The current account on the balance of payments measures the inflow and outflow of goods, services and investment incomes.
The main components of the current account are:
- 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
- A deficit on the current account means that the value of imports is greater than the value of exports.
- A surplus on the current account means that the value of imports is less than the value of exports.
Balance of payments and current account
The balance of payments is composed of two main aspects.
- Current account
- Capital / financial account
If a country has a deficit on the current account, it needs a surplus on the financial account.
To give a simplistic example. If the US runs a current account deficit –
- US buys manufactured clothes and toys from China.
- China use this foreign currency to buy US bonds.
Therefore, there is a flow of money from the US to China to buy goods.
But also a flow of money from China to the US – through the financial account to finance the purchase of imported goods.
Example of UK current account
Q3 2012 (Not seasonally adjusted figures for current account)
UK current account. This shows in 2007, net investment incomes helped to reduce the trade deficit.
UK current account
This shows the UK has run mainly a current account deficit since 1980. This means the UK has run a surplus on the capital / financial account.
A trade deficit refers to just the balance of trade on visible goods. This trade deficit is a component of the current account. The UK has often run a deficit on the trade account, but run a surplus on services