In economics, a country's current account records the value of exports and imports of both goods and services and international transfers of capital. It is one of the two components of its balance of payments, the other being the capital account (also known as the financial account). Current account measures the nation's earnings and spendings abroad and it consists of the balance of trade, net primary income or factor income (earnings on foreign investments minus payments made to foreign investors) and net unilateral transfers, that have taken place over a given period of time. The current account balance is one of two major measures of a country's foreign trade (the other being the net capital outflow). A current account surplus indicates that the value of a country's net foreign assets (i.e. assets less liabilities) grew over the period in question, and a current account deficit indicates that it shrank. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.[1][2]
The current account is an important indicator of an economy's speed. It is defined as the sum of the balance of trade (goods and services exports minus imports), net income from abroad, and net current transfers. A positive current account balance indicates the nation is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower from the rest of the world. A current account surplus increases a nation's net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount.
A country's balance of trade is the net or difference between the country's exports of goods and services and its imports of goods and services, excluding all financial transfers, investments and other components, over a given period of time. A country is said to have a trade surplus if its exports exceed its imports, and a trade deficit if its imports exceed its exports.
Positive net sales abroad generally contribute to a current account surplus; negative net sales abroad generally contribute to a current account deficit. Because exports generate positive net sales, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports.
In the net factor income or income account, income payments are outflows, and income receipts are inflows. Income are receipts from investments made abroad (note: investments are recorded in the capital account but income from investments is recorded in the current account) and money sent by individuals working abroad, known as remittances, to their families back home. If the income account is negative, the country is paying more than it is taking in interest, dividends, etc.
The various subcategories in the income account are linked to specific respective subcategories in the capital account, as income is often composed of factor payments from the ownership of capital (assets) or the negative capital (debts) abroad. From the capital account, economists and central banks determine implied rates of return on the different types of capital. The United States, for example, gleans a substantially larger rate of return from foreign capital than foreigners do from owning United States capital.
In the traditional accounting of balance of payments, the current account equals the change in net foreign assets. A current account deficit implies a reduction of net foreign assets:
If an economy is running a current account deficit, it is absorbing (absorption=domestic consumption+investment+government spending) more than that it is producing. This can only happen if some other economies are lending their savings to it (in the form of debt to or direct/ portfolio investment in the economy) or the economy is running down its foreign assets such as official foreign currency reserve.
On the other hand, if an economy is running a current account surplus it is absorbing less than that it is producing. This means it is saving. As the economy is open, this saving is being invested abroad and thus foreign assets are being created.
Normally, the current account is calculated by adding up the 4 components of current account: goods, services, income and current transfers.[4]
Goods
Being movable and physical in nature, goods are often traded by countries all over the world. When a transaction of certain good's ownership from a local country to a foreign country takes place, this is called an "export". The other way around, when a good's owner changes to a local inhabitant from a foreigner, is defined to be an "import". In calculating current account, exports are marked as credit (the inflow of money) and imports as debit (the outflow of money).
Services
When an intangible service (e.g. tourism) is used by a foreigner in a local land and the local resident receives the money from a foreigner, this is also counted as an export, thus a credit.
Factor Income
A credit of income happens when an individual or a company of domestic nationality receives money from a company or individual with foreign identity. In general, receipts (inflows) of factor income are considered credits and payments abroad (outflows) of factor income are considered debits. For example, interest received in the home-country from a bond bought abroad or deposits held abroad are a credits. The repatriated profit of a home company that has a factory abroad or the dividents paid to a home country investor from shares bought of a company abroad is also a credit.
Current transfers
Current transfers take place when a certain foreign country simply provides currency to another country with nothing received as a return. Typically, such transfers are done in the form of donations, aids, or official assistance. Remittances from migrants are part of the balance of current transfers.
A country's current account can be calculated by the following formula:
Where CA is the current account, X and M are respectively the export and import of goods and services, NY the net income from abroad, and NCT the net current transfers.
Better still a country can calculate its current account balance by simply adding the value of the visible balance of trade to that of the invisible balance of trade. the visible balance of trade is the sum total of the differences of all the imports and export of all tangible goods while the invisible balance of trade is the total gotten from the difference between exports and imports of services.
The quarterly current account of Australia ($AU million) since 1959
A nation's current account balance is influenced by numerous factors – its trade policies, exchange rate, competitiveness, forex reserves, inflation rate and others. Since the trade balance (exports minus imports) is generally the biggest determinant of the current account surplus or deficit, the current account balance often displays a cyclical trend. During a strong economic expansion, import volumes typically surge; if exports are unable to grow at the same rate, the current account deficit will widen. Conversely, during a recession, the current account deficit will shrink if imports decline and exports increase to stronger economies. The currency exchange rate exerts a significant influence on the trade balance, and by extension, on the current account. An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit (or narrowing the surplus). An undervalued currency, on the other hand, boosts exports and makes imports more expensive, thus increasing the current account surplus (or narrowing the deficit). Nations with chronic current account deficits often come under increased investor scrutiny during periods of heightened uncertainty. The currencies of such nations often come under speculative attack during such times. This creates a vicious circle where precious foreign exchange reserves are depleted to support the domestic currency, and this forex reserve depletion – combined with a deteriorating trade balance – puts further pressure on the currency. Embattled nations are often forced to take stringent measures to support the currency, such as raising interest rates and curbing currency outflows.
Action to reduce a substantial current account deficit usually involves increasing exports (goods going out of a country and entering abroad countries) or decreasing imports (goods coming from a foreign country into a country). Firstly, this is generally accomplished directly through import restrictions, quotas, or duties (though these may indirectly limit exports as well), or by promoting exports (through subsidies, custom duty exemptions etc.). Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly increase the balance of payments. Also, currency wars, a phenomenon evident in post recessionary markets is a protectionist policy, whereby countries devalue their currencies to ensure export competitiveness. Secondly, adjusting government spending to favor domestic suppliers is also effective.
Less obvious methods to reduce a current account deficit include measures that increase domestic savings (or reduced domestic borrowing), including a reduction in borrowing by the national government.
A current account deficit is not always a problem. The Pitchford thesis states that a current account deficit does not matter if it is driven by the private sector. It is also known as the "consenting adults" view of the current account, as it holds that deficits are not a problem if they result from private sector agents engaging in mutually beneficial trade. A current account deficit creates an obligation of repayments of foreign capital, and that capital consists of many individual transactions. Pitchford asserts that since each of these transactions were individually considered financially sound when they were made, their aggregate effect (the current account deficit) is also sound.
A deficit implies we import more goods and services than we export.
To be more precise, the current account equals: Trade in goods (visible balance) Trade in services (Invisible balance) e.g. insurance and services Investment incomes e.g. dividends, interest and migrants remittances from abroad Net transfers – e.g. International aid The current account is essentially exports – imports (+net international investment balance)
If one has a current account deficit, in a floating exchange rate this must be balanced by a surplus on the financial / capital account.
The balance of payments (BOP) is the record of a country's monetary transactions with the rest of the world. Transactions are either marked as a credit or a debit. Within the BOP there are three separate categories under which different transactions are categorized: the current account, the capital account and the financial account. In the current account, goods, services, income and current transfers are recorded. In the capital account, physical assets such as a building or a factory are recorded. And in the financial account, assets pertaining to international monetary flows of, for example, business or portfolio investments are noted.[citation needed]
Absent changes in official reserves, the current account is the mirror image of the sum of the capital and financial accounts. One might then ask: Is the current account driven by the capital and financial accounts or is it vice versa? The traditional response is that the current account is the main causal factor, with capital and financial accounts simply reflecting financing of a deficit or investment of funds arising as a result of a surplus. However, more recently some observers have suggested that the opposite causal relationship may be important in some cases. In particular, it has controversially been suggested that the United States current account deficit is driven by the desire of international investors to acquire US assets (see Ben Bernanke,[5]William Poole links below). However, the main viewpoint undoubtedly remains that the causative factor is the current account and that the positive financial account reflects the need to finance the country's current account deficit.[citation needed]
Current account surpluses are facing current account deficits of other countries, the indebtedness of which towards abroad therefore increases. According to Balances Mechanics by Wolfgang Stützel this is described as surplus of expenses over the revenues. Increasing imbalances in foreign trade are critically discussed as a possible cause of the financial crisis since 2007.[6] The existing differences between the current accounts in the eurozone is considered to be the root cause of the Euro crisis by many Keynesian economists, such as Yanis Varoufakis, Heiner Flassbeck,[7]Paul Krugman[8] and Joseph Stiglitz.[9]
U.S. account deficits
Since 1989, the current account deficit of the US has been increasingly large, reaching close to 7% of the GDP in 2006. In 2011, it was the highest deficit in the world.[10] New evidence, however, suggests that the US current account deficits are being mitigated by positive valuation effects.[11] That is, the US assets overseas are gaining in value relative to the domestic assets held by foreign investors. The net foreign assets of the US are therefore not deteriorating one to one with the current account deficits. The most recent experience has reversed this positive valuation effect, however, with the US net foreign asset position deteriorating by more than two trillion dollars in 2008, down to less than $18 trillion, but has since risen to $25 trillion.[12] This temporary decline was due primarily to the relative under-performance of domestic ownership of foreign assets (largely foreign equities) compared to foreign ownership of domestic assets (largely US treasuries and bonds).[13]
OECD quarterly international trade statistics
The Organisation for Economic Co-operation and Development, OECD – an international economic organisation of 34 countries, founded in 1961 to "promote policies that will improve the economic and social well-being of people around the world"[14] – produces quarterly reports on its 34 member nations comparing statistics on balance of payments and international trade in terms of current account balance in billions of US dollars and as a percentage of GDP.[15]
For example, according to their report the current account balance in billions of US dollars of several countries can be compared,
Australia for 2013 was −51.39 and 2014 was −43.69, with each quarter between 2013 Q1 through 2015 Q2 ranging from a low of −14.81 in Q2 2015 to a high of −8.53 in Q1 2014. Australia's current account balance in Q2 2015 was up down to −14.81. The current balance in Q2 as a percentage of GDP was −4.7%.
Canada for 2013 was −54.62, and 2014 was −37.46 with each quarter between 2013 Q1 through 2015 Q2 ranging from a low of −14.63 in Q1 2015 to a high of −8.28 in Q3 2014. Canada's current account balance in Q2 2015 was up at −14.15. The current balance in Q2 as a percentage of GDP was −3.5%.
China for 2013 was 148.33, and 2014 was 219.90 with each quarter between 2013 Q1 through 2015 Q2 ranging from a low of 31.96 in Q4 2014 to a high of 75.58 in Q4 2013. The United States' current account balance in Q2 2015 was down to 73.03. The current balance in 2013 as a percentage of GDP was 1.6%.
Germany for 2013 was 238.61, and 2014 was 285.82 with each quarter between 2013 Q1 through 2015 Q2 ranging from a low of 54.13 in Q3 2013 to a high of 68.89 in Q1 2014. Germany's current account balance in Q2 2015 was up to 68.39. The current balance in Q2 as a percentage of GDP was 8.2%.
Greece for 2013 was −4.89, and 2014 was −5.00 with each quarter between 2013 Q1 through 2015 Q2 ranging from a low of −2.76 in Q1 2013 to a high of 0.01 in Q2 2015. Greece's current account balance in Q2 2015 was up to 0.01. The current balance in Q2 as a percentage of GDP was 0.0.
The United States for 2013 was −376.76, and for 2014 was −389.53 with each quarter between 2013 Q1 through 2015 Q2 ranging from a low of −118.30 in Q1 2013 to a high of −81.63 in Q4 2013. The United States' current account balance in Q2 2015 was up to −109.68. The current balance in Q2 as a percentage of GDP was −2.4%.
The report also compares countries on services balance, exports of services, import of services, goods balance, export of goods and imports of goods in billions of US dollars.[15]
World Factbook data
The World Factbook,[16] a reference resource produced by the Central Intelligence Agency that collects data and publishes online open reports comparing the current account balance of countries.[17] According to World Factbook, "[c]urrent account balance compares a country's net trade in goods and services, plus net earnings, and net transfer payments to and from the rest of the world during the period specified. These figures are calculated on an exchange rate basis."[17] The top ten on their list of countries by current account balance in 2014 were:
In a 2012 article published by the International Monetary Fund (IMF)[2] the authors argue that a current account deficit with higher investments and lower savings may indicate that the economy of a country is highly productive and growing. If there is an excess of imports over exports there may be problems in terms of competitiveness. Low savings and high investment can also be caused by a "reckless fiscal policy or a consumption binge."[2] China's financial system favors the accumulation of large surpluses while the United States carries "large and persistent current account deficits" which has created a trade imbalance.[2]
Moreover, in practice, private capital often flows from developing to advanced economies. The advanced economies, such as the United States ... run current account deficits, whereas developing countries and emerging market economies often run surpluses or near surpluses. Very poor countries typically run large current account deficits, in proportion to their gross domestic product (GDP), that are financed by official grants and loans.
The balance of trade, commercial balance, or net exports, is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balance of trade for goods versus one for services. The balance of trade measures a flow of exports and imports over a given period of time. The notion of the balance of trade does not mean that exports and imports are "in balance" with each other.
The economy of the Czech Republic is a developed export-oriented social market economy based in services, manufacturing, and innovation that maintains a high-income welfare state and the European social model. The Czech Republic participates in the European Single Market as a member of the European Union, and is therefore a part of the economy of the European Union. It uses its own currency, the Czech koruna, instead of the euro. It is a member of the Organisation for Economic Co-operation and Development (OECD). The Czech Republic ranks 16th in inequality-adjusted human development and 24th in World Bank Human Capital Index, ahead of countries such as the United States, the United Kingdom or France. It was described by The Guardian as "one of Europe's most flourishing economies".
The invisible balance or balance of trade on services is that part of the balance of trade that refers to services and other products that do not result in the transfer of physical objects. Examples include consulting services, shipping services, tourism, and patent license revenues. This figure is usually generated by tertiary industry. The term 'invisible balance' is especially common in the United Kingdom.
In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of the euro.
The government budget balance, also referred to as the general government balance, public budget balance, or public fiscal balance, is the difference between government revenues and spending. For a government that uses accrual accounting the budget balance is calculated using only spending on current operations, with expenditure on new capital assets excluded. A positive balance is called a government budget surplus, and a negative balance is a government budget deficit. A government budget presents the government's proposed revenues and spending for a financial year.
In international economics, the balance of payments of a country is the difference between all money flowing into the country in a particular period of time and the outflow of money to the rest of the world. These financial transactions are made by individuals, firms and government bodies to compare receipts and payments arising out of trade of goods and services.
The national income and product accounts (NIPA) are part of the national accounts of the United States. They are produced by the Bureau of Economic Analysis of the Department of Commerce. They are one of the main sources of data on general economic activity in the United States.
In macroeconomics and international finance, the capital account, also known as the capital and financial account records the net flow of investment transaction into an economy. It is one of the two primary components of the balance of payments, the other being the current account. Whereas the current account reflects a nation's net income, the capital account reflects net change in ownership of national assets.
A country's economy has a double deficit when it is operating in deficit on two important metrics: the government budget balance and the current account.
The Mundell–Fleming model, also known as the IS-LM-BoP model, is an economic model first set forth (independently) by Robert Mundell and Marcus Fleming. The model is an extension of the IS–LM model. Whereas the traditional IS-LM model deals with economy under autarky, the Mundell–Fleming model describes a small open economy.
Foreign trade of Argentina includes economic activities both within and outside Argentina especially with regards to merchandise exports and imports, as well as trade in services.
In macroeconomics, the twin deficits hypothesis or the twin deficits phenomenon, is the observation that, theoretically, there is a strong causal link between a nation's government budget balance and its current account balance.
In its balance of payments accounts, Japan has traditionally run a deficit in services. Trade in services includes transportation, insurance, travel expenditures, royalties, licensing fees, and income from investments. The deficit in services rose steadily from US$99 million in 1960, to nearly US$1.8 billion in 1970 and to more than US$11.3 billion in 1980 which can be attributed to rising royalty and licensing payments for Japan's acquisition of technology from other industrial countries and to rising deficits in the trade-related services of transportation and insurance. The transportation deficit rose after the 1960s, as rapidly climbing labor costs made Japanese-flag vessels less competitive, leading to greater use of foreign-flag carriers.
The economic history of Brazil covers various economic events and traces the changes in the Brazilian economy over the course of the history of Brazil. Portugal, which first colonized the area in the 16th century, enforced a colonial pact with Brazil, an imperial mercantile policy, which drove development for the subsequent three centuries. Independence was achieved in 1822. Slavery was fully abolished in 1888. Important structural transformations began in the 1930s, when important steps were taken to change Brazil into a modern, industrialized economy.
The economic history of the Republic of Turkey may be studied according to sub-periods signified with major changes in economic policy:
1923–1929, when development policy emphasised private accumulation;
1929–1945, when development policy emphasised state accumulation in a period of global crises;
1950–1980, a period of state guided industrialisation based on import substituting protectionism;
1980 onwards, opening of the Turkish economy to liberal trade in goods, services and financial market transactions.
In accounting, finance and economics, an accounting identity is an equality that must be true regardless of the value of its variables, or a statement that by definition must be true. Where an accounting identity applies, any deviation from numerical equality signifies an error in formulation, calculation or measurement.
Foreign trade of the United States comprises the international imports and exports of the United States. The country is among the top three global importers and exporters.
The sectoral balances are a sectoral analysis framework for macroeconomic analysis of national economies developed by British economist Wynne Godley.
This article is about the foreign trade of Sudan.
References
↑ Ecological Economics: Principles And Applications. Herman E. Daly, Joshua Farley; Island Press, 2003
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