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. 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. Trade Surplus

    A trade surplus is an economic measure of a positive balance ...
  4. Account Balance

    An account balance is the amount of money in a financial repository, ...
  5. Net Importer

    A net importer is a country or territory whose value of imported ...
  6. Fiscal Deficit

    When a government's total yearly expenditure exceeds its yearly ...
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

    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. ...
  6. Insights

    An Analysis Of The US Trade Deficit

    The United States' trade deficit is historically large, the biggest in the world. With luck, it'll get even larger.
  7. Personal Finance

    Debt Versus Deficit: Understanding the Differences

    Gain an understanding how deficit differs from debt, and how they are related.
  8. Trading

    6 factors that influence exchange rates

    Here, you'll get in-depth look at out how a currency's relative value reflects a country's economic health and impacts your investment returns.
  9. Trading

    3 Reasons Why Countries Devalue Their Currency

    Ever since world currencies abandoned the gold standard, many currency devaluation events have sent disruptive ripples across the globe.
RELATED FAQS
  1. What's the difference between the current account and the capital account?

    Both accounts relate to the balance of payments of a nation: One considers goods and services currently produced, the other ... 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. Which factors can influence a country's balance of trade?

    Find out about the factors that affect a country's overall balance of trade and how it is used as an economic indicator. Read Answer >>
  4. Understanding the Effects of Fiscal Deficits on an Economy

    Understand what fiscal deficits are and understand the real impact of budget deficits on the economy. Learn why government ... Read Answer >>
  5. How does the balance of payments impact currency exchange rates?

    Take a brief look at the relationship between a nation's balance of payments and the exchange rate value of its currency ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center