IB Economics SLTopic 4 — The Global EconomyPaper 2Core skill~9 min read
What the Balance of Payments Records
The balance of payments is a country’s bank statement with the rest of the world. Every pound that crosses the border for any reason lands in one of its accounts. Most of the marks here come from knowing which account a transaction belongs in, and being able to add up a table without losing a minus sign.
📘 What you need to know
The balance of payments records all financial transactions between a country and the rest of the world.
Money coming in is a credit (+). Money going out is a debit (−).
More in than out is a surplus; more out than in is a deficit.
The current account covers trade in goods, trade in services, income earned on investments and work abroad, and transfers.
Goods are called visible trade; services are called invisible trade.
The capital account is small: debt forgiveness, migrants’ transfers and the sale of things like patents and copyrights.
The financial account covers ownership of assets: direct investment, portfolio investment, borrowing and reserve assets.
Direct investment means buying a controlling stake, usually taken as 10% or more of a firm. Anything smaller is portfolio investment.
The structure
Learn it as a tree with two branches. Almost every exam question is asking you to put a transaction on the correct branch, and the test is simple: is money changing hands for goods, services or income, or for ownership of an asset?
Older textbooks call primary income “net income” and secondary income “current transfers”. Both names describe the same rows, so use whichever your data table uses.
Paper 2 will hand you a table like this one and ask you to complete it. The arithmetic is easy; the marks go missing on signs and on the percentage at the end.
Notice how much of the story is in the first two bars. Many advanced economies look like this: they buy more goods than they sell and sell more services than they buy.
WORKED EXAMPLE
Trade in goods is −$48bn, trade in services +$31bn, primary income −$6bn and secondary income −$4bn. GDP is $900bn. Calculate the balance on goods and services, the current account balance, and the balance as a share of GDP. [4]
Step 1: balance on goods and services−48 + 31 = −$17bnStep 2: add the income rows−17 − 6 − 4 = −$27bnStep 3: as a share of GDP(27 ÷ 900) × 100 = 3%A current account deficit of $27bn, or 3% of GDPSay “deficit” as well as writing the minus sign, and give the percentage as a deficit too. A bare “3%” does not say which way it goes.
Expressing the balance as a share of GDP is the step students skip. A $27bn deficit means nothing on its own; 3% of GDP tells you whether it is large. Any Paper 2 question that gives you GDP is asking for that comparison.
Sorting transactions into accounts
WORKED EXAMPLE
State which account and section each of these belongs to, and whether it is a credit or a debit for the UK. [5]
A German firm buys a machine made in Britain
Current account, trade in goods. Money in, so a credit.
A British family holidays in Spain
Current account, trade in services. Money out, so a debit.
A British bank receives interest on a loan to a foreign company
Current account, primary income. Money in, so a credit.
A Japanese company buys a controlling stake in a British factory
Financial account, direct investment. Money in, so a credit.
The government cancels debt owed by a low-income country
Capital account, capital transfer. Money out, so a debit.
Thing or income = current; asset = financialThe tourism one catches people out. A holiday abroad is importing a service, even though nothing is shipped anywhere.
The 10% line. Buying enough shares to control a company is direct investment; buying a smaller stake for the return is portfolio investment. The distinction matters because direct investment tends to stay put, while portfolio money can leave overnight.
💡 Exam tip
Ask “thing or asset?” first. It sorts almost every transaction correctly in one step.
Follow the money, not the goods. A credit is money coming in, whichever direction the product travels.
Write the signs before adding. Most lost marks in these tables are dropped minus signs.
Convert to a share of GDP whenever GDP is given.
Use both sets of names if a table uses the older ones: net income is primary income, current transfers are secondary income.
Remember services are invisible trade, and for many economies they are the strongest part of the account.
⚠️ Common mix-up
Putting tourism in the goods section. It is a service, and one of the largest ones.
Confusing the capital and financial accounts. The capital account is the small one: debt forgiveness, migrants’ transfers, patents.
Recording profits from a foreign factory as trade. Income earned on an asset is primary income.
Thinking a deficit means the country is losing money. It means more is being spent abroad than earned abroad, which has to be financed somehow.
Treating exports as automatically good. The current account is a balance, not a score.
Ignoring the sign on the percentage. Three per cent of GDP is very different from minus three.
Up next: How the Accounts Fit Together — why a deficit in one account must be matched by a surplus in another, and what that tells you about a country running one for years.
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