4.6 Balance of payments

• Balance of payments records credit and debit items

• Accounts can show surpluses or deficits

• Calculation: elements of the balance of payments from data

• Current account includes trade in goods, trade in services, income, and current transfers

• Capital account includes capital transfers and transactions in non-produced non-financial assets

• Financial account includes FDI, portfolio investment, reserve assets, and official borrowing

• The balance of payments has an overall zero balance

• Credits are matched by debits

• Deficits are matched by surpluses

• The current account balance relates to currency demand, supply, and exchange rate movements

• Diagram [HL]: exchange rate showing relationship between current account balance and exchange rate

• Financial account flows affect demand and supply for a currency

• Capital and financial flows can influence exchange rates

• Deficits have implications for exchange rates, interest rates, foreign ownership of domestic assets, debt, credit ratings, demand management, and growth

• Correction methods include expenditure switching, expenditure reducing, and supply-side policies

• Evaluation considers effectiveness of measures to correct persistent deficits

• Marshall-Lerner condition explains when depreciation improves the current account

• J-curve effect shows the possible short-run worsening before improvement

• Diagram [HL]: J-curve with reference to the Marshall-Lerner condition

• Surpluses have implications for domestic consumption and investment, exchange rates, inflation, employment, and export competitiveness

• Evaluation considers domestic and international consequences