Current Account Balance

Definition

The current account balance is a measure of the net flow of goods, services, and income between a country and the rest of the world. It represents the difference between a country's exports and imports, as well as net income from foreign investments and net transfer payments.

5 Must Know Facts For Your Next Test

1. The current account balance is a key indicator of a country's economic performance and its position in the global economy.
2. A current account surplus indicates that a country is a net lender to the rest of the world, while a current account deficit indicates that a country is a net borrower.
3. The current account balance is influenced by factors such as exchange rates, domestic and foreign economic conditions, and government policies.
4. The current account balance is closely related to a country's national saving and investment identity, as it reflects the difference between national saving and investment.
5. Persistent current account deficits can lead to concerns about a country's external debt and the sustainability of its economic growth.

Review Questions

• Explain how the current account balance is measured and what it represents.
  • The current account balance is measured as the difference between a country's exports and imports of goods and services, as well as net income from foreign investments and net transfer payments. It represents the net flow of economic resources between a country and the rest of the world, reflecting the country's position as either a net lender or a net borrower in the global economy.
• Describe the relationship between the current account balance and a country's national saving and investment identity.
  • The current account balance is closely linked to a country's national saving and investment identity, which states that the difference between national saving and investment is equal to the current account balance. A current account surplus indicates that a country's national saving exceeds its investment, while a current account deficit suggests that a country's investment exceeds its national saving. This relationship highlights the macroeconomic factors that influence a country's external position and the need to consider both domestic and international factors when analyzing economic performance.
• Analyze the potential implications of persistent current account deficits for a country's economic stability and growth.
  • Persistent current account deficits can raise concerns about a country's external debt and the sustainability of its economic growth. A current account deficit means that a country is a net borrower from the rest of the world, which can lead to an accumulation of foreign debt over time. This can make the country vulnerable to changes in global financial conditions and increase the risk of economic instability. Additionally, a current account deficit may indicate underlying structural issues, such as a lack of competitiveness, inefficient resource allocation, or imbalances between domestic saving and investment. Addressing these issues may require policy changes to improve the country's external position and promote long-term economic stability and growth.

Related terms

Trade Balance: The trade balance is the difference between a country's exports and imports of goods and services, excluding income and transfer payments.

Capital Account: The capital account records the net change in ownership of national assets, such as foreign direct investment, portfolio investment, and other capital flows.

Balance of Payments: The balance of payments is a record of all economic transactions between a country and the rest of the world, including the current account and the capital account.