n economics, a country's current account is one of the two components of its balance of

payments, the other being thecapital account. The current account consists of the balance of
trade, net primary income or factor income (earnings on foreign investments minus payments
made to foreign investors) and net cash transfers.
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 increases a country's net foreign assets
by the corresponding amount, and a current account deficit does the reverse. 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]
Contents
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1 Overview

2 Calculation

3 Reducing current account deficits

4 Interrelationships in the balance of payments

5 U.S. account deficits

6 See also

7 References

8 External links

Overview[edit]
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, ignoring all
financial transfers, investments and other components. 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 contributes to a current account surplus; negative net sales
abroad generally contributes 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 paralleled reduction of the net foreign
assets.
Current account = changes in 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.

Calculation[edit]
Normally, the current account is calculated by adding up the 4 components of current
account: goods, services, income and current transfers. [3]
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.
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. A foreign company's
investment upon a domestic company or a local government is considered as 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.

A country's current account can be calculated by the following formula:

When CA is the current account, X and M the export and import of goods
and services respectively, NY the net income from abroad, and NCT the net
current transfers.

Reducing current account deficits[edit]

The quarterly current account of Australia ($AU million) since 1959

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.

Interrelationships in the balance of

payments[edit]
Main article: Balance of payments
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 U.S. assets
(See Ben Bernanke,[4]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.

U.S. account deficits[edit]

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.[5] New evidences, however, suggest that the U.S. current
account deficits are being mitigated by positive valuation effects.[6] That is,
the U.S. assets overseas are gaining in value relative to the domestic assets
held by foreign investors. The U.S. net foreign assets therefore is 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.[7] This 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).