current account balance of payments

formula for current account

= balance of trade + primary income + secondary income

what is balance of trade

visible balance - invisible balance

what comes under visible balance

inflow and outflow of goods

what comes under invisible balance

inflow and outflow of services like banking, insurance

what is primary income and what comes under it

a record of a country’s net income earned from investments abroad

eg: inflow: dividends paid to residents from foreign investments, interest paid on bonds and wages paid to workers working temporarily abroad

what is secondary income and what comes under it

a net transfer of financial grants, gifts or subsidies between residents and non-residents at a time period.

donations

foreign aid

subsidies for overseas firms

define current account deficit

occurs when a country spends more than it earns basically when imports exceed exports

causes of a current account deficit

inflation

high currency/exchange rate (less competitive exports)

decreased competitiveness of export industries

economic growth (consumer income)

recession in other countries

consequences of a current account deficit

unemployment in domestic industries

lower standard of living in the long run

low growth due to decrease in AG demand

capital outflow

lower exchange rate

how to correct current account deficit

leave it to floating exchange rate

contractionary fiscal policy (purchasing power)

contractionary monetary policy (FDI)

protectionist measures

define current account surplus

when a country earns more money that in spends basically more exports than imports

causes of current account surplus

improved competitiveness of domestic industries

currency depreciation (more compettive)

high FDI (more exports)

growth in other countries

consequences of current account surplus

employment

better standards of living

increased exchange rate

economic growth

demand pull inflation from exports