Components of the current account of the balance of payments: trade in services

Published by Patrick Mutisya · 14 days ago

Cambridge IGCSE Economics 0455 – Trade in Services (Current Account)

International Trade and Globalisation – Current Account of the Balance of Payments

Focus: Trade in Services

The current account records all transactions that involve the export or import of goods, services, primary income and secondary income. This note concentrates on the trade in services component.

1. What are Services?

Services are intangible products that cannot be stored, transported or physically possessed. They are produced and consumed simultaneously and are usually delivered across borders via communication technologies, travel, or movement of personnel.

2. Main Categories of Services

  • Transport services (e.g., shipping, airlines)

  • Travel services (tourism, business travel)

  • Financial services (banking, insurance, investment)

  • Telecommunications and information services

  • Professional services (legal, consulting, engineering)

  • Education and health services (students studying abroad, medical tourism)

3. How Trade in Services is Recorded

Each transaction is recorded as either an export (credit) or an import (debit) of services. The net balance of services is calculated as:

\$\text{Net Services} = \text{Exports of Services} - \text{Imports of Services}\$

This net figure is added to the other components of the current account to give the overall current‑account balance:

\$\text{Current Account (CA)} = (X-M){\text{goods}} + (X-M){\text{services}} + \text{Net Primary Income} + \text{Net Secondary Income}\$

4. Example of a Current‑Account Table (Simplified)

ComponentCredits (Exports)Debits (Imports)Net
Goods£2,500 m£2,200 m+£300 m
Services£800 m£650 m+£150 m
Primary Income (e.g., dividends, interest)£120 m£180 m‑£60 m
Secondary Income (e.g., remittances)£90 m£70 m+£20 m
Current‑Account Balance+£410 m

5. Why Trade in Services Matters

  1. Many economies, especially small or service‑oriented ones, earn a large share of foreign exchange from services.

  2. Services can be delivered with relatively low transport costs, making them competitive even for distant markets.

  3. Growth in digital technologies has expanded the range of tradable services (e.g., software, cloud computing).

  4. Improving the services balance can help offset a deficit in goods trade.

6. Sample Calculation

Suppose Country A records the following annual service transactions (in millions of dollars):

  • Export of transport services: $250

  • Export of tourism services: $180

  • Import of financial services: $120

  • Import of telecommunications services: $90

Net services balance:

\$\text{Net Services} = (250 + 180) - (120 + 90) = 430 - 210 = 220\ \text{million dollars}\$

If the other current‑account components sum to a net surplus of $150 m, the total current‑account balance would be:

\$\text{CA} = 220\ \text{m} + 150\ \text{m} = 370\ \text{million dollars (surplus)}\$

7. Key Points to Remember

  • Services are intangible and include transport, travel, financial, telecom, professional, education and health services.

  • Exports of services are recorded as credits; imports as debits.

  • The net services figure contributes to the overall current‑account balance.

  • Growth in digital and knowledge‑based services is reshaping the composition of many countries’ current accounts.

8. Practice Questions

  1. Identify three services that a country could export to improve its current‑account balance.

  2. Country B has the following service data (in £ billions): Export of travel services £1.2, export of financial services £0.8, import of telecom services £0.5, import of professional services £0.4. Calculate the net services balance.

  3. Explain how a rise in online education platforms could affect the services component of the current account.

Suggested diagram: Flow diagram showing exports and imports of services between a domestic economy and the rest of the world.