Unit 6.3 - Current account of the balance of payments

• Balance of payments


  A record of a country's economic transactions with the rest of the world over a year
• Components of the balance of payments

  • Current account
  • Financial account
  • Capital account
• Current account


  The overall balance of trade in goods and services, primary and secondary income

  
• Components of the current account

  • Trade in goods
  • Trade in services
  • Primary income
  • Secondary income
• Trade in goods


  Visible exports minus visible imports
• Trade in services


  Invisible exports minus invisible imports
• Primary income


  Profits, interest and dividends from investments in other countries and employees' compensation
• Secondary income


  Unrequited transfers of income e.g. foreign aid
• Balanced current account


  When the value of the current account deficits are matched by current account surpluses - total credit items equal total debit items
• Causes of current account deficits

  • Growing domestic economy
  • Declining economic activity with trading partners
  • Cyclical deficit caused by recession
  • Increased output leading to more imports and less exports
  • Structural problems like lack of international competitiveness

  
• Causes of current account surpluses

  • Declining domestic economy
  • Increasing economic activity with trading partners
  • Structural advantages like competitive advantage
• Consequences of current account deficits

  • Country living beyond its means - consuming more than they produce
  • Needs to attract investment or borrow
  • Reduced aggregate demand
  • Slow economic growth and unemployment
• Consequences of current account surpluses

  • Standard of living is not as high as it could be
  • High level of demand and additional money supply could increase inflationary pressure
• Current account balances should be considered as a percentage of GDP rather than in monetary terms