economics Current account

• Balance of payments

  A record of all the monetary transactions between residents of a country and the rest of the world over a given period of time
• Accounts in the balance of payments

  • Current account
  • Capital account
  • Financial account
• Items in the current account

  • Visible trade (in goods)
  • Invisible trade (in services)
  • Net income received or made in payment for the use of factors of production
  • Net current transfers
• Net income received

  Income debits (outflows) - income credits (inflows)
• Net current transfers

  Transfers received - transfers paid
• Current account deficit

  When the financial outflows in the current account exceed the financial inflows
• Causes of current account deficit

  • Higher exchange rate
  • Economic growth
  • Decline in competitiveness
  • Inflation
  • Recession in other countries
  • Borrowing money
• Consequences of current account deficit

  • Low growth
  • Unemployment
  • Lowers standard of living
  • Capital outflow
  • Loss of foreign currency reserves
  • Increased borrowing
  • Lower exchange rate
• Ways to correct a current account deficit

  • Do nothing (floating exchange rate should correct it)
  • Use contractionary fiscal policy
  • Use contractionary monetary policy
  • Protectionist measures
• Current account surplus


  When the financial inflows in the current account exceed the financial outflows
• Causes of current account surplus

  • Improved competitiveness
  • Growth in foreign countries
  • High foreign direct investment
  • Depreciation
  • High domestic savings rates
  • Closed economy
• Consequences of current account surplus

  • Economic growth
  • Appreciation
  • Employment
  • Better standards of living
  • Inflation
• Ways to correct a current account surplus

  • Do nothing (floating exchange rate should correct it)
  • Use expansionary fiscal policy
  • Use expansionary monetary policy
  • Remove protectionist measures
• Higher exchange rate


  When a country's currency becomes stronger compared to other currencies, its goods and services become more expensive for foreign buyers, leading to a decrease in exports and an increase in imports, contributing to a current account deficit.
• Economic growth


  During periods of economic growth, a country's demand for imports often increases, leading to a current account deficit if the value of imports exceeds the value of exports.
• Inflation


  When a country experiences inflation, its goods and services become more expensive compared to other countries, leading to a decrease in exports and an increase in imports, contributing to a current account deficit.
• Recession in other countries

  A recession in other countries can lead to a decrease in demand for a country's exports, resulting in a current account deficit.
• Borrowing money


  When a country borrows money from foreign lenders, it must eventually pay back the loans with interest. This can lead to a current account deficit as the country must use its current account to make the payments.
• Decline in competitiveness


  If a country's industries become less competitive in the global market, it may lead to a decrease in exports and a current account deficit due to factors such as high production costs, outdated technology, and poor quality products.