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What is the Current Account

The current account is a section in the Balance of Payments, which shows a country's transactions with goods, services and income. It is made up of four different parts.

1) The balance of trade in goods

2) The balance of trade in services

3) Net income flows (wages and investment income)

4) Net current transfers (unilateral flows with nothing received in return e.g. aid) 

Each transaction is entered into the account as a credit (e.g. exports, money into the country) or debit (e.g. imports, money out of the country).

The current account can be either in surplus or in deficit. If all the current accounts in the world were added they would sum to 0 (assuming you add the surplus and minus the deficit) as each credit in one country, is a debit in another.

The main factors effecting the current account are,

1) Competitiveness:

This is a long run indicator to whether a country will reduce its deficit (or increase its surplus). The more competitive a country is, the more it exports and the less it imports, as domestic goods are more affordable or better quality than foreign goods. Competitiveness depends on unit labour costs, relative wages and infrastructure.

2) Economic Growth 

With an increase in economic growth, it is likely that consumption increases. This may mean that more imports as consumed, causing a fall in the current account, provided ceteris paribus (all else is equal).

3) Exchange Rates

With a depreciation in the exchange rate, a currency becomes relatively more competitive, making exports cheaper for foreign countries and imports more expensive for the domestic country. This will lead to an improvement in the current account.

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