Loading the player...

What is the 'Current Account'

The current account records a nation's transactions with the rest of the world – specifically its net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments – over a defined period of time, such as a year or a quarter.

BREAKING DOWN 'Current Account'

The current account is one half of the balance of payments, the other half being the capital or financial account. While the capital account measures cross-border investments in financial instruments and changes in central bank reserves, the current account measures imports and exports of goods and services; payments to foreign holders of a country's investments and payments received from investments abroad; and transfers such as foreign aid and remittances

A country's current account balance may be positive (a surplus) or negative (a deficit); in either case the capital account balance will register an equal and opposite amount. Exports are recorded as credits in the balance of payments, while imports are recorded as debits. Each credit in the current account (such as an export) will be recorded as a corresponding debit in the capital account: the country "imports" the money that a foreign buyer pays for the export.

A positive current account balance indicates that the nation is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower. A current account surplus increases a nation's net foreign assets by the amount of the surplus, while a current account deficit decreases it by the amount of the deficit. (See also, Exploring the Current Account in the Balance of Payments.)

Factors Affecting the Current Account

Since the trade balance (exports minus imports) is generally the biggest determinant of the current account surplus or deficit, the current account balance often displays a cyclical trend. 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 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. The currencies of such nations often come under speculative attack during such times. This creates a vicious circle in which foreign exchange reserves are depleted to support the domestic currency, and this forex reserve depletion – combined with a deteriorating trade balance – puts further pressure on the currency. Embattled nations are often forced to take stringent measures to support the currency, such as raising interest rates and curbing currency outflows.

  1. Current Account Surplus

    A current account surplus is a positive current account balance, ...
  2. Trade Deficit

    A trade deficit occurs a country's imports exceeds its exports. ...
  3. Balance of Payments (BOP)

    The balance of payments is a statement of all transactions made ...
  4. Official Settlement Account

    An official settlement account is an account used to keep track ...
  5. Balance Of Trade - BOT

    The balance of trade is the difference between a country's import ...
  6. Trade Surplus

    An economic measure of a positive balance of trade, where a country's ...
Related Articles
  1. Investing

    What's the Balance of Trade?

    The balance of trade is the difference between the value of all the goods and services a country exports and the goods and services it imports.
  2. Insights

    The Pros & Cons of a Trade Deficit

    Is a trade deficit, also known as a current account deficit, beneficial or detrimental to a country's economy?
  3. Insights

    The Balance Of Trade

    The balance of trade is the difference between a country’s imports and exports. A trade deficit occurs when a country buys or imports more goods from other countries than it sells or exports. ...
  4. Trading

    6 Factors That Influence Exchange Rates

    An in depth look at out how a currency's relative value reflects a country's economic health and impacts your investment returns.
  5. Insights

    In Praise Of Trade Deficits

    When a country imports more than it exports, is it a recipe for disaster or just part of a larger cycle?
  6. Insights

    Can The U.S Close Its Trade Deficit?

    The stronger dollar could have increased the U.S. trade deficit. Instead, economic growth issues abroad and falling oil prices have helped shrink it.
  7. Insights

    How Much Does The U.S. Import From India?

    What is the value and composition of the U.S. trade deficit with its ninth largest trading partner?
  8. Investing

    Why Money Flow From Japan Matters to the U.S. Equity Market

    Discover why Japanese savers and investors may have a lot to say about the future of the U.S. equity market, and why the trade deficit is responsible.
  9. Investing

    OPEC Reports First Budget Deficit in 18 years

    OPEC budget swings to $99.6 billion deficit in 2015 from $238.1 billion surplus as oil plunges
  1. At what level is the current account deficit considered excessive, in terms of percent?

    Take a deeper look at the variables that impact current account deficits, and learn why not all types of deficits have equal ... Read Answer >>
  2. What is the difference between a current account deficit and a trade deficit?

    Learn the meanings of the macroeconomic terms "current account deficit" and "trade deficit," and understand the differences ... Read Answer >>
  3. What is the difference between the current account and the capital account?

    Learn how to differentiate between the capital account and the current account, the two components of the balance of payments ... Read Answer >>
  4. How does comparative advantage influence the balance of payments?

    Learn how comparative advantage affects a country's balance of exports and imports, which in turn influences the overall ... Read Answer >>
  5. What transactions are included in a country's balance of payments?

    Learn about the many types of transactions that are recorded in a country's balance of payments, including the current, capital ... Read Answer >>
  6. What is the difference between a nation's current account deficit and its currency ...

    Learn the respective meanings of the two terms, current account deficit and currency valuation, and understand the relationship ... Read Answer >>
Hot Definitions
  1. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  2. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  5. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center