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The current account of the balance of payments
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The current account records a country's trade with the rest of the world. Governments aim for a sustainable balance.
What the current account is
The current account records the value of a country's exports and imports of goods and services (plus some income flows).
Visibles: trade in goods, such as cars and food.
Invisibles: trade in services, such as tourism, banking and insurance.
Balance = exports − imports
A surplus means exports > imports. A deficit means imports > exports.
Visibles: trade in goods, such as cars and food.
Invisibles: trade in services, such as tourism, banking and insurance.
Balance = exports − imports
A surplus means exports > imports. A deficit means imports > exports.
Why deficits and surpluses happen
The quality of domestic goods compared with foreign goods.
Domestic prices compared with foreign prices.
The exchange rate: a stronger currency makes exports dearer and imports cheaper, which tends to worsen the current account; a weaker currency tends to improve it.
Domestic prices compared with foreign prices.
The exchange rate: a stronger currency makes exports dearer and imports cheaper, which tends to worsen the current account; a weaker currency tends to improve it.
Effects of a deficit
Money leaks out of the economy, reducing demand for domestic output.
It may cause inflation if foreign prices rise (imported inflation).
It may show low demand for exports.
It must be financed, for example by borrowing or using foreign currency reserves, which may not be sustainable.
It may cause inflation if foreign prices rise (imported inflation).
It may show low demand for exports.
It must be financed, for example by borrowing or using foreign currency reserves, which may not be sustainable.
A country exports goods worth $40 billion and services worth $15 billion. It imports goods worth $50 billion and services worth $8 billion. What is the current account balance?
- Exports = 40 + 15 = 55
- Imports = 50 + 8 = 58
- 55 − 58
Answer: −$3 billion (a deficit)
The current account records trade in goods (visibles) and services (invisibles). Balance = exports − imports. Deficits come from poor quality, high prices or a strong currency; they cause leakages and must be financed.
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