Current account of the balance of payments

The current account of the balance of payments records a country's international transactions in goods, services and income. It has four components.

Trade in goods (visibles) records exports and imports of physical goods such as cars, oil and food. Trade in services (invisibles) records exports and imports of services such as tourism, banking, insurance and shipping. Primary income records net income earned from factors of production abroad — chiefly investment income (interest, profits and dividends from overseas assets) and some wages — minus equivalent income paid to foreigners. Secondary income records net transfers for which no good or service is given in return, such as foreign aid, grants and remittances sent by migrant workers.

For each component, inflows (credits) include exports and income received, while outflows (debits) include imports and income paid abroad. The overall current account balance (CAB) is the sum of all four components.

A current-account deficit occurs when total outflows exceed total inflows on the current account — i.e. the balance is negative. This usually means a country is importing more goods and services (and paying out more income/transfers) than it is exporting and receiving. It is important to note that a country can have a deficit in trade in goods but still record an overall current-account surplus if its surpluses in services or income are large enough — so the goods balance alone does not determine the current account.

Step 1 — balance of trade in goods: 250 − 340 = −90 (a goods deficit).

Step 2 — balance of trade in services: 180 − 70 = +110 (a services surplus).

Step 3 — balance of trade in goods and services: −90 + 110 = +20.

Step 4 — current account balance: +20 + 30 (primary income) − 20 (secondary income) = +$30bn.

So the country has an overall current-account surplus of $30bn.

Comment. Although the country runs a sizeable deficit in goods (−90) — suggesting its manufactured/physical exports are less competitive than its imports — this is more than offset by a strong services surplus (+110) and positive primary income (+30). This pattern is typical of an advanced economy whose strength lies in services (e.g. finance, tourism) and overseas investment income rather than goods. The overall surplus indicates the country is, on balance, earning more from the rest of the world than it spends — though it remains dependent on services and income to offset its goods deficit, which could be a vulnerability if those weakened.

A current-account deficit means a country's outflows (mainly imports and income paid abroad) exceed its inflows. Whether this is a serious problem depends on its nature.

The case that it is serious. A deficit means net imports, which subtract from aggregate demand, potentially lowering output and employment. Because the overall balance of payments must balance, the deficit must be financed by inflows on the financial account — foreign investment or borrowing — or by running down reserves. Persistent reliance on borrowing leads to rising external debt and future interest/profit outflows. A large deficit may signal a loss of competitiveness, and if foreign confidence falls, inflows can suddenly stop, forcing a painful adjustment and a sharp currency depreciation. These are genuine dangers, especially for a developing economy.

The case that it may not be serious. A deficit can be benign. If it reflects imports of capital goods that raise future productive capacity, it supports long-run growth and future exports. If it is financed by stable, long-term foreign direct investment rather than volatile debt, it is sustainable and reflects confidence in the economy. A deficit caused by strong domestic growth pulling in imports can be a sign of health, and cheaper imports raise consumers' living standards now. A small or temporary deficit is easily managed.

Judgement. A current-account deficit is not always a serious problem. Its seriousness depends on its size, persistence, cause and financing: a large, persistent deficit driven by lost competitiveness and financed by debt is genuinely dangerous and requires correction; but a moderate deficit that funds productive investment and is financed by stable inflows may be perfectly sustainable and even beneficial. The most defensible conclusion is that policymakers should worry less about the deficit's existence and more about why it has arisen and how it is financed — judging the deficit by its cause and sustainability rather than treating any deficit as a problem.

A current-account surplus means inflows exceed outflows — the country earns more from trade and income than it spends abroad. It is often seen as a sign of strength, but it is not unambiguously beneficial.

The case that a surplus is beneficial. A surplus usually reflects strong international competitiveness (competitive, high-quality exports). Net exports are positive, so they add to aggregate demand, supporting output and employment. The country accumulates foreign assets and reserves, which provide a buffer against shocks and the means to invest abroad and earn future income. It also avoids the financing pressures and debt that a deficit can bring. For these reasons a surplus is generally regarded as healthy.

The case against / costs of a surplus. A large surplus has drawbacks. It can mean the country is consuming less than it produces — output is sold abroad rather than enjoyed domestically, so current living standards may be lower than they could be (e.g. high saving, suppressed domestic demand). A surplus driven by high AD/exports can contribute to inflation. A persistent large surplus also implies that other countries run deficits, which can provoke trade tensions and retaliation (accusations of an undervalued currency or unfair trade). The surplus may also reflect weak domestic demand rather than genuine strength.

Judgement. A current-account surplus is usually beneficial — it reflects competitiveness, supports demand and builds foreign assets — but it is not always wholly good. A moderate surplus from genuine competitiveness is healthy, but a large, persistent surplus achieved by suppressing domestic consumption can lower living standards, fuel inflation and cause international tension. The most defensible conclusion is that the desirability of a surplus depends on its size and cause: a modest, competitiveness-driven surplus is beneficial, whereas a very large surplus from weak domestic demand may not be — so 'always beneficial' is too strong.