Totally confused by balance of payments... Uni Work.

Discussion in 'Economics' started by The_Spoon, Apr 21, 2010.

  1. The_Spoon


    Hi everybody, I've just come across this forum and it looks really interesting, I'm just getting into finance and financial markets and am really enjoying what I am learning so far (Even though it's just the basics currently)

    I'm currently finishing off a piece of coursework for my International Finance module and I'm a bit confused regarding how the balance of payments is supposed to work and what info can be derived from it. It's quite basic stuff but it just seems to not be clicking in my brain, I've looked over the lecture slides, read the books and emailed the tutor but still have no clue.

    Basically, we have to compare Australia with another country through the financial crisis (I'm using the UK) and chart and describe the differences of various economic indicators. I've done all the rest but am stuck with the balance of payments and how the different accounts inter-relate.

    The assignment says we are supposed to look at the Current & Capital account balances but the figures I'm finding are confusing.

    Now as an example, Q4 2009 for the UK accounts show the following.

    Current Account Balance: -£1803Million
    Capital Account Balance: £972Million + £6149Million Net financial transactions = £7121Million

    Therefore to make it balance the Errors and Omissions must be -£5318Million according to the accounts. (But that doesn't seem to add up)

    Now I'm confused as to how they inter-relate. I know current account is for trade of goods & services and capital is for international financial transactions but why do they need to balance? And on top of that what can be derived from comparing the current account AND the capital account - don't they equal zero and cancel each other out... hence balancing? That would mean one should be the direct inverse of the other.

    However looking at the statistics over the past 2 years the UK accounts are showing a MASSIVE volume of errors and omissions (£5318 Million for Q4 2009) When all the literature I'm reading and the lecture slides say that it should just be a technical balancing figure (Usually no greater than 2% of the total amount, the only reasons in the lecture slides that it would be greater would be due to dodgy accounting practices)

    What does such a huge imbalance actually mean? I can't seem to find that out anywhere, or if I am reading it I certainly am not understanding it...... Close to throwing my laptop out the window here.

    I've attached the graphs I've created that come out using the data from the accounts on the Australian & UK government websites. As you can see, the Australian one is pretty much the inverse of each other (Which is what all the literature says it should be) but the UK one is all over the place.... I just don't understand what that means?

    I would have thought if anything the capital account would have gone through the floor as investors panicked and pulled their money out (Around the time all the banks were loosing money) not showing continued investment, I can see it's clearly declining and then in late 08 there's the massive spike of new money into the capital account? What the heck is that about?

    Thanks sooooo much for any help anyone can give. I hate not understanding things!
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  2. The_Spoon


    Argh, sorry for the double post. My first one wasn't showing up and it was saying I didn't have permission to post when I tried again, now it's let, me both have appeared and it's now telling me I don't have permission to delete my post... Must be some new member teething problems :p
  3. I haven't read your whole post yet. But I have noticed you only talk about the current account plus the capital account. There are three accounts in the balance of payments the financial account is the third. Could this be the discrepancy.
  4. There is no reply to tell me if this was helpful. Please tell me if you need help.