For AS Economics it is important to remember the structure of the Balance of Payments. The Economist had a useful graphic showing the external financial flows into Africa. Below is a revision note on the Balance of Payments
Balance of Payments consists of 3 accounts – Current Account, Capital Account and Financial Account:
- Current Account – this consist of 4 accounts:
- Trade in Goods – also know as visibles. E.G. Manufactured goods, Semi-finished goods, energy products, raw material, consumer goods and capital goods. The difference between visible exports (+) and imports (-) is sometimes known as the ‘Balance of Trade’.
- Trade in Services – Invisibles. E.G. Tourism, Banking, Shipping and Transport, Education, etc. The difference between invisible exports (+) and imports (-) is Balance on Services.
- Net Income – measures two main flows of income into and out of NZ: the compensation of employess – wages and salaries and investment income – Interest Profits and Dividends coming into NZ from NZ assets owned overseas matched against the outflow of profits and other income from foreign owned assets located within NZ.
- Net current transfers – relates to transfers of money between countries by central government and other economic agents. E.G. the UK is a net contributor to European Union (EU) Institutions. Other items include foreign aid, military grants and money transfers.
- Capital Account – this account is of minor consequence relative to the NZ Balance of Payments as a whole. The transactions recorded here involve transfers of ownership of fixed assets and also migrants transfers. Funds brought into NZ by new immigrants are recorded as capital account credits, whilst any funds sent by NZ residents who are emigrating to other countries are debits in the capital account.
- Financial Account – there are 2 main components of this account:
- Direct Investment Flows – relates to FDI – Foreign Direct Investment. E.G. if Toyota invest money in a car plant in NZ this would be an inflow of direct investment. Similarly, when Carter Holt Harvey invest money overseas this will result in an outflow of direct investment from NZ.
- Portfolio Investment Flows – consider the sale and purchase of NZ shares and government securities. E.G. when an overseas investor buys shares on the NZ stock market, there will be an inflow of portfolio investment. When overseas investor sell shares or securities, there is an outflow.
External financial flows into Africa came to a total of $178bn in 2016, according to the OECD, down from $183bn the year before. This was largely driven by a 60% fall in the value of inflows of portfolio investments. In 2015 these made up 9% of external inflows; in 2016 they accounted for only 4%. Global shocks mean investors have been buying fewer developing-country assets. Inflows of official development assistance and remittances also fell. But foreign direct investment in Africa increased by 10%. Countries in the Middle East and Asia are becoming a source of cash for greenfield projects. Total external inflows are expected to increase slightly this year, partly due to a projected rise in remittances.
Source: The Economist – 27th May 2017