Current Account Definition –

What is the current account?

The current account records the country’s transactions with the rest of the world, particularly net trade in goods and services. Net profit from cross-border investments and net remittance payments over a specific time period, such as a year or a quarter. The US current account in Q2 2021 was $190.3 billion.

important issues

  • The current account represents the country’s imports and exports of goods and services. Payments to foreign investors and money transfers such as foreign aid
  • The current account can be positive (surplus) or negative (deficit); Positive means the country is a net exporter and negative means it is a net importer of goods and services.
  • Country’s current account balance whether positive or negative will be equal but opposite to the capital account balance.
  • The United States has a significant deficit in the current account.

Understanding the current account

The current account is half of The other half of the balance of payments is the capital account, while the capital account measures cross-border investments in financial instruments and changes in central bank reserves. The current account measures the import and export of goods and services. Payments to investment holders of a particular country Payments received from foreign investments and remittances such as grants and remittances from abroad.

The country’s current account balance can be positive (excess) or negative (deficit); in any case The balance of the country’s capital account is registered in equal and opposite amounts. The export will be credited to the payment balance. while the import is saved as a debit.

A positive current account balance indicates the nation is a net lender to the rest of the world, while a negative current account balance indicates a net borrower. The current account surplus increases the country’s net foreign assets by the surplus. while the current account deficit decreased with the deficit.

Keep it with any double-credit bookkeeping. In the current account (for example, exports), the corresponding debits are made to the capital account. Items received by country are recorded as debits while items received in transactions are recorded as credits.

special considerations

Since the trade balance (exports minus imports) is generally the largest determinant of the surplus or current account deficit. Current account balances often show cyclical trends. during the strong economic expansion, import volumes often increase; If exports cannot grow at the same rate The current account deficit will increase, on the other hand, during a recession. The current account deficit will decrease if imports decrease and exports increase for a stronger economy.

The exchange rate has a huge influence on the trade balance and by expanding on the current account, one overvalued a currency makes imports cheaper and exports less competitive. This results in an increase in the current account deficit or a narrowing of the surplus. One is underestimated, on the other hand, the currency stimulates exports and makes imports more expensive. This increases the surplus in the current account or narrows the deficit.

Countries with chronic current account deficits are often subject to increased investor scrutiny during times of heightened uncertainty. The currencies of such countries are often subjected to speculative attacks during such periods.

This creates a vicious circle in which foreign exchange rate The reserves are depleted to support the domestic currency. and the amount of foreign exchange reserves that have been exhausted combined with a deteriorating trade balance will continue to put pressure on the currency Struggling countries are often forced to take strict measures to support their currencies, such as raising the currency. interest rate and control the outflow of currency

Current Account vs Capital Account

Some countries divide the capital account into two top-level parts (such as the financial account and the capital account). In this context, the financial account measures the increase or decrease in the ownership of international assets. Whereas the capital account measures financial transactions that do not affect income, production or savings.

What are the factors that may affect the current account?

the country’s trade balance (exports minus imports) is the biggest determinant of whether the current account is in surplus or deficit. During the strong economic expansion The amount of imports tends to increase. and if exports cannot grow at the same rate The current account will have a deficit. Conversely, during a recession, The current account will show a surplus if imports fall and exports increase for a stronger economy. The exchange rate is another variable that can affect the current account.

What is a capital account?

The capital account is part of the country’s balance of payments. and provides a summary of capital expenditures and incomes for the country. Capital accounts are sometimes referred to as financial accounts, with separate capital accounts, often very small, separate. The transaction summary includes the import and export of goods, services, capital, and remittance payments such as aid and remittances from abroad. basically The capital account measures the change in the ownership of a country’s assets. while the current account measures the country’s net income.

What is the balance of payments?

A country’s balance of payments (BOP) is all transactions made between entities in that country and others. of the world at a specific time, such as a quarter or a year. This includes both the current account and the capital account. In theory, the sum of all transactions recorded in the balance of payments should be zero. However, fluctuations in exchange rates and differences in accounting practices may prevent this in practice.


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