Below are some notes and a mindmap on the Balance of Payments with a New Zealand bias.
Balance of Payments consists of 3 accounts – Current Account, Capital Account and Financial Account:
1. Current Account – this consist of 4 accounts:
- Balance of 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’.
- Balance of trade in Services – Invisibles. E.G. Tourism, Banking, Shipping and Transport, Education, etc. The difference between invisible exports (+) and imports (-) is Balance on Services.
- Balance on Primary Income – measures two main flows of income into and out of NZ: the compensation of employees – 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.
- Balance on Secondary Income – relates to transfers of money between countries by central government and other economic agents – remittances sent back to NZ from overseas workers and overseas development aid. Also a financial commitment if your country is a member of an organisation like the EU, APEC etc.
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.