Components of the Current Account (Cambridge International IGCSE Economics)

The Current Account

Spec point — 6.4.1 · The components of the current account of the balance of payments – trade in goods, trade in services, primary income and secondary income.

• The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world

• The BoP has two main sections:

  • The current account: all transactions related to goods/services along with payments related to the transfer of income
  • The financial and capital account: which is not part of your syllabus

• Money flowing into the country is recorded in the relevant account as a credit (+) and money flowing out as a debit (-)

• A current account surplus occurs when the credits (money in) are higher than the debits (money out)

• A current account deficit occurs when the credits (money in) are less than the debits (money out)

The current account of the balance of payments

• The Current Account is often considered to be the most important account in the BoP

  • It records the net income that an economy gains from international transactions

An Example of the UK Current Account Balance for 2017

• Goods are also referred to as visible exports/imports

• Services are also referred to as invisible exports/imports

• Net income consists of income transfers by citizens and corporations

  • Credits are received from UK citizens who are abroad and send remittances home
  • Debits are sent by foreigners working in the UK back to their countries
  • (Income credits - Income debits) are often referred to as net primary income

• Current transfers are typically payments at government level between countries e.g. contributions to the World Bank

  • (Transfer credits - transfer debits) are often referred to as net secondary income

• The current account balance = net trade in goods + net trade in services + net primary income + net secondary income

Worked Example Current Account Calculations

The table shows a selection of economic data for a country

Data	Value in Euros (€,000m)
Primary income (net income transfers)	150
Secondary income (net current transfers)	-50
Value of exported goods	100
Value of exported services	75
Value of imported goods	40
Value of imported services	45

Calculate the current account balance of this country?

Step 1: Recall the formula for calculating the current account balance

Net trade in goods + net trade in services + net income + net current transfers

Step 2: Substitute the appropriate values

Net trade in goods = (100-40) = 60

Net trade in services = (75-45) = 30

Net income transfers = 150

Net current transfers = -50

Step 3: Complete the calculation

60 + 30 + 150 -50 = 190

Step 4: Check the units and ensure your answer uses the correct units

€190,000m