Components of the Current Account

The balance of payments

The balance of payments

• The Balance of Payments (BoP) for a country is a record of all the financial transactions that occur between it and the rest of the world

• The BoP has two main sections:

  • The Current Account: all transactions related to goods/services along with payments related to the transfer of income

  • The Financial and Capital Account: which is not part of your syllabus

The Current Account of the Balance of Payments

The Current Account of the balance of payments

• The Current Account is often considered to be the most important account in the BoP

  • It records the net income that an economy gains from international transactions

• Money flowing into the country is recorded in the relevant account as a credit (+) and money flowing out as a debit (-)

  • A current account surplus occurs when the credits (money in) are higher than the debits (money out)

  • A current account deficit occurs when the credits (money in) are less than the debits (money out)

Components of the current account

• The current account is made up of four main components:

1. Trade in goods (visible trade)

• This includes exports and imports of physical goods, such as machinery, food, raw materials and manufactured products

• Exports bring money into the country (credit)

• Imports involve spending on foreign goods (debit)

• This is also called visible trade

2. Trade in services (Invisible Trade)

• Includes banking, tourism, education, insurance, transport and digital services

• Services are called invisible because they are not physical products

• Like goods, exports of services are credits (money in), and imports are debits (money out)

3. Primary income

• This refers to income earned from investments and employment abroad

• Credits come from UK citizens or firms earning income from overseas (e.g., interest, profits, wages, dividends)

• Debits are payments sent abroad from the UK (e.g., profits made by foreign companies in the UK)

• This is often called net primary income (credits – debits)

4. Secondary income (Current transfers)

• These are transfers of money where nothing is received in return

• Includes foreign aid, remittances, EU contributions (or similar) and payments to international organisations

• Credits are transfers received by the UK

• Debits are transfers the UK makes to other countries

• Also known as net secondary income

The UK current account balance for 2017

• The overall current account is calculated as:

Net trade in goods + net trade in services + net primary income + net secondary income