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IGCSEEconomicsEdexcelRevision NotesGovernment & the EconomyThe Macroeconomic ObjectivesThe Current Account

The Current Account (Edexcel IGCSE Economics)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

The Current Account on the Balance of Payments

  • The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world

    • The current account focuses mainly on the financial transactions related to exports and imports of goods and services

  • The Current Account is often considered to be the most important account in the BoP

  • This account records the net income that an economy gains from international transactions

The UK Current Account Balance for 2017

Component

2017

Balance of trade in goods

(exports - imports)

£-32.9bn

Balance of trade in services

(exports - imports)

£27.9bn

Sub-total trade in goods/services

£-5bn

Net income

(interest, profits and dividends)

£-2.1bn

Current transfers

£-3.6bn

Total Current Account Balance

£-10.7bn

Current Account as a % of GDP

3.7%

  • Goods are also referred to as visible exports/imports

  • Services are also referred to as invisible exports/imports

  • Net income consists of income transfers by citizens and corporations

    • Credits are received from UK citizens who are abroad and send remittances home

    • Debits are sent by foreigners working in the UK back to their countries

  • Current transfers are typically payments at government level between countries, e.g. contributions to the World Bank

Current Account Deficits and Surpluses

  • A Current Account deficit occurs when the value of the outflows is greater than the value of the inflows

    • It usually occurs when imports > exports

    • Imports represent a leakage of money from the economy

  • A Current Account surplus occurs when the value of the inflows is greater than the value of the outflows

    • Usually occurs when imports < exports

    • Exports represent an injection of money into the economy

  • Most governments have a macroeconomic aim to get their Current Account balance as close to equilibrium as possible

    • If a country is running a deficit, export-led economic growth would help it become positive

    • However, with increasing income and wealth in an economy, the value of imports rises

      • Consumers enjoy the variety of goods/services abroad

      • Rising imports push the balance towards a deficit

Reasons for Current Account Deficits

  • Reasons for current account deficits and surpluses can be due to the quality and price competitiveness of domestic and foreign goods, as well as exchange rates between countries

  • The USA and UK have historically experienced significant trade deficits

    • In 2023, the United States had a trade deficit of over $773 billion, while the UK had a trade deficit of around £53 billion

Reasons for Deficits on the Current Account

Reason

Explanation

Quality of domestic goods

  • When a country develops a reputation for poor quality and design, its exports fall as foreign buyers look for better substitutes elsewhere

  • Domestic buyers who are able to shop abroad also choose to buy better quality products elsewhere, and the level of imports rises, leading to a current account deficit

Quality of foreign goods

  • If foreign goods are of higher quality as compared to domestic goods, consumers may favour foreign-produced goods, leading to a current account deficit

Price of domestic goods

  • Exporting firms may find themselves at a price and cost disadvantage in overseas markets, which will decrease competitiveness and the level of exports

Price of foreign goods

  • If foreign goods are competitively priced relative to domestic goods, it can lead to increased imports and a current account deficit

    • E.g The United States' trade deficit has been influenced by competitively priced consumer goods from countries like China

Exchange rates

  • Any appreciation of a country's currency makes a country's exports more expensive relative to other nations and imports cheaper

  • Domestic consumers may switch demand to foreign goods and as imports rise, the balance on the current account worsens

Reasons for Current Account Surpluses

  • In 2023, Germany had a trade surplus of €209.4 billion

    • This reflects their strong exports, particularly in sectors such as cars, machinery, and engineering

  • In 2023, China had a trade surplus of $823.2 billion U.S. dollars

    • This was due to its competitive pricing of electronics and weaker currency, which increased demand for their exports

Reasons for Surpluses on the Current Account

Reason

Explanation

Quality of domestic goods

  • When a country develops a reputation for excellent quality and design, its exports rise as foreign buyers increase demand

  • Domestic buyers choose to buy domestic products and the level of imports falls, leading to a current account surplus

    • E.g Japan's electronics industry historically produced high-quality goods, contributing to its trade surplus

Quality of foreign goods

  • If foreign goods are of lower quality compared to domestic goods, consumers may favour domestically produced goods, resulting in fewer imports and leading to a current account surplus

Price of domestic goods

  • If domestic goods are competitively priced relative to foreign goods, it can stimulate exports and lead to a current account surplus

    • E.g South Korea's automotive industry's success is partially attributed to competitive pricing, contributing to its trade surplus

Price of foreign goods

  • If foreign goods are priced higher relative to domestic goods, it can lead to decreased imports and a current account surplus

Exchange rates

  • Any fall in the value of currency (depreciation) makes exports more attractive to foreign buyers

    • E.g The depreciation of the British pound following Brexit helped increase exports and reduce its trade deficit in the short term

Examiner Tips and Tricks

The elasticity of imports and exports determines how impactful an appreciation or depreciation of the currency are. In the short term, elasticity tends to be more inelastic. There is little response to the price change, which was caused by the currency fluctuation. In the long term, exports and imports are more elastic in demand. Consumption patterns change as stakeholders realise the currency fluctuation has caused longer term changes to relative prices.

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    Author
    Reviewer
    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

    Jenna Quinn

    Author: Jenna Quinn

    Expertise: Head of New Subjects

    Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.