Current account (balance of payments)
Current account measures the nation's earnings and spendings abroad and it consists of the balance of trade, net primary income or factor income (earnings on foreign investments minus payments made to foreign investors) and net unilateral transfers, that have taken place over a given period of time.
The current account balance is one of two major measures of a country's foreign trade (the other being the net capital outflow).
During a strong economic expansion, import volumes typically surge; if exports are unable to grow at the same rate, the current account deficit will widen.
Conversely, during a recession, the current account deficit will shrink if imports decline and exports increase to stronger economies.
The currency exchange rate exerts a significant influence on the trade balance, and by extension, on the current account.
An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit (or narrowing the surplus).
An undervalued currency, on the other hand, boosts exports and makes imports more expensive, thus increasing the current account surplus (or narrowing the deficit).
Nations with chronic current account deficits often come under increased investor scrutiny during periods of heightened uncertainty.
Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly increase the balance of payments.
The Pitchford thesis states that a current account deficit does not matter if it is driven by the private sector.
It is also known as the "consenting adults" view of the current account, as it holds that deficits are not a problem if they result from private sector agents engaging in mutually beneficial trade.
And in the financial account, assets pertaining to international monetary flows of, for example, business or portfolio investments are noted.
In particular, it has controversially been suggested that the United States current account deficit is driven by the desire of international investors to acquire US assets (see Ben Bernanke,[6] William Poole links below).
[7] The existing differences between the current accounts in the eurozone is considered to be the root cause of the Euro crisis by many Keynesian economists, such as Yanis Varoufakis, Heiner Flassbeck,[8] Paul Krugman[9] and Joseph Stiglitz.
[14] The Organisation for Economic Co-operation and Development, OECD – an international economic organisation of 34 countries, founded in 1961 to "promote policies that will improve the economic and social well-being of people around the world"[15] – produces quarterly reports on its 34 member nations comparing statistics on balance of payments and international trade in terms of current account balance in billions of US dollars and as a percentage of GDP.
[16] The World Factbook,[17] a reference resource produced by the Central Intelligence Agency that collects data and publishes online open reports comparing the current account balance of countries.
"[18] The top ten on their list of countries by current account balance in 2014 were: On the same list the bottom ten countries by current account balance in 2014 were In a 2012 article published by the International Monetary Fund (IMF)[2] the authors argue that a current account deficit with higher investments and lower savings may indicate that the economy of a country is highly productive and growing.
Low savings and high investment can also be caused by a "reckless fiscal policy or a consumption binge.
Very poor countries typically run large current account deficits, in proportion to their gross domestic product (GDP), that are financed by official grants and loans.
