Economics. Dr. Pass Christopher

because basically they represent transactions that cannot be seen directly and can be compiled only indirectly from company returns, government accounts, foreign currency purchases and sales data from banks. Traditionally, the UK has incurred deficits on ‘visibles’ largely because of the need to import basic foodstuffs, raw materials and (until the 1980s) oil. What are worrying to some economists, however, are the large deficits in manufactures, where seemingly the UK has been losing international competitiveness. (See DEINDUSTRIALIZATION.) The service sector has traditionally been in surplus thanks to the City of London’s banking and insurance business, which, together with proceeds from the UK’s position as a leading overseas investor, have been major foreign exchange earners. As can be seen in Fig. 13 (b), the UK has recently been in overall surplus on current account after previously chalking up large deficits.

      Fig. 13 Balance of payments. (a) The UK Balance of Payments, 2003. (b) UK Balance of Payments, 1993–2003. Source: UK Balance of Payments, Office for National Statistics (Pink Book), 2004.

      In addition to current account transactions, there are also currency flows into and out of the country related to capital items. The capital and financial account is made up of a number of elements including: receipts and payments related to FOREIGN DIRECT INVESTMENT (monies spent by companies on setting up or acquiring overseas manufacturing plants, sales offices, etc.); receipts and payments related to PORTFOLIO INVESTMENT (monies spent by mainly financial institutions in purchasing overseas stocks and shares, government bonds, etc.); and receipts and payments related to interbank transfers (for example, foreign currency deposits with UK commercial banks taking advantage of higher UK interest rates compared to other financial centres). Recently the UK has been a net exporter of capital after a number of years of capital account surpluses – see Fig. 13 (b).

      The current balance and the capital and financial account, together with the ‘balancing item’ (which includes errors and omissions in recording transactions and leads and lags in currency payments and receipts), result in the balance for official financing. This figure shows whether the country has incurred an overall surplus or deficit. If the balance of payments is in surplus, the country can add to its INTERNATIONAL RESERVES and, if necessary, repay borrowings; if it is in deficit, this has to be covered by running down its international reserves or by borrowing (for example, from the INTERNATIONAL MONETARY FUND).

      Maintaining BALANCE-OF-PAYMENTS EQUILIBRIUM over a run of years is usually one of the four major objectives of a government’s MACROECONOMIC POLICY. A balance of payments surplus or deficit can be remedied in a number of ways, including external price adjustments, internal price and income adjustments, and trade and currency restrictions.

      balance-of-payments disequilibrium see BALANCE-OF-PAYMENTS EQUILIBRIUM.

      balance-of-payments equilibrium a situation where, over a run of years, a country spends and invests abroad no more than other countries spend and invest in it. Thus, the country neither adds to its stock of INTERNATIONAL RESERVES, nor sees them reduced.

      In an unregulated world it is highly unlikely that external balance will always prevail. Balance of payments deficits and surpluses will occur, but provided they are small, balance-of-payments disequilibrium can be readily accommodated. The main thing to avoid is a FUNDAMENTAL DISEQUILIBRIUM – a situation of chronic imbalance.

      There are three main ways of restoring balance-of-payments equilibrium should an imbalance occur:

      (a) external price adjustments. Alterations in the EXCHANGE RATE between currencies involving (depending upon the particular exchange-rate system in operation) the DEVALUATION/DEPRECIATION and REVALUATION/APPRECIATION of the currencies concerned to make exports cheaper/more expensive and imports dearer/less expensive in foreign currency terms. For example, with regard to exports, in Fig. 14 (a), if the pound-dollar exchange rate is devalued from $1.60 to $1.40 then this would allow British exporters to reduce their prices by a similar amount, thus increasing their price competitiveness in the American market.

      (b) internal price and income adjustments. The use of deflationary and reflationary (see DEFLATION, REFLATION) monetary and fiscal policies to alter the prices of domestically produced goods and services vis-à-vis products supplied by other countries so as to make exports relatively cheaper/dearer and imports more expensive/cheaper in foreign currency terms. For example, again with regard to exports, if it were possible to reduce the domestic price of a British product, as shown in Fig. 14 (b), given an unchanged exchange rate, this would allow the dollar price of the product in the American market to be reduced, thereby improving its price competitiveness vis-à-vis similar American products. The same policies are used to alter the level of domestic income and spending, including expenditure on imports.

      (c) trade and foreign exchange restrictions. The use of TARIFFS, QUOTAS, FOREIGN-EXCHANGE CONTROLS, etc., to affect the price and availability of goods and services, and of the currencies with which to purchase these products.

      Under a FIXED EXCHANGE-RATE SYSTEM, minor payments imbalances are corrected by appropriate domestic adjustments (b), but fundamental disequilibriums require, in addition, a devaluation or revaluation of the currency (a). It must be emphasized, however, that a number of favourable conditions must be present to ensure the success of devaluations and revaluations (see DEPRECIATION 1 for details).

      Fig. 14 Balance-of-payments equilibrium. (b) Internal price adjustment.

      In theory, a FLOATING EXCHANGE-RATE SYSTEM provides an ‘automatic’ mechanism for removing payments imbalances in their incipiency (that is, before they reach ‘fundamental’ proportions): a deficit results in an immediate exchange-rate depreciation, and a surplus results in an immediate appreciation of the exchange rate (see PURCHASING-POWER PARITY THEORY). Again, however, a number of favourable conditions must be present to ensure the success of depreciations and appreciations. See also ADJUSTMENT MECHANISM, J-CURVE, INTERNAL-EXTERNAL BALANCE MODEL, MARSHALL-LERNER CONDITION, TERMS OF TRADE.

      balance of trade a statement of a country’s trade in GOODS (visibles) with the rest of the world over a particular period of time. The term ‘balance of trade’ specifically excludes trade in services (invisibles) and concentrates on the foreign currency earnings and payments associated with trade in finished manufactures, intermediate products and raw materials, which can be seen and recorded by a country’s customs authorities as they cross national boundaries. See BALANCE OF PAYMENTS.

      balance sheet an accounting statement of a firm’s ASSETS and LIABILITIES on the last day of a trading period. The balance sheet lists the assets that the firm owns and sets against these the balancing obligations or claims of those groups of people who provided the funds to acquire the assets. Assets take the form of FIXED ASSETS and CURRENT ASSETS, while obligations take the form of SHAREHOLDERS’ CAPITAL EMPLOYED, long-term loans and CURRENT LIABILITIES.

      balances with the Bank of England deposits of money by the COMMERCIAL BANKS with the BANK OF ENGLAND. The Bank of England acts as the ‘bankers’ bank’ and commercial banks settle indebtedness between themselves by transferring ownership of these balances. Such balances are included as part of the commercial banks’ CASH RESERVES RATIO and RESERVE ASSET RATIO. In addition to the balances held for settling indebtedness, the banks may be required from time to time to make SPECIAL DEPOSITS with the Bank, which have the effect of reducing their reserve assets.

      balancing item see BALANCE OF PAYMENTS.

      bank a deposit-taking institution that is licensed by the monetary authorities of a country (the BANK OF ENGLAND