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Current Account of the Balance of Payments » The Current Account

What you'll learn this session

Study time: 30 minutes

Cambridge spec: 6.4.1

What the current account of the balance of payments is
The four parts of the current account, with examples of each
How to calculate a surplus or deficit on each part and on the whole account

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What is the current account?

Every country trades with the rest of the world. It sells goods and services abroad, buys things from abroad, earns income from abroad and sends money abroad. The balance of payments is a record of all the money flowing in and out of a country in a year. The current account is the part of it that records the everyday flows of money: payments for goods and services, income, and transfers.

The rule is simple. Money coming in to the country is counted as a plus. Money going out is counted as a minus. Each part of the current account has its own balance, and the four balances are added together to give the current account balance.

Key terms:

Balance of payments: a record of all the transactions between a country and the rest of the world over a period of time.
Current account: the part of the balance of payments that records trade in goods, trade in services, primary income and secondary income.
Trade in goods: the money earned from exporting goods and the money spent on importing goods.
Trade in services: the money earned from exporting services and the money spent on importing services.
Primary income: income earned from abroad from wages, profits, interest and dividends, less the same kinds of income paid abroad.
Secondary income: transfers of money between countries where nothing is given in return.
Current account deficit: money flowing out is greater than money flowing in, so the balance is negative.
Current account surplus: money flowing in is greater than money flowing out, so the balance is positive.

The four parts of the current account

📦 Trade in goods

Goods are physical things you can touch. Exports of goods earn money for the country, for example coffee beans, cars or oil sold abroad. Imports of goods cost money, for example phones or machinery bought from abroad.

✈️ Trade in services

Services are things you cannot touch. Examples are tourism, banking, insurance, shipping and consulting. A tourist who stays in a hotel in the country is an export of services, because money comes in. A local firm that pays a foreign company for insurance is an import of services.

💼 Primary income

Income from owning things abroad or working abroad. Examples are wages earned by a citizen working abroad, profits and dividends from investments abroad, and interest on loans to foreign borrowers. Income paid to foreign workers and foreign owners of firms in the country is a minus.

🎁 Secondary income

One-way transfers, where nothing is given in return. Examples are foreign aid, gifts and donations to charities abroad, payments to international organisations, and remittances (money sent home by workers abroad).

Calculating a balance

To find the balance of any one part, take the money coming in and subtract the money going out.

Balance on trade in goods = exports of goods − imports of goods
Balance on trade in services = exports of services − imports of services
Balance on primary income = primary income received − primary income paid
Balance on secondary income = secondary income received − secondary income paid

A positive answer is a surplus on that part. A negative answer is a deficit. Then add the four balances together to find the current account balance:

Current account balance

Current account balance = balance on goods + balance on services + balance on primary income + balance on secondary income

If the total is positive the country has a current account surplus. If it is negative the country has a current account deficit.

Worked examples

Worked example 1: a deficit

The made-up country of Pantavia has these figures for one year, in $ million.

Part	Money in	Money out
Goods (exports and imports)	120	150
Services (exports and imports)	80	50
Primary income (received and paid)	40	55
Secondary income (received and paid)	10	25

Goods: 120 − 150 = −30. Services: 80 − 50 = +30. Primary income: 40 − 55 = −15. Secondary income: 10 − 25 = −15.

Current account balance = −30 + 30 − 15 − 15 = −$30 million, a deficit. Notice that the surplus on services cancels out the deficit on goods. The overall deficit comes from the two income parts.

Worked example 2: a surplus

The made-up country of Lorvia has these figures, in $ million. Exports of goods 200, imports of goods 170. Exports of services 40, imports of services 55. Primary income received 60, paid 25. Secondary income received 12, paid 20.

Goods: 200 − 170 = +30. Services: 40 − 55 = −15. Primary income: 60 − 25 = +35. Secondary income: 12 − 20 = −8.

Current account balance = 30 − 15 + 35 − 8 = +$42 million, a surplus. Lorvia has a deficit on two parts, but the surpluses on the other two are bigger.

Worked example 3: finding a missing figure

The made-up country of Dalquist has a current account deficit of $10 million. The balance on goods is +$25 million, on services +$5 million and on primary income −$22 million. What is the balance on secondary income?

Let the secondary income balance be x. Then 25 + 5 − 22 + x = −10. So 8 + x = −10, and x = −$18 million.

Paper 1 style question

A country's current account shows: goods −$40 million, services +$25 million, primary income +$10 million, secondary income −$5 million. What is the current account balance?

A +$10 million B −$10 million C −$20 million D +$20 million

Answer: B. −40 + 25 + 10 − 5 = −10.

Common mistakes

Thinking the current account only covers goods. It has four parts, and services, income and transfers count too.
Adding imports instead of subtracting them. Imports are money going out, so they are subtracted.
Mixing up primary and secondary income. Primary income is paid for work or for owning something, such as wages or dividends. Secondary income is a one-way gift or transfer, with nothing given in return.
Calling a negative figure a surplus. A negative balance is a deficit.
Thinking a deficit on one part means a deficit overall. The parts are added together, so a surplus on one part can cancel out a deficit on another.

Exam-style question

Tolbria is a made-up country. The table shows its current account for one year, in $ billion. All figures are made up.

Part	Money in	Money out
Goods (exports and imports)	90	105
Services (exports and imports)	35	20
Primary income (received and paid)	18	26
Secondary income (received and paid)	6	4

(a) State two components of the current account of the balance of payments. [2 marks]

(b) Calculate the balance on trade in goods. [2 marks]

(d) Analyse how a surplus on one part of the current account can be cancelled out by a deficit on another part. [4 marks]

Model answer

(a) Any two of: trade in goods (1), trade in services (1), primary income (1), secondary income (1).

(b) Exports of goods − imports of goods (1) = 90 − 105 = −$15 billion (1).

(c) Services: 35 − 20 = +15. Primary income: 18 − 26 = −8. Secondary income: 6 − 4 = +2 (1). Current account = −15 + 15 − 8 + 2 = −$6 billion (1). This is a deficit (1).

(d) The balance on each part is calculated separately (1). They are then added together to give the current account balance (1). In Tolbria, the surplus of +$15 billion on services (1) exactly cancels out the deficit of −$15 billion on goods, so the overall deficit comes from the other parts (1).

Exam tip

In calculation questions, write the balance of each part before you add them up. If you make a slip in the total, you can still earn the method marks.

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