What Is a Current Account?
In economics and finance, the current account refers to a portion of a country's balance of payments. It records all transactions involving the exchange of products, services, income, and current transfers between a country and the rest of the globe.
According to Paul Krugman, Nobel laureate in economics: "The current account is a record of a country's transactions with the rest of the world that includes trade in goods and services, as well as income earned from foreign investments and unilateral transfers such as foreign aid. It reflects the nation's economic interactions with other countries and provides insights into its international competitiveness and financial flows."
More Through Understanding of the Term
In the balance of payments, the Current Account includes all international economic transactions with income or payment flows occurring within the year, the current period. The Current Account consists of four subcategories:
Goods trade and import of goods
Merchandise trade is the oldest and most traditional form of international economic activity. Although many countries depend on imports of goods (as they should according to the theory of comparative advantage), they also normally work to preserve either a balance of goods trade or even a surplus.
Services trade
The export and import of services. Common international services are financial services provided by banks to foreign importers and exporters, travel services of airlines, and construction services of domestic firms in other countries. For the major industrial countries, this subaccount has shown the fastest growth in the past decade.
Income
Predominantly current income is associated with investments that were made in previous periods. If a U.S. firm created a subsidiary in South Korea to produce metal parts in a previous year, the proportion of net income that is paid back to the parent company in the current year ( the dividend) constitutes current investment income. Additionally, wages and salaries paid to nonresident workers are also included in this category.
Current transfers
The financial settlements are associated with the change in ownership of real resources or financial items. Any transfer between countries that is one way- a gift or grant- is termed a current transfer. For example, funds provided by the United States government to aid in the development of a less-development nation would be a current transfer. Transfers associated with the transfer of fixed assets are included in a separate account, the Capital/Financial Account.
All countries participate in some amount of trade, most of which is merchandise. Many smaller and less-developed countries have little in the way of service trade, or items that fall under the income or transfers subaccounts.
The Current Account is typically dominated by the first component described, the export and import of merchandise. For this reason, the Balance of Trade (BOT), which is so widely quoted in the business press in most countries, refers specially to the balance of exports and imports of goods trade only. If the country is a larger industrialized country, however, the BOT is somewhat misleading, in that service trade is not included.
Types and Examples of Current Accounts
The current account records all transactions, including exchanging goods, services, income, and current transfers between a country and the rest of the world. The current account is made up of numerous parts, including:
- Goods trade balance
This shows the value of a country's exports less the value of its imports. A positive balance, also known as a trade surplus, indicates that a country exports more goods than it imports, whereas a negative balance, also known as a trade deficit, demonstrates that the country imports more things than it exports.
- Services balance
This includes the value of a country's service exports less the value of its service imports. Tourism, transportation, and financial services are examples of services.
- Income balance
This is the net income earned by people of a country from investments such as interest, dividends, and wages abroad. It also covers the earnings of foreigners living in the country.
- Current transfers
Foreign aid, remittances, and transfers to international organizations are examples of transfers of money or goods between countries that do not include the exchange of goods or services.
In Sentences
- The current account summarizes a country's foreign commerce and financial transactions.
- A current account surplus shows that a country exports more than it imports, while a deficit suggests the opposite.