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. According to Trading Economics, the quarter two 2019 current account of the United States was $-128.2 billion.
- The current account represents a country's imports and exports of goods and services, payments made to foreign investors, and transfers such as foreign aid.
- The current account may be positive (a surplus) or negative (a deficit); positive means the country is a net exporter and negative means it is a net importer of goods and services.
- A country's current account balance, whether positive or negative, will be equal but opposite to its capital account balance.
- The United States has a significant deficit in its current account.
Understanding the 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, 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 country's 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. In keeping with double-entry bookkeeping, any credit in the current account (such as an export) will have a corresponding debit recorded in the capital account. Essentially, the country "imports" the money that a foreign buyer pays for the export. The item received by the nation is recorded as a debit while the item given up in the transaction is recorded as a credit.
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.
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 foreign exchange 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.