IGCSE Economics - The Current Account

The Balance of Payments (BoP)

The record of all the financial transactions that occur between it and the rest of the world (mainly focusing on the financial transactions related to exports and imports of goods and services

Goods

referred to as visible exports/imports

Services

invisible exports/imports

Net income

income transfers by citizens and corporations

(example: creds are received from UK citizens who are abroad and send remittances home, debts are sent by foreigners working in the UK back to their countries)

Current transfers

Government level between countries e,g. contributions to the worldbank

A current account deficit

value of the inflows is greater than the values of the outflows, imports > exports, leakage of money from the economy

A current account surplus

value of inflows is greater than the value of the outflows, imports <exports, injection of money into the economy

if a country is running a deficit

export-led economic growth would help it become positive.

However, with increasing income and wealth in an economy, the value of imports rises (consumers enjoy the variety of goods/services abroad, rising imports push the balance towards a deficit)

Reasons for current account deficits

quality and price competitiveness of domestic and foreign goods, as well as exchange rates between countries

Quality of domestic goods

When a country develops a reputation for poor quality and design, exports fall as foreign buyers look for better substitutes elsewhere

Domestic buyers are able to shop abroad also choose to buy better quality products elsewhere, and the level of imports rises, leading to a current account deficit)

Quality of foreign goods

If foreign goods are higher quality compared to domestic goods, consumers may favour foreign-produced goods, leading to a current account deficit

Price of domestic goods

Exporting firms may find themselves at a price and cost disadvantage in overseas markets, which will decrease competitiveness and the level of exports

Price of foreign goods

If foreign goods are competitively priced relative to domestic goods, imports will increase —> current account deficit

(The United States’ trade deficit has been influenced by competitively priced consumer goods from countries like China)

Exchange rates

Any appreciation of a country’s currency makes its exports more expensive relative to other nations and imports cheaper

Domestic consumers may switch demand to foreign goods as imports rise, the balance on current account worsens

Reasons for Current Account Surpluses

Strong exports, competitive pricing and weaker currency which increases demand for exports

Quality of domestic goods

when a country develops a reputation for excellent quality and design, its exports rises as foreign buyers increase demand

Quality of foreign goods

if foreign goods are lower quality than domestic goods, consumers may favour domestically produced good, resulting in fewer imports leading to a current account surplus

Price of domestic goods

If domestic goods are competitively priced relative to foreign goods, it can stimulate exports and lead to a current account surplus

Price of foreign goods

Any fall in the value of currency (depreciation) makes exports attractive to foreign buyers