Components of the Current Account (Cambridge International IGCSE Economics)

The balance of payments

Spec point — The balance of payments

• 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

The Current Account of the Balance of Payments

Spec point — "– trade in goods – trade in services – primary income – secondary income"

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

• 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)

Components of the current account

• The current account is made up of four main components:

1. Trade in goods (visible trade)

• This includes exports and imports of physical goods, such as machinery, food, raw materials and manufactured products
• Exports bring money into the country (credit)
• Imports involve spending on foreign goods (debit)
• This is also called visible trade

2. Trade in services (Invisible Trade)

• Includes banking, tourism, education, insurance, transport and digital services
• Services are called invisible because they are not physical products
• Like goods, exports of services are credits (money in), and imports are debits (money out)

3. Primary income

• This refers to income earned from investments and employment abroad
• Credits come from UK citizens or firms earning income from overseas (e.g., interest, profits, wages, dividends)
• Debits are payments sent abroad from the UK (e.g., profits made by foreign companies in the UK)
• This is often called net primary income (credits – debits)

4. Secondary income (Current transfers)

• These are transfers of money where nothing is received in return
• Includes foreign aid, remittances, EU contributions (or similar) and payments to international organisations
• Credits are transfers received by the UK
• Debits are transfers the UK makes to other countries
• Also known as net secondary income

The UK current account balance for 2017

• The overall current account is calculated as:

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.

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

$\mathrm{Net} \mathrm{trade} \mathrm{in} \mathrm{goods}=(100-40)=60\,\mathrm{Net} \mathrm{trade} \mathrm{in} \mathrm{services}=(75-45)=30\,\mathrm{Net} \mathrm{income} \mathrm{transfers}=150\,\mathrm{Net} \mathrm{current} \mathrm{transfers}=-50$

Step 3: Complete the calculation

$=60+30+150-50\,\,=190$

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

$= € 190 , 000 \mathrm{m}$