Current accountSyllabus: Explain the four components of the current account, specifically:
- the balance of trade in goods,
- the balance of trade in services,
- income and
- current transfers.
The current account records money flows from imports and exports of goods (the 'balance of trade' or 'visible balance') and imports and exports of services (sometimes 'invisible trade'). It also records income flows (flows of interest, profits and dividends that may have arisen from investment flows) and transfers of money.
The current account balance is the net balance of all of these items.
The major components of the current account are:
- The balance of trade in goods (visible account)
The balance of trade in services (invisible account)
When combined,these two accounts are commonly known as trade in goods and services account. A difference in the monetary value of exports and imports, in the trade in goods and services account, is known as the balance of trade.
The balance of income (invisible)
Income flows consist of investment income such as interest, dividends, and payments of profits and reinvested earnings on direct investment.
The balance of current transfers (Invisible)
Current transfers consist of receipts and payments, where there is no corresponding exchange such as foreign aid and contribution to international organisations such as the European Union. This account also includes international transfers of money by private individuals, such as workers' remittances.
The balance of goods is also known as visible or merchandise balance, whereas the other three balances are sometimes referred to as the invisible balance.
The sum of the balances of the four components of the current account is known as the current account balance. A current account balance is in surplus if overall credits (incoming revenue) exceed debits (outgoing revenue) and in deficit if debits exceed credits.