The Interest Rate Transmission Mechanism

The Balance of Payments: Putting the Two Together

The following animation shows the effect when we put these two elements together. The 'boxes' represent the goods flowing to and from the UK as imports and exports (remember that services are also bought and sold but are not tangible or visible in the same way as, say, a box of bananas). The cash flowing to and from each country represents the flows of money as a result of the payments and receipts for the goods and services. The balance of payments is represented by the amount of cash in each country. In this animation the amount flowing into and out of the US and the UK is equal - both countries would have a 'balanced' balance of payments.

You can start and stop/reset the animation using the buttons provided or by tabbing to the animation and pressing s to start and q to stop. The main introductory page features further accessibility information on these resources.

The animation would show the effect of trade between the UK and the US if the trade of goods was equal between the two. The animation starts with 10 boxes representing goods in both the UK and the US and 10 notes representing dollars and pounds in each country. The animation depicts a situation where the number of goods bought by the UK from the US is the same as the number bought by the US from the UK. The trade balance for both countries would be neutral.

In reality, the flow of trade between countries is not equal even though in theory all the balance of payments figures throughout the world must be neutral. (If you think about it, this must be true; if there were only two countries trading and one had a surplus, it must mean the other must have an equal but opposite deficit.)

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