Economics · International trade and globalisation. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
The current account records a country's income from and payments to the rest of the world. It has four parts: trade in goods, trade in services, primary income (profit, interest and dividends, and wages earned abroad) and secondary income (transfers such as workers' remittances and aid).
If more money flows in than out there is a surplus; if more flows out there is a deficit. Deficits come from high inflation, low productivity, an overvalued currency, or high incomes at home pulling in imports.
A deficit takes demand out of the economy, so GDP and employment may fall and the currency tends to depreciate. A surplus does the reverse and may add to inflation.
Students stop at the trade balance and forget the two income parts. The current account balance is the sum of all four components, with the signs kept.
Answer: The current account balance is −$3 bn, a deficit of $3 bn.
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