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Encyclopedia > Current account
Blue = countries in current account surplus; Red = countries in current account deficit, 2005
Blue = countries in current account surplus; Red = countries in current account deficit, 2005

The current account of the balance of payments is the sum of the balance of trade (exports less imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation. The balance of trade is typically the most important part of the current account. This means that changes in the patterns of trade are key drivers of the current account. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant. Image File history File links Download high resolution version (1353x641, 47 KB) Summary Current account balance world figures, from CIA factbook, accessed April 2006 Red = deficit (more imports than exports) Blue = surplus (more exports than imports) Grey = no data Licensing File links The following pages link to this file: Balance... Image File history File links Download high resolution version (1353x641, 47 KB) Summary Current account balance world figures, from CIA factbook, accessed April 2006 Red = deficit (more imports than exports) Blue = surplus (more exports than imports) Grey = no data Licensing File links The following pages link to this file: Balance... The balance of payments is a measure of the payments that flow from one exports and imports of goods, services, and financial capital, as well financial transfers. ... The balance of trade encompasses the activity of exports and imports, like the work of this cargo ship going through the Panama Canal. ...


The current account and the capital and financial account and change in official reserves each sum up to an offsetting equality (are opposite in sign but same in magnitude) after errors and omissions are taken into account. This is as a result of a floating exchange rate, considering that demand for a currency is equal to supply for a currency under a floating exchange rate system - this result can be proved with simple algebra:


Demand for a Currency = Supply For A Currency


Exports + Income and Current Transfer Credits + Capital Inflow = Imports + Income and Current Transfer Debits + Capital Outflow


ie. X + IT Credits + Ki = M + IT Debits + Ko

 (X - M) + (IT Credits - IT Debits) = Ko - Ki 

Alternatively,


A deficit on the current account = A surplus in the capital account


Or in the other case,


A surplus on the current account = A deficit on the capital Account


This sum is known as the balance of payments. Typically, the changes in official reserves is very small. The balance of payments is a measure of the payments that flow from one exports and imports of goods, services, and financial capital, as well financial transfers. ...


Action to reduce a substantial current account deficit usually involves increasing exports or decreasing imports. This may be accomplished directly through import restrictions, quotas, or duties (though these may indirectly limit exports as well), or subsidizing exports. Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly affect the balance of payments. This can be accomplished by increasing domestic inflation (e.g. by cutting interest rates), loosening monetary policy (making more money available), or adjusting government spending to favor domestic suppliers.


Less obvious but more effective methods to reduce a current account deficit include measures that increase domestic savings (or reduced domestic borrowing), including a reduction in borrowing by the national government.


It should be noted that a current account deficit is not always a problem. The "Pitchford Thesis" states that a current account deficit does not matter if it is driven by the private sector. Some feel that this theory has held true for the Australian economy, which has had a persistent current account deficit, yet has experienced economic growth for the past 14 years (1991-2005). Others argue that Australia is accumulating a substantial foreign debt that could become problematic, especially if interest rates increase. Throughout this article, the unqualified term dollar and the $ symbol refer to the Australian dollar. ...


Interrelationships in the balance of payments

Absent changes in official reserves, the current account is the mirror image of the sum of the capital and financial accounts. One might then ask: Is the current account driven by the capital and financial accounts or is it vice versa? The traditional response is that the current account is the main causal factor, with capital and financial accounts simply reflecting financing of a deficit or investment of funds arising as a result of a surplus. However, more recently some observers have suggested that the opposite causal relationship may be important in some cases. In particular, it has controversially been suggested that the United States current account deficit is driven by the desire of international investors to acquire U.S. assets (See Ben Bernanke, William Poole links below). However, the main viewpoint undoubtedly remains that the driving factor is the current account and that the positive financial account mainly reflects the need to finance the U.S. current account deficit. Ben Shalom Bernanke (born December 13, 1953) (pronounced ber-NAN-kee, bər-nan-kē or ), is an American macroeconomist who is the current Chairman of the Board of Governors of the United States Federal Reserve (the Fed). He was previously Chairman of the U.S. Presidents Council of... Brooklyn Eagle, March 10, 1855 (partial) Brooklyn Eagle, March 20, 1855 William Poole, aka Bill The Butcher (July 1821 - March 8, 1855), was a member of the Bowery Boys street gang and the U.S. political party the Know-Nothings. ...


See also


  Results from FactBites:
 
Current account - Wikipedia, the free encyclopedia (573 words)
The current account of the balance of payments is the sum of the balance of trade (exports less imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).
Absent changes in official reserves, the current account is the mirror image of the sum of the capital and financial accounts.
The traditional response is that the current account is the main causal factor, with capital and financial accounts simply reflecting financing of a deficit or investment of funds arising as a result of a surplus.
  More results at FactBites »

 
 

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