The current account
Balance of payments: a record of all transactions between a country's residents and the rest of the world over a period.
Current account of the balance of payments: the record of a country's trade in goods, trade in services, primary income and secondary income with the rest of the world.
- The balance of payments splits into the current account, the capital account and the financial account.
- The capital and financial accounts record flows of assets and are examined at A Level (11.1.1), so this subtopic focuses on the current account.
- The current account measures trade and income flows and is a key indicator of external performance.
- It has four components: trade in goods, trade in services, primary income and secondary income.
- The current account is a key gauge of a country's trade and income position with the world.
- A surplus raises demand for the currency, while a deficit must be financed by inflows on the financial account.
- Persistent imbalances can signal deeper competitiveness or spending problems.
The four components
Trade in goods: exports and imports of physical, visible items such as cars, food and raw materials.
Trade in services: exports and imports of invisibles such as tourism, transport, insurance and financial services.
Primary income: cross-border investment income and compensation of employees, such as interest, profits and dividends.
Secondary income: transfers made with nothing given in return, such as workers' remittances, grants and foreign aid.
- Profits earned by residents on assets held abroad are a primary income inflow.
- Money sent home by migrant workers is a secondary income flow.
Balance and imbalance
Current account surplus: total inflows on the current account exceed total outflows.
Current account deficit: total outflows on the current account exceed total inflows.
- The balance on any component is its inflows − its outflows over the period.
- Summing the balances on all four components gives the current account balance.
- A balance can also be exactly zero when inflows and outflows are equal.
- A country records exports of goods and services of £200bn, imports of £230bn, net primary income of +£8bn and net secondary income of −£3bn, on a GDP of £1,000bn.
- The current account is in deficit by £25bn, about 2.5% of GDP, and a surplus on services can partly offset a deficit on goods within the same account.
- State clearly that the current account is only one part of the balance of payments.
- Define a surplus and a deficit precisely before using either term.
- Quote a balance as a % of GDP to judge whether it is large or small.
- Do not treat the whole balance of payments as if it were the current account.
- Do not confuse primary income (investment income and wages) with secondary income (transfers).
- What does the balance of payments record?
- Name the four components of the current account.
- What is the difference between primary and secondary income?
- When is the current account in surplus?
- Express a £25bn deficit as a % of £1,000bn GDP.
