The balance of payments records money flowing between a country and the rest of the world. At this level, you read a table, find the balance on each line and say what it does and does not show.
This lesson is part of globalisation and international trade. Read it alongside interpreting exchange rate changes, because the exchange rate affects these flows.
How do you read a simple table?
For each line, subtract money out from money in. A positive answer is a surplus, a negative answer is a deficit.
| Line | Money in | Money out |
|---|---|---|
| Goods (visible trade) | Exports of goods | Imports of goods |
| Services (invisible trade) | Services sold abroad, such as tourism | Services bought from abroad |
| Income | Income received from abroad | Income paid abroad |
| Transfers | Transfers received | Transfers sent |
Worked example: Pulau Laut
The figures are invented, in RM million, for a fictional island.
| Line | Money in | Money out | Balance |
|---|---|---|---|
| Goods | 300 | 260 | +40 |
| Services | 50 | 70 | −20 |
| Income | 15 | 25 | −10 |
| Transfers | 12 | 8 | +4 |
Goods: 300 − 260 = +40, a surplus. Services: 50 − 70 = −20, a deficit. Income: 15 − 25 = −10. Transfers: 12 − 8 = +4.
The balance on goods and services is 40 − 20 = +20. Adding income and transfers gives 20 − 10 + 4 = +14.
A correct statement is: “Pulau Laut received RM14 million more than it paid on these four lines over the period.”
What can a balance not show?
A surplus on goods does not show that the island is richer or that its firms are more efficient. A deficit on services does not show that tourism is weak, because the table has no figures for earlier years.
It also cannot show why a figure is what it is. High imports may come from dearer fuel, a weak currency or new building work, and the table lists the flows only.
Stay within the lines supplied. To practise comparing figures fairly, try the graph evidence and fair-comparison lab.
Which mistakes cost marks?
- Adding instead of subtracting. Balance is money in minus money out.
- Mixing lines. Using total goods and services when the question asks for goods only.
- Overreach. Writing “the economy is weak” from one negative line.
Check yourself
For a fictional island: exports of goods RM180 million, imports of goods RM205 million, services sold RM40 million, services bought RM22 million. Find the balance on goods, on services and on goods and services.
Answer
Goods: 180 − 205 = −25, a deficit of RM25 million. Services: 40 − 22 = +18, a surplus of RM18 million.
Goods and services together: −25 + 18 = −7, a deficit of RM7 million. The services surplus narrows the goods deficit but does not remove it.
What to study next
Test the whole area in the globalisation and trade practice set. Return to the area overview to see how the four skills connect.
If you want a teacher to go through a payments table with you, see online one-to-one Economics tuition.