Economics – International trade and globalisation - Current account of the balance of payments | e-Consult

Components of the Balance of Payments: The balance of payments is comprised of three main accounts: the current account, the capital account, and the financial account.

• Current Account: Records the balance of trade in goods and services, primary income, and secondary income. A deficit means the country is spending more abroad than it is earning.
• Capital Account: Records transactions relating to the transfer of non-produced, non-financial assets (e.g., patents, trademarks).
• Financial Account: Records transactions relating to the transfer of produced financial assets (e.g., stocks, bonds, bank deposits). This is often the largest component of the balance of payments.

Relationship between the Accounts: The current account, capital account, and financial account are linked. For example, a current account deficit might be financed by capital inflows (capital account surplus) or by borrowing from abroad (financial account deficit). A financial account surplus can lead to a current account deficit, as investment abroad reduces the demand for exports.

Conclusions from the Data: The data shows a current account deficit of £15 billion. This means the country is spending more on goods and services from abroad than it is earning from exports, income, and transfers. However, the capital account surplus of £10 billion suggests that the deficit in the current account is being financed by capital inflows. The financial account deficit of £5 billion indicates that the country is borrowing from abroad to finance its current account deficit and potentially other factors.