Current account
From Wikipedia, the free encyclopedia
- This article is about the macroeconomic current account. For the day to day bank account, see current account (banking).
The current account of the balance of payments is the sum of the balance of trade (exports less imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation.
The balance of trade is typically the most important part of the current account. This means that changes in the patterns of trade are key drivers of the current account. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant.
The current account, capital account, financial account and change in official reserves together sum to zero as a result of accounting definitions.(dubious; discuss) This sum is known as the balance of payments. Typically, the change in official reserves is very small.
Action to reduce a substantial current account deficit usually involves increasing exports or decreasing imports. This may be accomplished directly through import restrictions, quotas, or duties (though these may indirectly limit exports as well), or subsidizing exports. Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly affect the balance of payments. This can be accomplished by reducing domestic inflation (e.g. by cutting interest rates), loosening monetary policy (making more money available), or adjusting government spending to favor domestic suppliers.
Less obvious but more effective methods to reduce a current account deficit include measures that increase domestic savings (or reduced domestic borrowing), including a reduction in borrowing by the national government.
It should be noted that a current account deficit is not always a problem. The "Pitchford Thesis" states that a current account deficit does not matter if it is driven by the private sector. Some feel that this theory has held true for the Australian economy, which has had a persistent current account deficit, yet has experienced economic growth for the past 14 years (1991-2005). Others argue that Australia is accumulating a substantial foreign debt that could become problematic, especially if interest rates increase.
[edit] Interrelationships in the balance of payments
Absent changes in official reserves, the current account is the mirror image of the sum of the capital and financial accounts.
One might then ask: Is the current account driven by the capital and financial accounts or is it vice versa? The traditional response is that the current account is the main causal factor, with capital and financial accounts simply reflecting financing of a deficit or investment of funds arising as a result of a surplus. However, more recently some observers have suggested that the opposite causal relationship may be important in some cases. In particular, it has controversially been suggested that the United States current account deficit is driven by the desire of international investors to acquire U.S. assets. However, the main viewpoint undoubtedly remains that the driving factor is the current account and that the positive financial account mainly reflects the need to finance the U.S. current account deficit.
