Current Account of Balance of Payments
Big Idea: The current account tracks international trade in goods and services plus income transfers. Understanding why it goes into deficit or surplus—and what policies can fix it—is essential to international economics and exam success.
What You'll Learn
- The current account is part of the Balance of Payments—the record of ALL financial transactions between a country and the rest of the world
- It includes trade in goods (exports/imports), services, income transfers, and government transfers
- A current account surplus happens when exports exceed imports; a deficit is the opposite
- Deficits and surpluses have serious consequences: unemployment, economic growth, inflation, living standards
- Governments can use four strategies to stabilise deficits: do nothing, expenditure switching, expenditure reducing, or supply-side policies
- Each policy has trade-offs: short-term vs long-term, effective vs unpopular, etc.
The Current Account: What It Is & What It Includes
The Balance of Payments: The Big Picture
Every time money moves between a country and the rest of the world, it gets recorded. This complete record is called the Balance of Payments (BoP).
The BoP has two main sections:
- Current Account: All transactions involving goods, services, and income transfers
- Financial and Capital Account: Investment flows and loans (not part of your IGCSE syllabus)
Remember: Money flowing in to the country = Credit (+). Money flowing out = Debit (−).
The Four Components of the Current Account
Think of the current account as having four buckets of money flowing in and out:
1. Net Trade in Goods (Visible Exports/Imports)
These are physical, tangible products you can see and touch: cars, food, clothes, machinery, etc.
Calculation: Value of exported goods − Value of imported goods
If a country exports £100m worth of cars but imports £150m worth of oil, the net trade in goods is −£50m (a deficit in this category).
2. Net Trade in Services (Invisible Exports/Imports)
These are intangible—banking, insurance, tourism, education, consulting, software licenses, etc. The UK is famous for this (London's financial services).
Calculation: Value of exported services − Value of imported services
3. Net Primary Income (Income Transfers)
Money that flows between people and companies across borders. When a UK citizen works abroad and sends money home, that's a credit. When a foreign worker in the UK sends earnings back home, that's a debit.
Includes interest, profits, and dividends earned on investments abroad.
4. Net Secondary Income (Current Transfers)
Government-to-government transfers: contributions to the World Bank, aid to developing countries, EU membership contributions. These are not payments for goods or services—they're transfers with no return.
The Core Formula
Current Account = Net goods + Net services + Net primary income + Net secondary income
A Real-World Example: The UK in 2017
Worked Example
| Component | Value (£m) |
|---|---|
| Net trade in goods (exports − imports) | −£32.9bn |
| Net trade in services | +£27.9bn |
| Sub-total (goods + services) | −£5bn |
| Net primary income | −£2.1bn |