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The Balance of Payments

The transactions in balance of payments are separated into three categories; the Current balance, the Capital account and the Financial account. The current account comprises of transactions in goods and services, income payments and transfers. The capital account reflects transactions in fixed assets and mainly related to migrants. The financial account records transactions in financial assets.

Trades in goods and services reflect the balance between UK exports and imports of goods and services. Income represents employment income from abroad, as well as profits, dividends and interest receipts from UK ownership of foreign assets. The 3rd component is international transfers which is transfers made by the central government or by private individuals. This includes transactions and grants with other international organisations.

Overall, the balance of payments must always be zero, as we have to pay for everything we consume and receive payments for everything that is sold. But because the data collected isn’t entirely accurate the accounts incorporate a Net errors and omissions item which balances the accounts. Since the balance of payments is always 0 (balanced) if there is a deficit in the current balance (more imports than exports) then we must be selling foreign exchange or financial assets; i.e. a financial account surplus.