[2.1.1d.] Economics - Balance of Payments Current Account

What is the balance of payments?

The balance of payments is a set of accounts that record a country's international monetary transactions.

What is the current account?

The value of exports - the value of imports.

What is visible trade?

Visible trade is the trade of tangible goods.

The export or import of tangible goods is referred to as visible exports or visible imports.

What is invisible trade?

Invisible trade is the trade of services.

The export or import of services is referred to as invisible exports or invisible imports.

What is a current account surplus?

A positive value of the current account. It tells us that value of exports > value of imports.

This means we are exporting more than we are importing.

What is a current account deficit?

A negative value of the current account. It tells us that value of imports > value of exports.

This means we are importing more than we are exporting.

What is the impact of an appreciating currency on balance of payments?

If a currency is appreciating, the country can import more from other countries as imports seem cheaper and its exports to other countries seem more expensive.

My balance of payments will worsen (go towards a deficit).

What is the impact of a depreciating currency on balance of payments?

If your currency is depreciating, imports will be more expensive to you as you will have to spend relatively more money, and your exports seem cheaper to other countries so they will buy more from you.

My balance of payments will improve (go towards a surplus).

How does a current account deficit suggest a leakage in the economy?

It suggests consumers are relying more on imported goods, meaning employment and output in the domestic economy are under threat as money flows outwards to overseas businesses.

How does a current account deficit affect inflation?

High current account deficit leads to inflation because as the price of imported goods rise, the general inflation level will rise as if we grow reliant on imported goods they would be counted in the CPI.

How does a current account deficit suggest a low demand for exports?

If demand for exports is low, quality of services could be poor or prices could be too high. If this cannot be reversed, then a country might suffer a progressive decline in economic growth and rise in unemployment.