Current Account of the Balance of Payments
International Trade & Globalisation
The current account has four parts.
- . Exports and imports of physical goods, such as cars, oil, food and machinery. Exports are credits; imports are debits.
- . Exports and imports of services, such as tourism, banking, insurance, shipping and education. Selling these to foreigners is a credit; buying them from abroad is a debit.
- . Income from lending, investing or working abroad, such as interest, profit, dividends and wages, set against the same kinds of income paid out to foreigners.
- . Transfers for which nothing is given in return, such as foreign aid and workers' remittances sent between countries.
Common exam question
Which part of the current account a flow belongs to
Question: Say which part of the current account records a given flow, or what one part measures (1 mark, multiple choice).
Sort each flow by what the money is for. Goods and services are trade; foreign tourists' spending in the country is a service export. Interest, profits, dividends and wages from abroad are primary income. Money given with nothing in return (aid, cash workers send to family abroad, contributions to international organisations) is secondary income. Set in 4 of the 13 multiple-choice papers, once as the formula: the current account is the four balances added together.
The wrong options are the neighbouring parts: primary income beside a remittance, factor income or net exports beside secondary income. Money invested in assets abroad is not in the current account at all. Asked in 1 of the 11 structured papers, as two components to name from a fact file: the scheme credited the two listed there and accepted "invisibles" for trade in services.
Calculating the balance
The current-account balance = total credits − total debits across all four parts.
If credits exceed debits, the country has a current-account surplus; if debits exceed credits, it has a current-account deficit. The same arithmetic applies to a single part: for trade in goods alone, exports minus imports gives a trade surplus or trade deficit in goods. So a country can run a deficit on trade in goods while running a surplus on services or income, and the overall current-account balance combines all four parts.
Common exam question
Calculating a balance and reading its change
Question: Calculate the current account balance, or the balance on one part of it, from given figures, or say which balance improved (1 mark).
Take credits minus debits for each part, then add the parts, keeping every sign: a negative total is a deficit. Set in 5 of the 13 multiple-choice papers. The wrong options come from slips: the right size with the wrong sign, a services deficit added as a surplus, money leaving counted as coming in, or every item added regardless of direction.
For which balance improved: a deficit shrinking towards zero is an improvement, while a growing deficit and a falling surplus are deteriorations. On a chart, the trade balance can improve while imports rise, if exports rise by more.
Asked in 1 of the 11 structured papers, as the sum of a fact file's two balances: the answer was negative, and the scheme also took it without the dollar sign or in the local currency.
Worked example
Working out a current account balance
The table shows one year's international transactions for a country.
| Item | $ million |
|---|---|
| Exports of goods | 480 |
| Imports of goods | 530 |
| Exports of services | 150 |
| Imports of services | 90 |
| Interest and profits received from abroad | 40 |
| Interest and profits paid abroad | 65 |
| Foreign aid received | 20 |
| Money sent home by foreign workers living in the country | 35 |
| Spending by a foreign firm on building a factory in the country | 120 |
Calculate the balance on trade in goods and the current account balance, and say whether each is a surplus or a deficit.
Solution:
- Trade in goods: 480 − 530 = −$50m, a deficit of $50 million
- Trade in services: 150 − 90 = +$60m
- Primary income: 40 − 65 = −$25m
- Secondary income: the aid is a credit and the money the foreign workers send home is a debit, so 20 − 35 = −$15m
- The factory spending is investment, not trade, income or a transfer, so it is left out
- Current account: −50 + 60 − 25 − 15 = −$30m, a deficit of $30 million
Counting the factory spending as a credit would turn this into a $90m surplus, and counting the workers' money as coming in would give a $40m surplus.
Exam tip
Define a deficit in money terms
To define a trade in goods deficit, say that spending on imported goods is greater than the revenue earned from exported goods. The mark scheme gives both marks for that and only one for saying that imports exceed exports, so write it in values. A surplus is the reverse, and adding services, income and transfers gives the current account version.