Current Account of the Balance of Payments Flashcards
(15 cards)
What is the Current Account?
A component of the Balance of Payments that records all money flows in and out of a country relating to trade, income, and transfers.
Current Account structure – what are the 4 components?
1️⃣ Trade in Goods (visibles)
2️⃣ Trade in Services (invisibles)
3️⃣ Primary Income (investment income, wages)
4️⃣ Secondary Income (transfers – e.g. aid, remittances, EU contributions)
Trade in goods
Value of exports and imports of physical goods (e.g. cars, food, oil).
Trade balance in goods = Exports – Imports
Trade in services
Exports and imports of intangible services (e.g. tourism, banking, insurance, education).
Primary income
Earnings on foreign investments:
* Inflows: interest/dividends received from abroad
* Outflows: income paid to foreign investors in the domestic economy
Secondary income (transfers)
Includes government transfers (e.g. UK’s foreign aid, EU budget payments) and private transfers (e.g. remittances). These are unilateral, not in return for goods/services.
How is the Current Account balance calculated?
(Exports – Imports of goods) + (Exports – Imports of services) + Net primary income + Net transfers = Current Account Balance
Current Account surplus vs deficit
Surplus: inflows > outflows (net lender to the world)
Deficit: outflows > inflows (net borrower)
Is the Current Account a volume or value measure?
It measures monetary values, not physical quantities. It’s about the value of flows, not the number of goods.
UK Current Account trends (past 10–15 years)
Persistent deficit, mainly due to large goods deficit outweighing surplus in services. Funded by capital/financial account inflows.
Why might a country run a current account deficit?
- High consumption of imports
- Low productivity (uncompetitive exports)
- Strong exchange rate
- High income growth (sucking in imports)
Why might a current account surplus occur?
- Strong exports
- Weak domestic demand
- Undervalued exchange rate
- High national saving relative to investment
Evaluation: is a current account deficit always bad?
Depends on:
* Size relative to GDP
* Whether it’s temporary or structural
* How it’s financed (sustainable borrowing vs FDI inflows)
* If imports are used for productive investment
How is a current account deficit financed?
Through a surplus on the capital/financial account: e.g. FDI, portfolio investment, or foreign borrowing.
What is the overall BOP identity?
Current Account + Capital & Financial Account = 0 (after adjusting for errors & omissions). A deficit on the current must be offset by a surplus elsewhere.
