Current account of the balance of payments

Economics AS · International economic issues. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

The current account records a country's income from and payments to the rest of the world in a year. It has four parts: trade in goods, trade in services, primary income and secondary income.

Money flowing into the country is a credit (+) and money flowing out is a debit (−). If total debits are greater than total credits there is a current account deficit; if credits are greater there is a surplus.

A deficit may be caused by high consumer spending on imports, a high exchange rate, high inflation or low productivity compared with other countries. A persistent deficit must be financed by borrowing or selling assets and tends to push a floating currency down. A persistent surplus may mean lower consumption at home and a rising currency.

Rules to remember

Trade in goods: exports and imports of physical products (cars, oil, wheat).
Trade in services: tourism, transport, banking, insurance, education.
Primary income: income from factors of production across borders (wages, interest, profits, dividends).
Secondary income: transfers with nothing received in return (workers' remittances, foreign aid, payments to international organisations).
Balance of trade in goods = exports of goods − imports of goods (the same method for services).
Balance of trade in goods and services = goods balance + services balance.
Current account balance (CAB) = goods balance + services balance + net primary income + net secondary income.

Common mistake

The current account is more than the trade balance. A country can have a surplus on goods and services and still have a current account deficit if large amounts of primary or secondary income flow out.

Worked example

In a year a country exports goods worth $220 bn and imports goods worth $260 bn. It exports services worth $90 bn and imports services worth $60 bn. Net primary income is −$15 bn and net secondary income is +$5 bn. Find the current account balance.

Balance of trade in goods = 220 − 260 = −$40 bn.
Balance of trade in services = 90 − 60 = +$30 bn.
Balance of trade in goods and services = −40 + 30 = −$10 bn.
CAB = −10 + (−15) + 5 = −$20 bn.

Answer: The current account balance is −$20 bn, a deficit of $20 bn.

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