Components of the Current Account (CIE IGCSE Economics)

• The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world
  
  
• The BoP has two main sections:
  • The current account: all transactions related to goods/services along with payments related to the transfer of income
  • The financial & capital account: which is not part of your syllabus
    
    
• Money flowing into the country is recorded in the relevant account as a credit (+) and money flowing out as a debit (-)
• A current account surplus occurs when the credits (money in) are higher than the debits (money out)
• A current account deficit occurs when the credits (money in) are less than the debits (money out)

The Current Account of the Balance of Payments

• The Current Account is often considered to be the most important account in the BoP
  • It records the net income that an economy gains from international transactions
    

An Example of the UK Current Account Balance For 2017

Component	2017
A. Net trade in goods (exports - imports)	£-32.9bn
B. Net trade in services (exports - imports)	£27.9bn
C. Sub-total trade in goods/services (A+B)	£-5bn
D. Net income (interest, profits & dividends)	£-2.1bn
E. Current transfers	£-3.6bn
Total Current Account Balance (C+D+E)	£-10.7bn
Current Account as a % of GDP	3.7%

 

• Goods are also referred to as visible exports/imports
• Services are also referred to as invisible exports/imports
• Net income consists of income transfers by citizens and corporations
  • Credits are received from UK citizens who are abroad & send remittances home
  • Debits are sent by foreigners working in the UK back to their countries
  • (Income credits - Income debits) are often referred to as net primary income
• Current transfers are typically payments at government level between countries e.g. contributions to the World Bank
  • (Transfer credits - transfer debits) are often referred to as net secondary income
     
• The current account balance = net trade in goods + net trade in services + net primary income + net secondary income

Step 1: Recall the formula for calculating the current account balance
 Net trade in goods + net trade in services + net income + net current transfers
 

Step 2: Substitute the appropriate values

Net trade in goods = (100-40) = 60

Net trade in services = (75-45) = 30

Net income transfers = 150

Net current transfers = -50
 

Step 3: Complete the calculation

60 + 30 + 150 -50 = 190
 

Step 4: Check the units and ensure your answer uses the correct units

€190,000m