The current account records dealings with the world

1. The balance of payments is kept over a stated period, usually a quarter or a year, so it measures flows of money rather than a stock of wealth held at one moment.
2. Money coming into the UK from the rest of the world is an inflow, and money leaving the UK to pay the rest of the world is an outflow.
3. The current account is the part of that record you are examined on, and it covers what the UK earns and pays through trade, income and transfers.
4. It is built from four components, and adding their balances together gives the current account balance for the period.

Four components make up the current account

1. Trade in goods: exports and imports of physical products such as cars, oil, machinery and food.
2. Trade in services: exports and imports of services such as tourism, banking, insurance and shipping, where nothing physical crosses the border.
3. Primary income: income earned from owning assets abroad or working abroad, such as interest, profits, dividends and wages.
4. Secondary income: transfers where nothing is given in return, such as foreign aid, grants and money workers send home to their families.

Each component has an inflow and an outflow

1. Every component records both money earned from foreigners and money paid to foreigners.
2. Trade in goods: a UK firm selling machinery to Japan is an inflow, while a UK shop buying Japanese televisions is an outflow.
3. Trade in services: a French family staying in a Cornish hotel is a services export and an inflow, while a UK consumer spending on holiday in Greece is a services import and an outflow.
4. Primary income: interest earned by a UK saver on a French bank account is an inflow, while profits a foreign owner takes out of a UK factory are an outflow.
5. Secondary income: foreign aid sent abroad by the UK government is an outflow, while grants received from abroad are an inflow.

Investment flows are not on the current account

1. The current account covers products, income and transfers only, so money that buys an asset is recorded elsewhere in the balance of payments.
2. A Spanish firm buying land in the UK to build a factory is investment, not current account, because the money buys an asset rather than a product, income or a transfer.
3. The profits that same firm later sends home from its UK factory do appear on the current account, as an outflow of primary income.
4. So the test is what the money buys, not who is paying or where they live.

Sorting a transaction into the right component

1. Ask first what is being paid for: a physical product, a service, income from an asset or a job, or a transfer given for nothing in return.
2. Then ask which way the money moves, because that decides whether the entry is an inflow or an outflow for the UK.
3. The same transaction sits on both countries' accounts in opposite directions, so a UK import of German cars is a German export of goods.

Once the four components are added up the result is a surplus, a deficit or a balanced account, which is where 4.2.2 begins.