Current Account
What is Current Account?
The current account records a country's trade in goods and services plus net income and net transfers with the rest of the world.
Its largest component is the trade balance (net exports). A current account deficit means a country imports more than it exports and is offset by a financial account surplus. It shows how a country pays for its foreign transactions.
Current Account: a worked example
Suppose a country reports goods exports of $410 billion against goods imports of $520 billion, so the goods balance is 410 - 520 = negative $110 billion. Services run the other way: exports of $180 billion against imports of $120 billion gives 180 - 120 = positive $60 billion. Net investment income on assets held abroad adds positive $35 billion, and net transfers, mostly remittances sent to relatives overseas, come to negative $28 billion. Total the four pieces: -110 + 60 + 35 - 28 = negative $43 billion. The current account is in deficit by $43 billion. Notice that a $110 billion goods deficit produced a current account deficit less than half that size once the other three components were counted.
The mistake students make with current account
Net investment income trips students on direction. Interest and dividends a resident earns on assets held abroad are a credit, money arriving, even though buying those assets originally sent money out through the financial account. Interest a domestic firm pays to foreign bondholders is a debit. Flip a $35 billion income credit into a debit and a $43 billion current account deficit balloons to $113 billion, because the swing is twice the size of the entry. Trace the direction of the payment in the period being measured, not the direction of the original investment.
Current Account questions
What is included in the current account?
Four components make up the current account: trade in goods, trade in services, net investment income, and net transfers. Goods cover physical merchandise. Services cover items like tourism, shipping, insurance, and consulting. Investment income covers interest and dividends earned on assets held abroad minus what is paid out to foreign owners. Transfers cover remittances, foreign aid, and gifts, where nothing is given in return. Adding the four balances yields the current account balance.
What causes a current account deficit to widen?
Domestic income growing faster than trading partners' income raises spending on imports while export demand lags behind. An appreciating currency makes exports pricier abroad and imports cheaper at home. A domestic inflation rate above trading partners does the same thing more slowly. Falling national saving relative to investment forces the shortfall to be funded from abroad, which shows up as a wider deficit. A swing in one large import category, such as energy or capital equipment, can move the balance on its own.
What does a current account surplus mean?
A current account surplus means a country sells more goods, services, and income flows to the rest of the world than it buys from it. The extra foreign currency earned gets used to acquire foreign assets, so the surplus pairs with a capital and financial account deficit, meaning net lending abroad. Surpluses show up often in economies with high saving rates or strong export sectors. A surplus does not automatically mean better off, since it also reflects weak domestic spending.
Formula / Example
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Common comparisons
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