Components of the Current Account (Cambridge (CIE) O Level Economics)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

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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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.