One of three components of a country’s balance of payments system, the current account is the country’s trade balance, or the balance of imports and exports of goods and services, plus earnings on foreign investments minus payments to foreign investors. The other two components are the capital account and the financial account. It is also a metric used for all internationally transferred capital.
Understanding Current Accounts
An objective for almost every country is to export goods and services to boost revenue. The primary goal is to build a trade surplus, where more goods and services are exported than are imported. When the residents (individuals/families, businesses, and the government) of a country can produce for their own needs, the current account is more than likely in balance.
The (current) account is unbalanced. A deficit occurs when more goods are imported than exported, meaning more money is paid to foreign buyers/countries than received from foreign vendors/countries.
The current account is one of the three components of a country’s balance of payments system. The other components are:
Capital Account – A record of all investment transactions that don’t actively affect the country’s ability to produce its savings or income; and
Financial Account – A record of the fluctuations in ownership of international assets
The Four Components of the Current Account
1. Net Income
Net income accounts for all income the residents of a country generate. The income is earned either through work done overseas or on foreign investments in the form of interest or dividends.
2. Direct Transfers
Direct transfers include direct foreign aid from the government to another country and any money sent from workers in one country back to family/friends in their home country. Foreign direct investments are also included in this component, covering any investments made into ventures or assets in another country.
Trade makes up the largest part of the (current) account, the trade (buying and selling) of goods and services between countries.
4. Asset Income
Asset income focuses on the rise and fall of assets within a country, including securities, real estate, reserves (both from central banks or reserves held by the government), and bank deposits. The success or failure of the assets held leads to increases or decreases in asset income.
The current account is an important metric for any country because it measures current trade activities, direct investments, and the success of assets held by residents of the country. It is also important as one part of the balance of payments that a country uses to gauge its financial surpluses or deficits accurately.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: