Current Account

What Is the Current Account?

The current account records a nation's transactions with the remainder of the world — explicitly its net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments — over a defined period, like a year or a quarter. The Q4 2021 current account deficit of the U.S. was negative $217.9 billion.

Figuring out the Current Account

The current account is one-half of the balance of payments, the other half being the capital account. While the capital account measures cross-border investments in financial instruments and changes in central bank reserves, the current account measures imports and exports of goods and services, payments to foreign holders of a country's investments, payments received from investments abroad, and transfers like foreign aid and settlements.

A country's current account balance might be positive (a surplus) or negative (a deficit); regardless, the country's capital account balance will register an equivalent and inverse amount. Exports are recorded as credits yet to be determined of payments, while imports are recorded as debits.

A positive current account balance demonstrates that the nation is a net lender to the remainder of the world, while a negative current account balance shows that it is a net borrower. A current account surplus increases a nation's net foreign assets by the amount of the surplus, while a current account deficit diminishes it by the amount of the deficit.

In keeping with [double-passage bookkeeping](/twofold section), any credit in the current account (like an export) will have a comparing debit kept in the capital account. The thing received by the nation is recorded as a debit while the thing given up in the transaction is recorded as a credit.

Special Considerations

Since the trade balance (exports minus imports) is generally the greatest determinant of the current account surplus or deficit, the current account balance frequently shows a cyclical trend. During a strong economic expansion, import volumes regularly flood; in the event that exports can't develop at a similar rate, the current account deficit will extend. On the other hand, during a recession, the current account deficit will shrink in the event that imports decline and exports increase to stronger economies.

The exchange rate applies a huge influence on the trade balance, and by extension, on the current account. A overvalued currency makes imports less expensive and exports less competitive, in this manner enlarging the current account deficit or limiting the surplus. A undervalued currency, then again, helps exports and makes imports more costly, in this way expanding the current account surplus or restricting the deficit.

Nations with constant current account deficits frequently go under increased investor investigation during periods of uplifted vulnerability. The currencies of such nations frequently go under speculative attack during such times.

This makes an endless loop wherein foreign exchange reserves are drained to support the domestic currency, and this foreign exchange reserve exhaustion — joined with a weakening trade balance — comes down on the currency. Troubled nations are frequently forced to go to rigid lengths to support the currency, for example, raising interest rates and checking currency surges.

Current Account versus Capital Account

A few countries will split the capital account into two high level divisions (i.e., the financial account and the capital account). In this unique situation, the financial account measures an increase or reduction in international ownership of assets, while the capital account measures financial transactions that don't influence income, production, or savings.

Features

• The U.S. has a huge deficit in its current account.
• The current account might be positive (a surplus) or negative (a deficit); positive means the country is a net exporter and negative means it is a net importer of goods and services.
• The current account addresses a country's imports and exports of goods and services, payments made to foreign investors, and transfers like foreign aid.
• A country's current account balance, whether positive or negative, will be equivalent however inverse to its capital account balance.

FAQ

What Is a Capital Account?

The capital account is one part of a country's balance of payments and gives a summary of the capital expenditure and income for a country. Sometimes the capital account is called the financial account, with a separate, as a rule tiny, capital account listed separately. The summary of transactions comprises of imports and exports of goods, services, capital, and transfer payments like foreign aid and settlements. Basically, the capital account measures the changes in national ownership of assets, though the current account measures the country's net income.

What Are Some Factors That Can Impact the Current Account?

A country's trade balance (exports minus imports) is generally the greatest determinant of whether the current account is in a surplus or deficit. During a strong economic expansion, import volumes ordinarily flood and, on the off chance that exports can't develop at a similar rate, the current account will be in deficit. On the other hand, during a recession, the current account will show a surplus on the off chance that imports decline and exports increase to stronger economies. Exchange rates are another variable that can impact the current account.

What Is a Balance of Payments?

A country's balance of payments (BOP) is a statement of all transactions made between elements in that country and the remainder of the world over a defined period, like a quarter or a year. It incorporates both the current account and capital account. In theory, the sum of all transactions kept yet to be determined of payments ought to be zero; notwithstanding, exchange rate changes and differences in accounting practices might obstruct this in practice.