Components of the Current Account (Cambridge (CIE) O Level Economics)
Revision Note
The Current Account
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 BoP has two main sections:
The current account: all transactions related to goods/services along with payments related to the transfer of income
The financial and capital account: which is not part of your syllabus
Money flowing into the country is recorded in the relevant account as a credit (+) and money flowing out as a debit (-)
A current account surplus occurs when the credits (money in) are higher than the debits (money out)
A current account deficit occurs when the credits (money in) are less than the debits (money out)
The current account of the balance of payments
The Current Account is often considered to be the most important account in the BoP
It records the net income that an economy gains from international transactions
An Example of the UK Current Account Balance for 2017
Component | 2017 |
|---|---|
A. Net trade in goods (exports - imports) | £-32.9bn |
B. Net trade in services (exports - imports) | £27.9bn |
C. Sub-total trade in goods/services (A+B) | £-5bn |
D. Net income (interest, profits and dividends) | £-2.1bn |
E. Current transfers | £-3.6bn |
Total Current Account Balance (C+D+E) | £-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
(Income credits - Income debits) are often referred to as net primary income
Current transfers are typically payments at government level between countries e.g. contributions to the World Bank
(Transfer credits - transfer debits) are often referred to as net secondary income
The current account balance = net trade in goods + net trade in services + net primary income + net secondary income
Worked Example
Current Account Calculations
The table shows a selection of economic data for a country
Data | Value in Euros (€,000m) |
|---|---|
Primary income (net income transfers) | 150 |
Secondary income (net current transfers) | -50 |
Value of exported goods | 100 |
Value of exported services | 75 |
Value of imported goods | 40 |
Value of imported services | 45 |
Calculate the current account balance of this country?
Step 1: Recall the formula for calculating the current account balance
Net trade in goods + net trade in services + net income + net current transfers
Step 2: Substitute the appropriate values
Net trade in goods = (100-40) = 60
Net trade in services = (75-45) = 30
Net income transfers = 150
Net current transfers = -50
Step 3: Complete the calculation
60 + 30 + 150 -50 = 190
Step 4: Check the units and ensure your answer uses the correct units
€190,000m
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