Balance of Payments and Foreign Exchange Rate — Part 1: The Balance of Payments: visual lesson, ISC Class 12 Economics

Lesson

The Balance of Payments

Part 1 — what a country earns from and pays to the rest of the world, and what happens when it pays more than it earns.

In this lesson you will

Classify transactions into the current and capital accounts and find the balance of trade
Calculate the current account, capital account and overall balances for a country
Explain the causes of a deficit and the measures to correct it

Part 1 at a glance

Diagram

Structure of the balance of payments

A systematic record of all economic transactions between residents and the rest of the world in a year.

Concept

The current account does not change foreign assets or liabilities; the capital account does.

Table distinguishing the current account (goods, services, income and transfers, with no change in assets or liabilities) from the capital account (investment, loans and banking capital, which change assets or liabilities)
Basis	Current account	Capital account
Records	Goods, services, income, transfers	Investment, loans, banking capital
Assets and liabilities	No change	Changes them
Example	Tea exports	Purchase of shares by foreigners