Current Account Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The current account measures transactions in goods, services, and income, as well as current transfers between residents and nonresidents of a country. As such, the current account records the value of real resource transactions (i.e., exchanges involving goods, services, and income) and current transfers (i.e., unilateral transfers such as food donations) in a specific time period between a country and the rest of the world. The balance on the current account and the size of the current account relative to gross domestic product are important indicators of a country’s integration and openness to the rest of the world.

The value of transactions recorded in the current account of a country is estimated through periodic surveys of economic exchanges between its residents and nonresidents. In the current account, each transaction is recorded either as a credit or debit entry. A transaction that is a source of foreign exchange leads to a credit entry; a transaction that is a use of foreign exchange generates a debit entry. Thus, exports of merchandise goods are recorded as credit whereas imports are recorded as debit.

The current account is said to be in deficit when the value of real resources and current transfers acquired from the rest of the world exceeds the value of real resources and current transfers provided to the rest of the world. A surplus in the current account indicates that the opposite is true: real resources and current transfers to the rest of the world have a greater economic value than those from the rest of the world. Furthermore, the balance on the current account shows the relationship of national expenditure to national income. A current account deficit indicates that a country spends more than it produces (its income); the difference between what it spends and produces is imported from the rest of the world.

The current account is a primary component of a country’s balance of payments. The other major component is the capital and financial account, which records capital flows and transfers. The balance of payments is organized on the basis of the double entry accounting principle; it records economic transactions between residents and nonresidents of a country in the form of two offsetting entries, a credit and a debit. A credit entry in the current account is a source of foreign exchange, which implies an increase in the financial assets acquired from the rest of the world. It is thus recorded as a debit entry in the capital and financial account. For this reason, a surplus or deficit in the current account is offset by a deficit or surplus in the capital and financial account. In other words, a country running a deficit in the current account is a net debtor from the rest of the world whereas a country running a surplus is a net creditor to the rest of the world. It should be observed that the relationship between the current account and the capital and financial account holds true through accounting identity.

The balance on the current account can be seen as being constituted by the balance on goods trade, the balance on services trade, the balance on income, and the balance on current transfers. While the current account is conceptually different from the balance on goods and services trade, a deficit or surplus in the current account is often driven by a trade deficit and surplus. This is because exports and imports of goods and services are often the biggest—in terms of value—components of the current account.

Bibliography:

Jörg Decressin and Piti Disyatat, “Productivity Shocks and the Current Account: An Alternative Perspective of Capital Market Integration,” Journal of International Money and Finance (v.27/6, 2008);
Giancarlo Gandolfo, International Finance and Open-Economy Macroeconomics (Springer-Verlag, 2001);
International Monetary Fund, Balance of Payments Manual, 5th ed. (1993);
Rita M. Maldonado, “Recording and Classifying Transactions in the Balance of Payments,” International Journal of Accounting (v.15, 1979);
Robert M. Stern, The Balance of Payments: Theory and Economic Policy (Aldine, 1973);
S. Department of Commerce, The Balance of Payments of the United States: Concepts, Data Sources, and Estimating Procedures (U.S. Government Printing Office, 1990).

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