The current account captures a nation’s transactions with the rest of the world—detailing its net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments—over a specified period, such as a year or a quarter.
Key Takeaways
- The current account showcases a country’s imports and exports of goods and services, payments made to foreign investors, and international transfers such as foreign aid.
- It can be positive (a surplus) or negative (a deficit): a positive balance means the country is a net exporter, while a negative balance indicates it is a net importer of goods and services.
- A country’s current account balance, whether positive or negative, will be exactly opposite to its capital account balance.
- The U.S has a notable current account deficit.
Delving into the Current Account
The current account forms one half of the balance of payments, with the capital account comprising the other. Whereas the capital account tracks cross-border investments and changes in central bank reserves, the current account measures:
- Imports and exports of goods and services
- Payments to foreign holders of domestic investments
- Payments received from international investments
- Transfer payments such as foreign aid and remittances
A nation’s current account balance may be positive (a surplus) or negative (a deficit); either way, the nation’s capital account balance will reflect an opposing amount.
When the current account balance is positive, the nation acts as a net lender globally, whereas a negative balance suggests it is a net borrower. Specifically, a current account surplus increments the nation’s net foreign assets, while a deficit diminishes them.
Adhering to double-entry bookkeeping, any credit in the current account (like an export) will be matched by a corresponding debit in the capital account. Likewise, the domestic item received is debited while the item given up is credited.
Key Factors Influencing the Current Account
Since trade balance (exports minus imports) significantly determines the current account surplus or deficit, it often displays a cyclical trend:
During economic expansions, import volumes usually surge, leading to a widened current account deficit if exports do not increase as briskly. Conversely, during recessions, a reduction in imports may shrink the current account deficit or even turn it into a surplus.
Additionally, exchange rates significantly sway the trade balance and, by extension, the current account. An overvalued currency makes imports cheaper domestically and exports less competitive globally, influencing the current account accordingly.
On the contrary, an undervalued currency can bolster exports and make imports dearer, thus impacting the current account balance positively.
Balancing Current and Capital Accounts
Some countries might divide the capital account into two—financial account and capital account. Here, the financial account notes shifts in international ownership of assets, whereas the capital account records financial transactions with no direct effect on income, production, or saving.
Influence of Global Trade and Currency Exchange
Countries with enduring current account deficits often face heightened scrutiny from international investors, especially during periods of global financial instability. Such nations might encounter speculative currency attacks, leading to a catch-22 where foreign exchange reserves get depleted to uphold the domestic currency, exacerbating an already deteriorating trade balance. These nations might then enforce severe measures like hiking interest rates to sustain their currency.
Current Account vs. Capital Account
While current accounts track net income reflected by trading activities and transfers, capital accounts gather data on ownership changes of national assets. Together, they reveal extensive data on a country’s worldwide economic engagement.
The Bottom Line
The current account reveals the economic verve of a nation by presenting its net international trade, investment earnings, and transfer activities. Surplus denotes more exports than imports, whereas a deficit means more imports than exports. This metric operates in a dyad with the capital account, which documents opposing balance changes vis-a-vis national ownership of assets. Evaluating both offers a comprehensive glance at a country’s economic pulse in the global stage.
Related Terms: balance of payments, capital account, trade balance, foreign investments, economic expansion.
References
- U.S. Bureau of Economic Analysis. “U.S. International Transactions, First Quarter 2022 and Annual Update”.
