BALANCE OF PAYMENTS

STRUCTURE OF THE CURRENT ACCOUNT

 OBJECTIVES

DEFINITION OF BALANCE OF PAYMENTS, SURPLUS AND

DEFICIT
DESCRIPTION OF THE COMPONENTS OF THE CURRENT
ACCOUNT
CONSEQUENCES FOR OCCURRENCE OF IMBALANCES

ACHIEVING STABILITY IN BALANCE OF PAYMENTS

 CONCEPT OF BALANCE OF PAYMENTS
BALANCE OF PAYMENTS is an account in which a country records all its
monetary transactions with the rest of the world periodically.

It usually contains tree different types of accounts viz:

• Current account (for goods and services imported and exported)
• Capital account (for investments, loans received or granted on long term basis)
• Money movement account (for settlement of imbalances in the other accounts)

Imbalances are the surplus and deficit.

SURPLUS occurs when receipts of a country exceeds her payments while

DEFICIT is seen when payments of any sort exceeds receipts
 COMPONENTS OF THE CURRENT
ACCOUNT

The current account is the key account in the balance of payments as it

is used to record all flows of incomes and payments between a
country’s residents and residents of other countries.

• Trade in goods (import and export of visible goods)

It is split • Trade in services (import and export of services/invisible goods)
into four • Primary income (wages, rent and incomes on investments received and
paid)
components • Secondary income (also known as current transfers such as pensions,
viz: gift of money, foreign aids, social contribution, welfare payments,
taxes on primary income, etc.)
Calculation For Current Account Balance

The balance of the current account can

be calculated each period by adding
together the balance on each section of
the account. Balance for each is gotten
by deducting payments from receipts
(that is, credits – debits). Hence,
balance of current account = G + S +
PI + CT
Example and Activity on Current account
 CONSEQUENCES OF TRADE
IMBALANCES
The significant problems that could be The significant problems that could be created
created by trade deficits includes: by trade surplus includes:

Fall in the value of exchange rates

Political and economic pressure on the
Escape of money from the economy government from other countries
Less spending on locally produced goods
Probability of demand-pull inflation
High probability of imported inflation

Redundancy of factors of production or

unemployment due to low demand of local Increase in the price of exports due to
products higher currency value

Increase in debt burden due to interest

charges on loans Fall in demand and job losses
 CORRECTING TRADE IMBALANCES
For deficits, government can:

Manage the floating exchange rate or devalue its

currency against the currencies of its major trade
partners, and maintain a low fixed exchange rate with
them

Apply contractionary fiscal policy by increasing taxes Manage the

For floating
and cutting expenditure surplus, exchange rate
Use
with its major Use
expansionary Remove trade
govern trade partners, expansionary
monetary barriers.
and maintain a fiscal policy
Apply contractionary monetary policy by increasing ment high fixed
policy

can: exchange rate

interest rates and selling bonds with them

Introducing and implementing trade barriers (tariffs,

quota, embargo, subsidies, bureaucracy and excessive
quality standards)