The current account deficit narrowed over the year to March 2020, to $-8.4 billion (-2.7% of GDP) – see graph from ASB. This was expected especially as the fall in tourism was offset by the solid trade in goods. Tourist spending was down 8.3% whilst transport services declined by 9.4%. Travel spending overseas by New Zealander’s (imports) was down 9.7% for travel services and 5.1% for transport. The narrowing of the deficit often coincides with a downturn in the economy as there is weaker domestic demand for foreign products and services by consumers and the business sector. Covid-19 has magnified the downturn and there is more pain to come for the domestic economy. Below are some notes on the Balance of Payments which is part of NCEA Level 2 and CIE AS/A2 courses
Balance of Payments consists of 3 accounts – Current Account, Capital Account and Financial Account:
1. 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. Germany is a net contributor to European Union (EU) Institutions. Other items include foreign aid, military grants and money transfers.
2. 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.
3. 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.
Balance of Payments and Current Account
In theory the BOP should always balance. The sum of the current account, capital account and financial account balances should be zero. In reality however, this is never the case as it is impossible to record accurately every single transaction that takes place. An additional item known as net errors or omissions, or balancing item, is added to the BOP to ensure that the accounts balance. You can see below that a further $2,600m is required to make the accounts balance – this is referred to as “Net errors and omissions”