The Balance of Payments.

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The Balance of Payments

The Balance of Payments is a record of the financial dealings over a period of time between the UK and the international economy. Essentially the accounts are divided into two sections with the current account measuring trade in goods and services and the capital account tracking flows of money associated with saving, investment, speculation and currency stabilization in and out of the UK.

The Office for National Statistics divides the UK current account into four parts.

1. Trade in goods, ranging from raw materials to industrial products.

2. Trade in services, such as transport (e.g. shipping and air transport), travel and tourism, insurance and other financial services and royalties and license fees.

3. Income flows which relate to UK investments abroad and to foreign investments in the UK (investment income). These flows comprise a substantial proportion of the invisibles.

4. Current Transfers which relate mainly to the UK’s membership of the European Union. The UK has to pay part of its tax revenues to the EU, however in return receives payments such as agricultural subsidies or regional grants.

These four components of the Current Account are classified as either visibles or invisibles. Visibles are the trade in goods, whereas invisibles are the trade in services, income flows and current transfers.

The difference between visible exports and visible imports is known as the Balance of Trade. Conversely the difference between invisible exports and invisible imports is known as the Balance on Invisible Trade. When added together the Balance of Trade and the Balance on Invisible Trade make up the current balance, one of the country’s key economic indicators. This can either be in deficit or surplus depending on the

As can be seen form the graph below Britain has generally run a current account deficit. After recording small surpluses in the early 1980s, the UK balance of payments deteriorated badly in the late 1980s following the consumption driven economic boom. Throughout the nineties there was a clear improvement in figures; however 1999 signalled a return to deficit. Figures released by National Statistics Online show that the general trend in the current account has been progressively worsening since then.  

At the start of 2003 UK Trade Info estimated the UK’s balance on trade in goods and services as a deficit of 2.2 billion. Through the course of the year the UK trade deficit has significantly widened; the latest statistics released in November 2003 provisionally estimated a deficit of 3.3 billion. This has largely been the result of the widening deficit on trade in goods coupled with a reasonably constant surplus on trade which counterbalances the deficit. Trade deficit on goods has risen form 3.5 billion in January to 4.4 billion in November, whereas surplus on trade has hovered around the 1 billion mark. In the past 3 months the UK has run a record trade deficit of 13.2 billion. Reduced production of North Sea oil due to maintenance is largely accountable for the reduced exports and subsequent increased deficit.

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In terms of trade with the EU, latest trends indicate that the UK’s deficit with EU nations has continued to widen to. Figures released by the Office for National Statistics in 2002 estimated the trade deficit as 1.7 million; this has risen significantly over the past year with figures estimated at a record deficit of 2.1 billion in November 2003. The UK’s poor trade performance with Europe is largely the result of the recent sluggishness of euro zone economies.

Although the UK’s overall trade deficit has deteriorated over the past few years, exemplified by record ...

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