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The Interest Rate Transmission Mechanism

The Balance of Payments: Exports

The balance of payments records the value of goods and services traded between the UK and the rest of the world. Payments for goods and services (imports) bought from abroad are recorded as a debit (negative) on the balance of payments whereas purchases of UK goods and services by foreign buyers' exports are recorded as a credit (positive) on the accounts.

If the amount spent on goods and service by UK buyers is greater than the amount received from selling goods and services abroad, the UK will experience a balance of payments deficit (trade deficit). If the reverse occurs then the UK will experience a balance of payments surplus (trade surplus).

Understanding the balance of payments

To understand the balance of payments it is necessary to understand the difference between imports and exports. The important point to remember is the direction of the money flows in payment for goods and services and the receipts from selling goods and services with our trading partners.

Exports

Exports are the sale of goods and services to foreigners. The sale of goods and services generates income flows into the UK. The level of exports (the volume of goods and services) refers to the amount of goods and services sold but the balance of payments will be affected by the value of those sales (price x quantity sold) and this in turn is affected by the price of exports. The price facing foreigners is in turn affected by the exchange rate.

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 illustrate the export of goods from the UK to the United States. As goods move across the Atlantic, the US buyer pays for the goods by exchanging dollars for pounds. The animation starts with 20 boxes representing goods in the UK and 20 notes representing dollars in the US. As the sale of goods increases the boxes reduce one by one from the UK and stack up in the US whilst dollars move from the US, change into pounds and stack up in the UK. The end of the animation occurs when 15 of the 20 boxes have been sold and 15 of the 20 dollars have moved to the UK.

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