What is the Current Account?
One-third 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 net income and direct payments. It is also a metric used for all internationally transferred capital.
Digging Deeper into the Current Account
The objective for almost every country is to export goods and services to boost revenue. The primary goal is to acquire 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 are financially stable enough to pay for their needs, the current account is considered in balance.
The (current) account is unbalanced, and a deficit occurs when more goods are imported than are exported, meaning less money is taken in from foreign buyers/countries than brought in by those foreign vendors/countries.
The current account is one-third of the country’s balance of payments system. The other components are:
- Capital account – A record of all 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, as well as 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, which covers 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, which includes things such as 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 system of balance of payments that a country uses to accurately gauge its financial surpluses or deficits.
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