Current Account

Published May 15, 2023

Definition of Current Account

The current account measures a country’s imports and exports of goods and services, net income payments, and net transfers. It’s part of the balance of payments and is an important indicator of a country’s economic health. The current account can be in deficit, balanced, or surplus.

Example

Let’s imagine Country A is a net exporter of goods and services. That means it sells more goods and services abroad than it buys from other countries. As a result, it has a positive trade balance, which contributes to a current account surplus. On the other hand, Country B is a net importer. It buys more goods and services from other countries than it sells abroad. Therefore, it has a negative trade balance and a current account deficit.

Now, let us assume that Country B is running a large current account deficit. This means it is consuming more than it is producing, and it is relying on borrowing from other countries to finance this deficit. Over time, this borrowing can become unsustainable, and the country may face a financial crisis, leading to a depreciation of its currency and an increase in inflation.

Why Current Account Matters

The current account balance is a crucial indicator of a country’s economic health. A current account surplus can indicate that a country is producing goods and services competitively, which can attract foreign investment and support long-term economic growth.

On the other hand, a current account deficit can signal that a country is spending more than it is producing, which can lead to a loss of competitiveness and a reliance on foreign borrowing. As a result, policymakers must monitor and manage their country’s current account balance to maintain economic stability and growth.