6.3 Current account of the balance of payments
- Syllabus
- 9708–2026–2027
- Topic
- 6.3
- Level
- AS
Learning objectives
6.3.1Current account components• Components of the current account of the balance of payments:- current account: trade in goods, trade in services, primary income and secondary income- definition of balance and imbalances (deficit and surplus) in the current account of the balance of payments6.3.2Current account calculations• Calculation of:- balance of trade in goods- balance of trade in services- balance of trade in goods and services- current account balance (CAB)6.3.3Current account imbalance causes• Causes of imbalances in the current account of the balance of payments6.3.4Current account imbalance effects• Consequences of imbalances in the current account of the balance of payments for the domestic and external economy
The current account has four components
| Component | What crosses the border | Credit example | Debit example |
|---|---|---|---|
| Trade in goods | Physical products | Machinery exported | Food imported |
| Trade in services | Intangible services | Spending by foreign tourists at home | Residents' holidays abroad |
| Primary income | Returns to labour or capital owned across borders | Interest, profit, dividend, rent or wages received from abroad | Equivalent income paid abroad |
| Secondary income | Transfers with no direct good/service/factor return | Aid or remittances received | Aid or remittances sent abroad |
The current-account balance is total current-account credits minus total debits. Credits are receipts from abroad; debits are payments abroad. A positive balance is a surplus, a negative balance is a deficit, and zero is balance.
A foreign government paying a domestic university to educate its students is a service export and credit. A resident receiving dividends from foreign shares is primary-income credit. A government donation abroad is secondary-income debit.
The current account is not just visible trade in goods. Use the current syllabus terms primary income and secondary income; older sources may call secondary income current transfers.
Calculate each current-account balance with signs
| Required calculation | Formula |
|---|---|
| Balance of trade in goods | Goods exports - goods imports |
| Balance of trade in services | Service exports - service imports |
| Balance of trade in goods and services | Goods balance + services balance |
| Current-account balance (CAB) | Goods balance + services balance + primary-income balance + secondary-income balance |
Treat exports and receipts as positive credits and imports and payments as negative debits. If a table already gives a balance, preserve its sign. If it gives separate flows, subtract the debit before combining components.
Goods exports 90 and imports 120 give -30. Service exports 50 and imports 35 give +15. With primary income -8 and secondary income +3: CAB = -30 + 15 - 8 + 3 = -20, a current-account deficit of 20.
Name the result precisely: a movement from -40 to -20 is a smaller or declining deficit, not a surplus. Trade in goods and services alone cannot determine CAB unless primary and secondary income are also known.
Trace current-account imbalances to their component
| Cause | Likely current-account channel |
|---|---|
| Faster domestic growth/rising incomes | Imports rise and exports may be diverted home; deficit pressure |
| Higher inflation than competitors or low productivity | Exports lose price competitiveness and imports become relatively attractive |
| Appreciation/overvalued currency | Exports become dearer and imports cheaper; effect depends on elasticities |
| Depreciation/undervalued currency | Opposite price effect; may support surplus, but elasticities and time matter |
| Higher essential commodity/import prices | Import expenditure rises, especially with inelastic demand |
| Foreign recession, trade barriers or changed tastes | Export demand/revenue falls |
| Income and transfer changes | Lower investment income/remittances/aid received, or higher payments abroad, worsen CAB |
| Export productivity, subsidies or strong partner growth | Export volume/revenue can rise and improve CAB |
Separate cyclical causes from structural ones. A temporary demand boom or commodity-price spike may reverse; persistent low productivity, narrow export dependence, weak non-price competitiveness or an overvalued currency can sustain an imbalance.
One change can work in two directions. Falling unemployment raises income and imports, but it can also raise domestic output and exports. Decide which channel dominates from spare capacity, productivity, import propensity, elasticities and the time period.
A deficit is not only 'buying too many foreign goods': services, primary income and secondary income also count. Nor does a surplus prove high productivity; it may reflect weak domestic demand or an undervalued currency.
Evaluate both domestic and external effects of imbalances
| Imbalance | Domestic economy | External economy |
|---|---|---|
| Deficit | Lower net exports can reduce AD, growth and jobs; cheaper imports may raise living standards or supply productive capital; depreciation can create imported inflation | Downward exchange-rate pressure; need for capital inflows/borrowing or reserve use; possible debt interest, confidence and financing vulnerability |
| Surplus | Higher net exports can raise AD, output and jobs but may cause demand-pull inflation; if caused by recession/weak imports it may accompany low welfare and employment | Upward exchange-rate pressure and accumulation of foreign assets/reserves; partners face deficits and may retaliate |
A deficit must be matched elsewhere in the balance of payments by net financial/capital inflows or reserve changes. Productive foreign direct investment financing capital imports is less concerning than unstable short-term borrowing used for consumption, although neither outcome is guaranteed.
The cause changes the verdict. A deficit caused by investment imports may expand future productive capacity; one caused by persistent uncompetitiveness is more vulnerable. A surplus driven by strong export productivity differs from one caused by a domestic recession suppressing imports.
Do not judge from the sign alone. Evaluate size relative to national income, duration, cause, import/export composition, spare capacity, elasticities, financing quality, debt and reserve position, confidence and trading-partner response.