Current Account of the Balance of Payments

The balance changes whenever the value of what a country sells abroad changes relative to what it buys.

Causes of a current-account deficit

• Low international competitiveness. If domestic goods are more expensive or lower quality than foreign rivals, exports fall and imports rise. This can come from high relative inflation, low productivity or a high exchange rate.
• Strong domestic demand. When incomes and spending are high, people buy more imports, widening the deficit.
• A high exchange rate. A strong currency makes exports dear abroad and imports cheap at home, worsening the trade balance.
• Reliance on imported essentials. A country that must import much of its food, fuel or raw materials runs a structural import bill.

Causes of a current-account surplus

The opposite conditions: high competitiveness from low costs, high productivity or a low exchange rate; weak domestic demand that holds imports down; or a strong base of exports such as commodities, manufactured goods or services like tourism and finance.