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Current Account

Reviewed by Sujaini | Updated on Oct 05, 2020

Catalogue

What is a Current Account?

The current account records transactions of a nation with the rest of the world, specifically the net trade-in products and services, net income from cross-border investments, and net transfer payments, over a defined period, such as a year or a quarter of the time. The current account comprises one half of the balance of payments, while the other half is the debt or financial statement.

While the capital account measures cross-border investments in financial instruments and changes in central bank reserves, the current account measures the imports and exports of goods and services, payments to foreign holders of the investments of a country, payments received from foreign investments, and transfers such as foreign aid and remittances.

The current account balance of a country can be positive (a surplus) or negative (a deficit). In either case, the equivalent and the opposite amount will be recorded on the capital account balance of the country. Exports are registered in the balance of payments as credits while imports are recorded as debits.

While the capital account measures cross-border investments in financial instruments and changes in central bank reserves, the current account measures the imports and exports of goods and services, payments to foreign holders of the investments of a country, payments received from foreign investments, and transfers, such as foreign aid and remittances.

Because the trade balance (exports minus imports) is usually the primary determinant of the current account surplus or deficit, a cyclical pattern is also seen in the current account balance. Import volumes often increase during a robust economic expansion. If exports cannot rise at the same rate, the current account deficit will expand.

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