive means inflows exceed outflows
Exercise
Outline (1) major component of the Current A/C in the Balance of Payments
(2mks)
Explain what is meant by ‘current a/c deficit’ (3 mks)
Define the term ‘Balance of Payments (2mks)

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