The Current Account (Edexcel IGCSE Economics)

Revision Note

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.

Last updated: 13 June 2024

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