![Cumulative Current Account Balance](https://upload.wikimedia.org/wikipedia/commons/3/32/Cumulative_Current_Account_Balance.png)
In
economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...
, a country's current account records the value of exports and imports of both goods and services and international transfers of capital. It is one of the two components of its
balance of payments, the other being the
capital account
In macroeconomics and international finance, the capital account, also known as the capital and financial account records the net flow of investment transaction into an economy. It is one of the two primary components of the balance of payments, ...
(also known as the financial account). Current account measures the nation's earnings and spendings abroad and it consists of the
balance of trade
The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balance ...
, net ''primary income'' or ''factor income'' (earnings on foreign investments minus payments made to foreign investors) and net unilateral transfers, that have taken place over a given period of time. The current account balance is one of two major measures of a country's foreign trade (the other being the
net capital outflow
Net capital outflow (NCO) is the net flow of funds being invested abroad by a country during a certain period of time (usually a year). A positive NCO means that the country invests outside more than the world invests in it. NCO is one of two majo ...
). A current account surplus indicates that the value of a country's net foreign assets (i.e. assets less liabilities) grew over the period in question, and a current account deficit indicates that it shrank. Both government and private payments are included in the calculation. It is called the current account because
goods
In economics, goods are items that satisfy human wants
and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not t ...
and
services
Service may refer to:
Activities
* Administrative service, a required part of the workload of university faculty
* Civil service, the body of employees of a government
* Community service, volunteer service for the benefit of a community or a p ...
are generally consumed in the current period.
[''Ecological Economics: Principles And Applications''. Herman E. Daly, Joshua Farley; Island Press, 2003]
Overview
The current account is an important indicator of an economy's health. It is defined as the sum of the balance of trade (goods and services
export
An export in international trade is a good produced in one country that is sold into another country or a service provided in one country for a national or resident of another country. The seller of such goods or the service provider is an ...
s minus
imports), net income from abroad, and net current transfers. A positive current account balance indicates the nation is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower from the rest of the world. A current account surplus increases a nation's net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount.
A country's balance of trade is the net or difference between the country's exports of goods and services and its imports of goods and services, excluding all financial transfers, investments and other components, over a given period of time. A country is said to have a trade surplus if its exports exceed its imports, and a trade deficit if its imports exceed its exports.
Positive net sales abroad generally contribute to a ''current account surplus''; negative net sales abroad generally contribute to a ''current account deficit''. Because exports generate positive net sales, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports.
In the net factor income or income account, income payments are outflows, and income receipts are inflows. Income are receipts from investments made abroad (note: investments are recorded in the
capital account
In macroeconomics and international finance, the capital account, also known as the capital and financial account records the net flow of investment transaction into an economy. It is one of the two primary components of the balance of payments, ...
but income from investments is recorded in the current account) and money sent by individuals working abroad, known as
remittances, to their families back home. If the income account is negative, the country is paying more than it is taking in interest, dividends, etc.
The various subcategories in the income account are linked to specific respective subcategories in the capital account, as income is often composed of factor payments from the ownership of capital (assets) or the negative capital (debts) abroad. From the capital account, economists and central banks determine implied rates of return on the different types of capital. The United States, for example, gleans a substantially larger rate of return from foreign capital than foreigners do from owning United States capital.
In the traditional accounting of balance of payments, the current account equals the change in
net foreign assets In economics, the concept of net foreign assets relates to balance of payments identity.
The net foreign asset (NFA) position of a country is the value of the assets that country owns abroad, minus the value of the domestic assets owned by foreigne ...
. A current account deficit implies a reduction of net foreign assets:
: Current account = change in
net foreign assets In economics, the concept of net foreign assets relates to balance of payments identity.
The net foreign asset (NFA) position of a country is the value of the assets that country owns abroad, minus the value of the domestic assets owned by foreigne ...
.
If an economy is running a current account deficit, it is absorbing (absorption = domestic consumption + investment + government spending) more than that it is producing. This can only happen if some other economies are lending their savings to it (in the form of debt to or direct/ portfolio investment in the economy) or the economy is running down its foreign assets such as official foreign currency reserve.
On the other hand, if an economy is running a current account surplus it is absorbing less than that it is producing. This means it is saving. As the economy is open, this saving is being invested abroad and thus foreign assets are being created.
Calculation
![US Current Account Balance 2017 Computation](https://upload.wikimedia.org/wikipedia/commons/c/cf/US_Current_Account_Balance_2017_Computation.png)
Normally, the current account is calculated by adding up the 4 components of current account: goods, services, income and current transfers.
; Goods: Being movable and physical in nature, goods are often traded by countries all over the world. When a transaction of certain good's ownership from a local country to a foreign country takes place, this is called an "export". The other way around, when a good's owner changes to a local inhabitant from a foreigner, is defined to be an "import". In calculating current account, exports are marked as credit (the inflow of money) and imports as debit (the outflow of money).
; Services: When an intangible service (e.g. tourism) is used by a foreigner in a local land and the local resident receives the money from a foreigner, this is also counted as an export, thus a credit.
; Income: A credit of income happens when an individual or a company of domestic nationality receives money from a company or individual with foreign identity. A foreign company's investment upon a domestic company or a local government is considered as a debit. Foreign Direct investment and dividends are elements that take part in this chapter.
; Current transfers: Current transfers take place when a certain foreign country simply provides currency to another country with nothing received as a return. Typically, such transfers are done in the form of donations, aids, or official assistance. Remittances from migrants are part of the balance of current transfers.
A country's current account can be calculated by the following formula:
Where CA is the current account, X and M are respectively the export and import of goods and services, NY the net income from abroad, and NCT the net current transfers.
Better still a country can calculate its current account balance by simply adding the value of the visible balance of trade to that of the invisible balance of trade. the visible balance of trade is the sum total of the differences of all the imports and export of all tangible goods while the invisible balance of trade is the total gotten from the difference between exports and imports of services.
Reducing current account deficits
![ABS-5302](https://upload.wikimedia.org/wikipedia/commons/f/f6/ABS-5302.0-BalancePaymentsInternationalInvestmentPositionAustralia-BalancePaymentsSummary-Original_Quarter-CurrentAccount-A3533808F.svg)
A nation's current account balance is influenced by numerous factors – its trade policies, exchange rate, competitiveness, forex reserves, inflation rate and others.
Since the trade balance (exports minus imports) is generally the biggest determinant of the current account surplus or deficit, the current account balance often displays a cyclical trend. During a strong economic expansion, import volumes typically surge; if exports are unable to grow at the same rate, the current account deficit will widen. Conversely, during a recession, the current account deficit will shrink if imports decline and exports increase to stronger economies.
The currency exchange rate exerts a significant influence on the trade balance, and by extension, on the current account. An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit (or narrowing the surplus). An undervalued currency, on the other hand, boosts exports and makes imports more expensive, thus increasing the current account surplus (or narrowing the deficit).
Nations with chronic current account deficits often come under increased investor scrutiny during periods of heightened uncertainty. The currencies of such nations often come under
speculative attack In economics, a speculative attack is a precipitous selling of untrustworthy assets by previously inactive speculators and the corresponding acquisition of some valuable assets ( currencies, gold). The first model of a speculative attack was contai ...
during such times. This creates a vicious circle where precious foreign exchange reserves are depleted to support the domestic currency, and this forex reserve depletion – combined with a deteriorating trade balance – puts further pressure on the currency. Embattled nations are often forced to take stringent measures to support the currency, such as raising interest rates and curbing currency outflows.
Action to reduce a substantial current account deficit usually involves increasing exports (goods going out of a country and entering abroad countries) or decreasing imports (goods coming from a foreign country into a country). Firstly, this is generally accomplished directly through import restrictions, quotas, or duties (though these may indirectly limit exports as well), or by promoting exports (through subsidies, custom duty exemptions etc.). Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly increase the balance of payments. Also,
currency war
Currency war, also known as competitive devaluations, is a condition in international affairs where countries seek to gain a trade advantage over other countries by causing the exchange rate of their currency to fall in relation to other currenc ...
s, a phenomenon evident in post recessionary markets is a protectionist policy, whereby countries devalue their currencies to ensure export competitiveness. Secondly, adjusting government spending to favor domestic suppliers is also effective.
Less obvious methods to reduce a current account deficit include measures that increase domestic savings (or reduced domestic borrowing), including a reduction in borrowing by the national government.
A current account deficit is not always a problem. The ''Pitchford thesis'' states that a current account deficit does not matter if it is driven by the private sector. It is also known as the "consenting adults" view of the current account, as it holds that deficits are not a problem if they result from private sector agents engaging in mutually beneficial trade. A current account deficit creates an obligation of repayments of foreign capital, and that capital consists of many individual transactions. Pitchford asserts that since each of these transactions were individually considered financially sound when they were made, their aggregate effect (the current account deficit) is also sound.
A deficit implies we import more goods and services than we export.
To be more precise, the current account equals:
Trade in goods (visible balance)
Trade in services (Invisible balance) e.g. insurance and services
Investment incomes e.g. dividends, interest and migrants remittances from abroad
Net transfers – e.g. International aid
The current account is essentially exports – imports (+net international investment balance)
If one has a current account deficit, in a floating exchange rate this must be balanced by a surplus on the financial / capital account.
Interrelationships in the balance of payments
The balance of payments (BOP) is the record of a country's monetary transactions with the rest of the world. Transactions are either marked as a credit or a debit. Within the BOP there are three separate categories under which different transactions are categorized: the current account, the capital account and the financial account. In the current account, goods, services, income and current transfers are recorded. In the capital account, physical assets such as a building or a factory are recorded. And in the financial account, assets pertaining to international monetary flows of, for example, business or portfolio investments are noted.
Absent changes in official reserves, the current account is the mirror image of the sum of the capital and financial accounts. One might then ask: Is the current account driven by the capital and financial accounts or is it vice versa? The traditional response is that the current account is the main causal factor, with capital and financial accounts simply reflecting financing of a deficit or investment of funds arising as a result of a surplus. However, more recently some observers have suggested that the opposite causal relationship may be important in some cases. In particular, it has controversially been suggested that the United States current account deficit is driven by the desire of international investors to acquire US assets (see
Ben Bernanke,
William Poole
William Poole (July 24, 1821 – March 8, 1855), also known as Bill the Butcher, was the leader of the Washington Street Gang, which later became known as the Bowery Boys gang. He was a local leader of the Know Nothing political movement ...
links below). However, the main viewpoint undoubtedly remains that the causative factor is the current account and that the positive financial account reflects the need to finance the country's current account deficit.
Current account surpluses are facing current account deficits of other countries, the indebtedness of which towards abroad therefore increases. According to
Balances Mechanics
The Balances Mechanics (german: Saldenmechanik; from balances of bookkeeping respectively the credit system and mechanics to characterize the strict universal identities) is a work and mean of economics, comparable with Stock-Flow Consistent Model ...
by
Wolfgang Stützel
Wolfgang Stützel (23 January 1925, in Aalen, Germany – 1 March 1987, in Saarbrücken, West Germany) was a German economist and professor of economics at the Saarland University, Germany. From 1966 to 1968 he was member of the German Council ...
this is described as surplus of expenses over the revenues. Increasing imbalances in foreign trade are critically discussed as a possible cause of the financial crisis since 2007. The existing differences between the current accounts in the eurozone is considered to be the root cause of the
Euro crisis
The European debt crisis, often also referred to as the eurozone crisis or the European sovereign debt crisis, is a multi-year debt crisis that took place in the European Union (EU) from 2009 until the mid to late 2010s. Several eurozone membe ...
by many
Keynesian
Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...
economists, such as
Yanis Varoufakis
Ioannis "Yanis" Varoufakis ( el, Ιωάννης Γεωργίου "Γιάνης" Βαρουφάκης, Ioánnis Georgíou "Giánis" Varoufákis, ; born 24 March 1961) is a Greek economist and politician. A former academic, he served as the Gree ...
,
Heiner Flassbeck
Heiner Flassbeck (born 12 December 1950) is a German economist and public intellectual. From 1998 to 1999 he was a State Secretary in the German Federal Ministry of Finance (german: Bundesministerium der Finanzen) where he also advised former f ...
,
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was ...
and
Joseph Stiglitz.
U.S. account deficits
Since 1989, the current account deficit of the US has been increasingly large, reaching close to 7% of the GDP in 2006. In 2011, it was the highest deficit in the world. New evidence, however, suggests that the US current account deficits are being mitigated by positive
valuation effects In economics, valuation effects of a country are the changes in the value of assets held abroad, minus the changes in the value of domestic assets held by foreign investors.
The traditional balance of payment identity ignores valuation effects, on ...
.
[Current Account Sustainability and Relative Reliability](_blank)
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html That is, the US assets overseas are gaining in value relative to the domestic assets held by foreign investors. The
net foreign assets In economics, the concept of net foreign assets relates to balance of payments identity.
The net foreign asset (NFA) position of a country is the value of the assets that country owns abroad, minus the value of the domestic assets owned by foreigne ...
of the US are therefore not deteriorating one to one with the current account deficits. The most recent experience has reversed this positive valuation effect, however, with the US net foreign asset position deteriorating by more than two trillion dollars in 2008, down to less than $18 trillion, but has since risen to $25 trillion. This temporary decline was due primarily to the relative under-performance of domestic ownership of foreign assets (largely foreign equities) compared to foreign ownership of domestic assets (largely US treasuries and bonds).
OECD quarterly international trade statistics
The
Organisation for Economic Co-operation and Development, OECD – an international economic organisation of 34 countries, founded in 1961 to "promote policies that will improve the economic and social well-being of people around the world"
– produces quarterly reports on its 34 member nations comparing statistics on
balance of payments and
international trade
International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy)
In most countries, such trade represents a significant ...
in terms of current account balance in billions of US dollars and as a percentage of GDP.
For example, according to their report the current account balance in billions of US dollars of several countries can be compared,
*Australia for 2013 was −51.39 and 2014 was −43.69, with each quarter between 2013 Q1 through 2015 Q2 ranging from a low of −14.81 in Q2 2015 to a high of −8.53 in Q1 2014. Australia's current account balance in Q2 2015 was up down to −14.81. The current balance in Q2 as a percentage of GDP was −4.7%.
* Canada for 2013 was −54.62, and 2014 was −37.46 with each quarter between 2013 Q1 through 2015 Q2 ranging from a low of −14.63 in Q1 2015 to a high of −8.28 in Q3 2014. Canada's current account balance in Q2 2015 was up at −14.15. The current balance in Q2 as a percentage of GDP was −3.5%.
* China for 2013 was 148.33, and 2014 was 219.90 with each quarter between 2013 Q1 through 2015 Q2 ranging from a low of 31.96 in Q4 2014 to a high of 75.58 in Q4 2013. The United States' current account balance in Q2 2015 was down to 73.03. The current balance in 2013 as a percentage of GDP was 1.6%.
* Germany for 2013 was 238.61, and 2014 was 285.82 with each quarter between 2013 Q1 through 2015 Q2 ranging from a low of 54.13 in Q3 2013 to a high of 68.89 in Q1 2014. Germany's current account balance in Q2 2015 was up to 68.39. The current balance in Q2 as a percentage of GDP was 8.2%.
* Greece for 2013 was −4.89, and 2014 was −5.00 with each quarter between 2013 Q1 through 2015 Q2 ranging from a low of −2.76 in Q1 2013 to a high of 0.01 in Q2 2015. Greece's current account balance in Q2 2015 was up to 0.01. The current balance in Q2 as a percentage of GDP was 0.0.
* The United States for 2013 was −376.76, and for 2014 was −389.53 with each quarter between 2013 Q1 through 2015 Q2 ranging from a low of −118.30 in Q1 2013 to a high of −81.63 in Q4 2013. The United States' current account balance in Q2 2015 was up to −109.68. The current balance in Q2 as a percentage of GDP was −2.4%.
The report also compares countries on services balance, exports of services, import of services, goods balance, export of goods and imports of goods in billions of US dollars.
''World Factbook'' data
''
The World Factbook
''The World Factbook'', also known as the ''CIA World Factbook'', is a reference resource produced by the Central Intelligence Agency (CIA) with almanac-style information about the countries of the world. The official print version is availabl ...
'',
a reference resource produced by the
Central Intelligence Agency
The Central Intelligence Agency (CIA ), known informally as the Agency and historically as the Company, is a civilian foreign intelligence service of the federal government of the United States, officially tasked with gathering, processing, ...
that collects data and publishes online open reports comparing the current account balance of
countries.
According to ''World Factbook'', "
rrent account balance compares a country's net trade in goods and services, plus net earnings, and net transfer payments to and from the rest of the world during the period specified. These figures are calculated on an exchange rate basis."
The top ten on their
list of countries by current account balance
This is a list of countries by current account balance.
CIA World Factbook data Top 20 economies with the largest surplus
This is a list of the 20 countries and territories with the largest surplus in current account balance (CAB), based o ...
in 2014 were:
# Germany: $286,400,000,000
# China: $219,700,000,000
# Netherlands: $90,160,000,000
# Saudi Arabia: $76,920,000,000
# Taiwan: $65,420,000,000
# Russia: $59,460,000,000
# Singapore: $58,770,000,000
# Qatar: $54,840,000,000
# United Arab Emirates: $54,630,000,000
On the same list the bottom ten countries by current account balance in 2014 were
: 185. Mexico: −$24,980,000,000
: 186. Indonesia: −$26,230,000,000
: 187. France: −$26,240,000,000
: 188. European Union: −$34,490,000,000 (2011 est)
: 189. Canada: −$37,500,000,000
: 190. Australia: −$43,750,000,000
: 191. Turkey: −$46,530,000,000
:192. India: −$57,200,000,000
: 193. Brazil: −$103,600,000,000
: 194. United Kingdom: −$173,900,000,000,
: 195. United States: −$389,500,000,000
International Monetary Fund
In a 2012 article published by the
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
(IMF)
the authors argue that a current account deficit with higher investments and lower savings may indicate that the economy of a country is highly productive and growing. If there is an excess of imports over exports there may be problems in terms of competitiveness. Low savings and high investment can also be caused by a "reckless fiscal policy or a consumption binge."
China's financial system favors the accumulation of large surpluses while the United States carries "large and persistent current account deficits" which has created a trade imbalance.
The authors note that,
See also
*
List of countries by current account balance
This is a list of countries by current account balance.
CIA World Factbook data Top 20 economies with the largest surplus
This is a list of the 20 countries and territories with the largest surplus in current account balance (CAB), based o ...
*
*
Global saving glut
A global saving glut (also GSG, cash hoarding, dead cash, dead money, glut of excess intended saving, or shortfall of investment intentions) is a situation in which desired savingAccording tBernanke 2005national saving is the "sum of saving done ...
*
Federal Reserve Economic Data
Federal Reserve Economic Data (FRED) is a database maintained by the Research division of the Federal Reserve Bank of St. Louis that has more than 816,000 economic time series from various sources. They cover banking, business/fiscal, consumer pri ...
*
National debt of the United States
The national debt of the United States is the total national debt owed by the federal government of the United States to Treasury security holders. The national debt at any point in time is the face value of the then-outstanding Treasury ...
References
Further reading
* Carrasco, C. A., & Peinado, P. (2014).
On the origin of European imbalances in the context of European integration'' Working papers wpaper71, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
External links
Current Account Surplus Watchfrom
New America Foundation
New America, formerly the New America Foundation, is a think tank in the United States founded in 1999. It focuses on a range of public policy issues, including national security studies, technology, asset building, health, gender, energy, educa ...
The Global Saving Glut and the U.S. Current Account Deficitfrom
Global saving glut
A global saving glut (also GSG, cash hoarding, dead cash, dead money, glut of excess intended saving, or shortfall of investment intentions) is a situation in which desired savingAccording tBernanke 2005national saving is the "sum of saving done ...
{{DEFAULTSORT:Current Account
Balance of payments
International macroeconomics
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