Current account

The term Current Account usually refers to the current account of the balance of payments (BOP) and contains the import and export items of goods and services. The current account is often presented alongside the capital account of the BOP which contains data about short and long-term capital flows. Basically the BOP must balance, so if there is a large current account surplus, there will be a large capital account deficit.

Table of contents

1 Dealing with a large current account deficit 2 Key drivers of the current account 3 Structural influences on the BOP and the current account 4 Related Material

Dealing with a large current account deficit

When it is talked about most, the current account will be either in large surplus (export receipts exceeding import payments) or substantial deficit (import payments exceeding export receipts). Generally it is a significant current account deficit (rather than a surplus) that is perceived to be a problem requiring action, but the current (trading) and capital (largely financial) accounts are inter-related and a persistent capital surplus can (by raising the exchange rate above the level it would otherwise reach) cause a current account deficit.

If action to address a substantial current account deficit is taken, then the more obvious measures to consider include:

• encouraging depreciation of the exchange rate (e.g. by cutting interest rates or by currency intervention of one kind or another)
• import restrictions, quotas or duties
• measures to promote exports e.g. encouraging arms sales abroad

Key drivers of the current account

The items in the current account (e.g. perhaps especially imports and exports of goods) are sensitive to international price differentials (the differences between the prices of goods in different countries), to the rise and decline of industries (e.g the emergence of the Japanese automobile industry 20 years ago, and the decline of the US steel industry at the same time), and to differential economic growth rates (e.g. with a country being likely to experience a deteriorating current account balance if its economy is growing more rapidly than other countries).

The theory of purchasing power parity deals with the relationships between price levels (and changes of price levels) in competing countries, and is relevant in any discussion of the stability and likely trajectory of a current account balance, because the price pressures that may be operating will find their expression primarily (though not exclusively) in the traded goods area (within the current account).

Structural influences on the BOP and the current account

Countries can experience structural features or trends in their BOP's that will influence the current account. For example, the USA in recent years has enjoyed large capital account surpluses that may, depending on your beliefs about the key drivers of the US BOP, have caused the large current account deficits. Again the rise of China as a global competitor has caused a large bi-lateral deficit between the USA and China (i.e. China selling to the USA more than it buys from her) and this is likely a structural feature of trade between the two countries that will persist for years to come. Finally, some countries (e.g Malaysia and at times much of South East Asia) have been perceived as attractive locations for direct investment; they have had corresponding capital account surpluses, and resultant tendencies to experience trade and current account deficits.

Related Material

• Service sector
• Stabilisation measures