Business, Legal & Accounting Glossary
Current account and capital account together form primary components of the balance of payments. These balances are obtained as a sum total of the balance of trade, net factor income, and net transfer payments.
When calculating current account, government, as well as private payments, are taken into account. Current account, along with net capital outflow, is used to analyze the nature of a nation’s foreign trade. A surplus amount in a country’s current account results in a corresponding rise in its net foreign assets. A current account deficit leads to the opposite scenario.
Current account = Balance of trade + net factor income + net transfer payments
Balance of payments refers to payments made between an individual country and several other countries. Balance of payments takes into account factors like financial capital, export and import of goods and services, and financial transfers.
Balance of trade, also called net exports, is the difference between the value of a nation’s exports and imports, calculated over a specified period of time. Balance of trade is the most important factor used for calculating the balance of payments.
A current account deficit is an indication that imports of goods and services in a country are greater in value than exports. This that a country is importing more goods and services than it is exporting. Such deficits need to be balanced by a surplus financial or capital account.
The current account deficit of the US has touched $800 billion, nearly 7% of US GDP. Some methods being considered to reduce current account deficit include reductions in US budget deficit, domestic demand expansion and exchange rate realignment.
Recent current account deficit experienced by the US has been a cause for concern for the global economy.
While the common belief is that the US account deficit is a problem, others view it as actually a good thing. The reason is that the US is benefiting from this deficit. It is consuming more than it produces. Its people are enjoying a better lifestyle as a result.
Countries that are large exporters to the US, like China, value the US dollar more than they value the goods they are selling the US. And when the US buys so much from them and creates this deficit, where does the money go? Much of it goes back into the US, in the form of Treasury Bills, owned by China.
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This glossary post was last updated: 26th March, 2020 | 6 Views.