The balance of payments is a record of all of the transactions made between agents within one country and those located abroad. One of the standard truisms of economics is that the balance of payments always balances. This is true in the sense that any consistently drawn up set of accounts must balance. However, it is also possible that the individual items that make up the balance of payments may indicate fundamental imbalances in the spending plans of agents within the economy. In this article, we will look at the construction of the balance of payments accounts for the UK economy. This will enable us to assess whether the current situation is consistent with long-term equilibrium or to what extent it will require significant changes in expenditure plans in the immediate future.
First, let us consider the overall balance of payments accounts. These can be divided up into four main items, as shown in Table 1. These items are the current account, which summarises the effects of all current flows of income and expenditure; the capital balance, which allows for the acquisition or disposal of non-produced non-financial assets; the financial account, which summarises all transactions in financial assets and liabilities; and net errors and omissions, which takes into account any errors that arise because of mistakes in recording or because of variation in the timing of receipts and expenditures. As shown in Table 1, the sum of these four components equals zero because net errors and omissions is defined as minus the sum of the other three items.
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