BACKGROUND PAPER 4:
Introduction
This background paper discusses the compilation of balance of payments statistics and illustrates the calculation of the summary measures (balance of trade and current account balance of payments) employed by economists in analysing balance of payments trends. It is suggested that you consult Thirlwall (1980) to improve both your understanding of this class of statistics and your knowledge of UK balance of payments trends since the mid-nineteenth century. Another useful text is Backhouse (1991, ch. 5) but his account is confined entirely to the postwar period.
Balance of payments: definitions and concepts
Introduction
The difference between exports and imports, as measured in the national income accounts, is termed the balance of trade (or the trade balance). This needs to be distinguished from two other measures: the current account balance and the balance of payments.
Table BG.4A Balance of payments at current prices (&pound;bn), 1988
CURRENT ACCOUNT TRANSACTIONS:
1.
Exports of goods
80.6
2.
Imports of goods
101.4
3.
Visible trade balance
(20.8)
4.
Exports of services
27.9
5.
Imports of services
23.8
6.
Invisible trade balance
4.1
7.
Balance of trade
(16.7)
8.
Interest, dividends, profits and transfers
2.1
9.
Current account balance
(14.6)
CAPITAL ACCOUNT TRANSACTIONS:
10.
UK private sector
4.5
11.
Public corporations
(0.4)
12.
Government (ex. official reserves)
0.9
13.
Total capital account
5.0
14.
Balancing item
12.3
15.
Balance of payments (change in official reserves)
2.7
SOURCE: Backhouse (1991, table 5.1).
Using table BG.4A to assist you, work through the following balance of payments identities (line numbers are given in parentheses):
From this numerical example for 1988 it can be seen that the UK ran a substantial deficit on visible trade, that is imports of goods exceeded exports of goods, which was only partially compensated for by a surplus on the invisibles account, that is exports of services exceeded imports of services. To the resulting deficit on the balance of trade we then add the surplus on interest etc. to obtain the current account balance of payments, thereby producing an overall deficit. The addition of capital transactions and the balancing item produce the overall balance of payments, a measure of the change in Britain�s overall official foreign currency reserves, which in this case is in surplus because of the large balancing item, suggestive that the value of exports had been understated and/or imports overstated.
The current account
The current account of the balance of payments is the account in which the values of the flows of goods and services and other current receipts and payments between residents of the UK and residents of the rest of the world are recorded. It is thus of central importance in the assessment of a country�s international trading performance.
The structure and presentation of the current account of the balance of payments is shown in table BG.4B which records data for the interwar years, 1924-37, and uses the following legend:
The three balances of the current account (visible trade, invisible trade and current account balance) are shown columns (13), (14) and (16) respectively.
Table BG.4B UK balance of payments, current account, current prices (&pound;m), 1924-37
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
1924
958
242
282
4
27
1,513
1,172
152
69
21
21
1,435
(214)
90
202
78
1925
943
215
318
4
35
1,515
1,208
149
67
23
16
1,463
(265)
66
251
52
1926
794
223
323
4
37
1,381
1,140
152
67
23
17
1,399
(346)
71
257
(18)
1927
845
245
324
4
43
1,461
1,115
142
67
22
17
1,363
(270)
103
265
98
1928
858
234
325
5
44
1,466
1,095
140
69
21
17
1,342
(237)
94
267
124
1929
854
242
328
5
43
1,472
1,117
152
69
21
17
1,376
(263)
90
269
96
1930
670
214
295
5
49
1,233
953
147
67
18
12
1,197
(283)
67
252
36
1931
464
168
221
5
40
898
786
140
53
10
12
1,001
(322)
28
191
(103)
1932
425
153
182
4
20
784
641
123
52
7
12
835
(216)
30
135
(51)
1933
427
146
194
5
17
789
619
120
34
11
13
797
(192)
26
158
(8)
1934
463
145
208
5
16
837
683
116
33
13
14
859
(220)
29
169
(22)
1935
541
149
226
5
14
935
724
124
36
14
14
912
(183)
25
181
23
1936
523
174
246
6
14
963
784
135
40
17
14
990
(261)
39
195
(27)
1937
614
229
264
6
14
1,127
950
144
43
22
15
1,174
(336)
85
204
(47)
SOURCE: Derived from Feinstein (1972, table 15).
Figures BG.4A and BG.4B chart the key data in table BG.4B as a percentage of GDP. This is a more useful way of presenting balance of payments data because it abstracts from the problem of changes in the price level and permits the use of a central reference point, GDP, to illustrate the importance of foreign trade. Figure BG.4A shows the decline in the openness of the British economy between the wars, in part because of reduced price and non-price competitiveness but also in the 1930s as a consequence of the collapse of world trade. Figure BG.4B reveals that current account surplus in the 1920s gave way in 1931 to a deficit of over 2 percentage points of GDP as both the visible and invisible balances deteriorated.
Capital account
Clearly, the balance of payments must balance (though the accounts always contain a balancing item to permit this); and thus if the current account balance is in surplus it must be balanced by an equivalent deficit or vice versa in the other two components of the balance of payments:
A complete summary of the balance of payments for the crisis year of 1967 (the year the Wilson government was financed forced to devalue sterling from $2.80 to $2.40) is given in table BG.4C.
Table BG.4C UK balance of payments, current prices (&pound;m), 1967
1.
Current account
2.
Visible balance
(567)
3.
Invisible balance
273
4.
Current balance
(294)
5.
Capital account
6.
Capital transfers
-
7.
Investment and other capital
(497)
transactions
8.
Balancing item
225
9.
EEA losses on forward commitments
(105)
10.
Official settlements account balance
(671)
11.
Net transactions with overseas
556
monetary authorities
12.
Official reserves
115
SOURCE: Thirlwall (1980, table 1.2).
The current balance, which is defined as the sum of rows (2) and (3), was in deficit in this crisis year of &pound;294m or 0.7% of GDP (much less than the current account deficits recorded in the late 1980s and early 1990s). To this we have to add row (7), a very large figure for net overseas investment (this was a period when British companies were investing heavily overseas), row (8) the balancing item (approximating to the same size as the current account deficit) and row (9), the operating losses of the Exchange Equalization Account, the Bank of England account which manages the sterling exchange rate. The sum of rows (4)-(9) yields row (10), the official settlements account balance, which shows that the overall balance of payments deficit was financed by government borrowing overseas (row 11) and some reduction in official reserves (row 12).
Balance of payments statistics: reliability
Finally, how reliable is the balance of payments data for the economic historian? Feinstein�s reliability grades are shown in table BG.4D - draw your own conclusions!
Table BG.4D Feinstein�s reliability grades for balance of payments data, 1870-1965
Exports and
imports of
goods, and
Exports and
Net property
total goods
imports of
income from
and services
services
abroad
1870-1913
B
C
C
1914-21
C
D
D
1922-38
B
C
B
1939-45
C
D
D
1946-65
A
B
C
NOTES:
A = Firm figures +/- < 5%; B = Good estimates +/- 5%-15%; C = Rough estimates +/- 15%-25%; D = Conjectures +/- 25%
SOURCE: Feinstein (1972, p. 115).
REFERENCES
Backhouse, R. (1991) Applied UK macroeconomics.
Beveridge, W.H. (1944) Full employment in a free society.
Booth, A. and Glynn, S. (1976) �Unemployment in the interwar period: a multiple problem�, Journal of Contemporary History, 10 (4), pp. 611-36.
Clapham, J. (1933) �Economic history as a discipline�, in F.C. Lane and J.C. Riemersma (eds) (1953) Enterprise and secular change: readings in economic history, pp. 415-20.
Clark, C. (1937) National income and outlay.
Coleman, D.C. (1987) History and the economic past: an account of the rise and decline of economic history in Britain.
Connell, D. (1979) The UK�s performance in export markets: some evidence from international trade data.
Crafts, N.F.R. (1985) British economic growth during the industrial revolution.
CSO (annual) Economic Trends, annual supplement.
CSO (annual) United Kingdom balance of payments [CSO Pink Book].
CSO (annual) United Kingdom national accounts [CSO Blue Book].
CSO (monthly) Economic Trends.
CSO (monthly) Monthly Digest of Statistics.
Deane, P. and Cole, W.A. (1962) British economic growth, 1688-1959, 2nd edn.
Department of Employment (monthly) Labour Gazette.
Devon, E. (1958) An Introduction to British economic statistics.
Eichengreen, B. and Hatton, T.J. (eds) (1988) Interwar unemployment in international perspective.
Feinstein, C.H. (1972) National income, expenditure and output of the United Kingdom, 1855-1965.
Flora, P., Alber, J., Eichenberg, R., Kohl, J., Kraus, F., Pfenning, W. and Seebohm, K. (1983) State, economy and society in western Europe, 1815-1975: a data handbook. Vol. I: The growth of mass democracies and welfare states.
Flora, P., Kraus, F. and Pfenning, W. (1987) State, economy and society in western Europe, 1815-1975: a data handbook. Vol. II: The growth of industrial societies and capitalist economies.
Floud, R.C. (1979) An introduction to quantitative methods for historians, 2nd edn.
Garraty, J.A. (1979) Unemployment in history: economic thought and public policy.
Garside, W.R. (1980) The measurement of unemployment in Great Britain, 1850-1979: methods and sources.
Gould, J.D. (1972) Economic growth in history: a survey.
Grassman, S. (1980) �Long-term trends in openness of national economies�, Oxford Economic Papers, n.s., 32 (1), pp. 123-33.
Howson, S. (1981) �Slump and unemployment�, R. Floud and D. McCloskey (eds) The economic history of Britain since 1700. Vol. 2: 1860 to the 1970s, pp. 265-85.
Johnson, C. (1988) Measuring the economy.
Lee, C.H. (1979) British regional employment statistics, 1841-1971.
Middleton, R. (1985a) Towards the managed economy: Keynes, the Treasury and the fiscal policy debate of the 1930s.
Middleton, R. (1985b) �Unemployment in the north-east during the interwar period�, in R.A. Chapman (eds) Public policy studies: the north-east of England, pp. 20-43.
Middleton, R. (1988) �The size of the public sector�, in A.C. Darnell and J.L. Evans (eds) Contemporary economics, pp. 103-17.
Middleton, R (1996) Government versus the market: the growth of the public sector, economic management and British economic performance, c.1890-1979.
Mitchell, B.R. (1988) British historical statistics.
Mitchell, B.R. (1992) International historical statistics: Europe, 1750-1988, 3rd edn.
Mitchell, B.R. (1993) International historical statistics: the Americas, 1750-1988, 2nd edn.
OECD (1987) Historical statistics, 1960-1985.
Panic, M. and Rajan, A.H. (1971) Product changes in industrial countries� trade: 1955-68 two studies
Platt, D,C.M. (1988) Micky Mouse numbers in world history: the short view.
Sinclair, P. (1987) Unemployment: economic theory and evidence.
Smithies, E. (1984) The black economy in England since 1914.
Stone, R. (1951) �The use and development of national income and expenditure estimates�, in D.N. Chester (ed.) Lessons of the British war econom, pp. 83-101.
Thirlwall, A.P. (1980) Balance-of-payments theory and the United Kingdom experience.
Times, The (1970) The British economy: key statistics, 1900-1970.
To IT-MA home page
To Department of Historical Studies home page.
(c)R. Middleton 1997. Last modified 30 June 1998.