About this article
The balance of payments summarises the economic transactions of the UK with the rest of the world. These transactions can be broken down into 3 main accounts: the current account, the capital account and the financial account.
The current account comprises the trade in goods and services account, the primary income account and secondary income account. The difference in the monetary value of these accounts is known as the current account balance. A current account balance is in surplus if overall credits exceed debits and in deficit if overall debits exceed credits.
The sum of the current and capital account balances is equal to the balance of the financial account. As the capital account is relatively small in comparison, the current account and financial account can be said to be counterparts.
The current account balance plus the capital account balance measures the extent to which the UK is a net lender (that is, in surplus) or net borrower (that is, in deficit). With the exception of a few quarters the UK has generally been a net borrower from the rest of the world since the mid 1980s.
Trade in goods covers transactions in general merchandise for which changes of ownership occur between UK residents and the rest of the world. General merchandise (with some exceptions) refers to moveable goods.
Trade in services covers the provision of services between UK residents and non-residents. It also covers transactions in goods that are not freighted out of the country in which transactions take place, for example, purchases for local use by foreign forces in the UK, or by UK forces abroad and purchases by tourists. Transactions in goods that are freighted into or out of the UK are included under trade in goods.
Primary income account
The primary income account is comprised of compensation of employees, investment income and other primary income.
Compensation of employees presents remuneration in return for the labour input into the production process contributed by an individual. In the international accounts, compensation of employees is recorded when the employer (the producing unit) and the employee are resident in different economies.
Investment income covers earnings (for example, profits, dividends and interest payments and receipts) arising from foreign investment in financial assets and liabilities. Credits are the earnings of UK residents from their investments abroad and other foreign assets. Debits are the earnings of foreign residents from their investments in the UK and other UK liabilities. The flow of investment in the financial account is recorded separately from earnings, although reinvested earnings of companies with foreign affiliates are a component of both. The total value of UK assets and liabilities held at any time is also recorded separately under the international investment position.
Other primary income covers earnings from rent and taxes, and subsidies on production and on the import of goods. Under the Balance of Payments Manual fifth edition, taxes and subsidies on production and on the import of goods were classified to secondary income (previously titled current transfers). The recording of rent was previously classified to other investment income.
Secondary income account
Secondary income represents the provision (or receipt) of an economic value by one party without directly receiving (or providing) a counterpart item of economic value. In plain terms, this is a transaction representing “something for nothing”. Transfers can be in the form of money or of goods or services provided without the expectation of payment. General government transfers include receipts, contributions and subscriptions from or to European Union (EU) institutions and other international bodies, bilateral aid and military grants.
The capital account comprises 2 components: capital transfers and the acquisition or disposal of non-produced, non-financial assets.
Under the Balance of Payments Manual sixth edition, there is no longer a requirement to record migrant transfers. The manual clarifies that the change in the residence does not involve a transaction between 2 entities but a change in status.
Capital transfers are those involving transfers of ownership of fixed assets, transfers of funds associated with the acquisition or disposal of fixed assets and cancellation of liabilities by creditors without any counterparts being received in return. As with current transfers, they can be sub-divided into general government transfers and other sectors transfers. The main sources of information are government departments (Department for International Development and HM Treasury) and the Bank of England. Compensation payments from the EU are also included here, for example, payments related to the destruction of animals to combat BSE and foot and mouth disease.
Acquisition or disposal of non-produced, non-financial assets
The sale or purchase of non-produced, non-financial assets covers intangibles such as patents, copyrights, franchises, leases and other transferable contracts, and goodwill. It also covers transactions involving tangible assets that may be used or needed for the production of goods and services but have not themselves been produced, such as land and sub-soil assets. The use of such assets is recorded under trade in services as royalties and licence fees; only the outright purchase or sale of such assets is recorded in the capital account.
The financial account covers transactions that result in a change of ownership of financial assets and liabilities between UK residents and non-residents and records the transactions according to the instrument and functional category. Entries in the financial account can correspond to goods, services, income, capital account, or other financial account entries. For example, the corresponding entry for an export of goods would be an increase in financial assets such as currency and deposits. Alternatively, the purchase of shares would lead to the exchange of currency and deposits.
International investment position
Linked to the balance of payments is the international investment position (IIP). The IIP brings together the available estimates of the levels of identified UK external assets (foreign assets owned by UK residents) and identified UK external liabilities (UK assets owned by foreign residents) at the end of each calendar period. The framework of international accounts sets out that the IIP is also presented by functional category, consistent with investment income and the financial account.