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.

RELATED TERMS
  1. Balance of Payments (BOP)

    The balance of payments is a statement of all transactions made ...
  2. Balance Of Trade - BOT

    The balance of trade is the difference between a country's import ...
  3. Official Settlement Account

    An official settlement account is an account used to keep track ...
  4. Trade Surplus

    An economic measure of a positive balance of trade, where a country's ...
  5. Capital Account

    A national account that shows the net change in asset ownership ...
  6. Net Importer

    A net importer is a country or territory whose value of imported ...
Related Articles
  1. Insights

    Exploring the Current Account in the Balance of Payments

    Learn how a country's current account balance reflects the country's economic health.
  2. Personal Finance

    Current Account Deficits: Government Investment or Irresponsibility?

    Deficit can be a sign of trouble for some countries, and of health for others. Find out what it means when more funds are exiting than entering a nation.
  3. 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.
  4. 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?
  5. Insights

    What Is The Balance Of Payments?

    Learn about the balance of payments, and how it helps countries to track how much money is coming in and how much money is going out.
  6. Personal Finance

    Debt versus deficit: Understanding the differences

    An educational article explaining in detail how deficit differs from debt and how they are related.
  7. Trading

    Main Factors that Influence Exchange Rates

    The exchange rate is one of the most important determinants of a country's relative level of economic health and can impact your returns.
  8. 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.
  9. 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?
RELATED FAQS
  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's the difference between the current account and the capital account?

    The current account considers goods and services currently being produced. The capital account is concerned with payments ... Read Answer >>
  3. 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 >>
  4. What is a trade deficit and what effect will it have on the stock market?

    Learn what is a trade deficit is, also known as net exports, and what effect they have on the stock market. Read Answer >>
  5. 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 >>
  6. Is a deficit in the balance of payments a bad thing?

    Discover how it might be possible to run a balance of payments deficit, what that means in terms of international trade and ... Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center