Exploring The Current Account In The Balance Of Payments

The balance of payments (BOP) is the place where countries record their monetary transactions with the rest of the world. Transactions are either marked as a credit or a debit. Within the BOP there are three separate categories under which different transactions are categorized:

• the current account, 
• the capital account and 
• the financial account. 

In the current account, goods, services, income and current transfers are recorded.

In the capital account, physical assets such as a building or a factory are recorded.

And in the financial account, assets pertaining to international monetary flows of, for example, business or portfolio investments, are noted.

In this article, we will focus on analyzing the current account and how it reflects an economy's overall position.


The Current Account

The balance of the current account tells us if a country has a deficit or a surplus.

If there is a deficit, does that mean the economy is weak?

Does a surplus automatically mean that the economy is strong? Not necessarily.

But to understand the significance of this part of the BOP, we should start by looking at the components of the current account:

• goods, 
• services, 
• income and 
• current transfers.

1. Goods - These are movable and physical in nature, and in order for a transaction to be recorded under "goods", a change of ownership from/to a resident (of the local country) to/from a non-resident (in a foreign country) has to take place. Movable goods include general merchandise, goods used for processing other goods, and non-monetary gold. An export is marked as a credit (money coming in) and an import is noted as a debit (money going out).

2. Services - These transactions result from an intangible action such as transportation, business services, tourism, royalties or licensing. If money is being paid for a service it is recorded like an import (a debit), and if money is received it is recorded like an export (credit).

3. Income - Income is money going in (credit) or out (debit) of a country from salaries, portfolio investments (in the form of dividends, for example), direct investments or any other type of investment. Together, goods, services and income provide an economy with fuel to function. This means that items under these categories are actual resources that are transferred to and from a country for economic production.

4. Current Transfers - Current transfers are unilateral transfers with nothing received in return. These include workers' remittances, donations, aids and grants, official assistance and pensions. Due to their nature, current transfers are not considered real resources that affect economic production.

Now that we have covered the four basic components, we need to look at the mathematical equation that allows us to determine whether the current account is in deficit or surplus (whether it has more credit or debit). This will help us understand where any discrepancies may stem from, and how resources may be restructured in order to allow for a better functioning economy.


The following variables go into the calculation of the current account balance (CAB):
X = Exports of goods and services
M = Imports of goods and services
NY = Net income abroad
NCT = Net current transfers

The formula is:
CAB = X - M + NY + NCT


What Does It Tell Us?

Theoretically, the balance should be zero, but in the real world this is improbable, so if the current account has a surplus or a deficit, this tells us something about the government and state of the economy in question, both on its own and in comparison to other world markets.

A surplus is indicative of an economy that is a net creditor to the rest of the world. It shows how much a country is saving as opposed to investing. What this means is that the country is providing an abundance of resources to other economies, and is owed money in return. By providing these resources abroad, a country with a CAB surplus gives other economies the chance to increase their productivity while running a deficit. This is referred to as financing a deficit.

A deficit reflects government and an economy that is a net debtor to the rest of the world. It is investing more than it is saving and is using resources from other economies to meet its domestic consumption and investment requirements. For example, let us say an economy decides that it needs to invest for the future (to receive investment income in the long run), so instead of saving, it sends the money abroad into an investment project. This would be marked as a debit in the financial account of the balance of payments at that period of time, but when future returns are made, they would be entered as investment income (a credit) in the current account under the income section.

A current account deficit is usually accompanied by depletion in foreign-exchange assets because those reserves would be used for investment abroad. The deficit could also signify increased foreign investment in the local market, in which case the local economy is liable to pay the foreign economy investment income in the future.

It is important to understand from where a deficit or a surplus is stemming because sometimes looking at the current account as a whole could be misleading.


Analyzing the Current Account

Exports imply demand for a local product while imports point to a need for supplies to meet local production requirements. An export is a credit to a local economy while an import is a debit, an import means that the local economy is liable to pay a foreign economy. Therefore a deficit between exports and imports (goods and services combined) - otherwise known as a balance of trade deficit (more imports than exports) - could mean that the country is importing more in order to increase its productivity and eventually churn out more exports. This in turn could ultimately finance and alleviate the deficit.

A deficit could also stem from a rise in investments from abroad and increased obligations by the local economy to pay investment income (a debit under income in the current account). Investments from abroad usually have a positive effect on the local economy because, if used wisely, they provide for increased market value and production for that economy in the future. This can allow the local economy eventually to increase exports and, again, reverse its deficit.

So, a deficit is not necessarily a bad thing for an economy, especially for an economy in the developing stages or under reform: an economy sometimes has to spend money to make money. To run a deficit intentionally, however, an economy must be prepared to finance this deficit through a combination of means that will help reduce external liabilities and increase credits from abroad. For example, a current account deficit that is financed by short-term portfolio investment or borrowing is likely more risky. This is because a sudden failure in an emerging capital market or an unexpected suspension of foreign government assistance, perhaps due to political tensions, will result in an immediate cessation of credit in the current account.

The Bottom Line

The volume of a country's current account is a good sign of economic activity. By scrutinizing the four components of it, we can get a clear picture of the extent of activity of a country's industries, capital market, services and the money entering the country from other governments or through remittances. However, depending on the nation's stage of economic growth, its goals, and of course the implementation of its economic program, the state of the current account is relative to the characteristics of the country in question. But when analyzing a current account deficit or surplus, it is vital to know what is fueling the extra credit or debit and what is being done to counter the effects (a surplus financed by a donation may not be the most prudent way to run an economy). On a separate note, the current account also highlights what is traded with other countries, and it is a good reflection of each nation's comparative advantage in the global economy.


By Reem Heakal

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Economic Factors - International Economic Factors

A significant issue when dealing with international companies is that transactions occur in more than one currency. A company that collects revenues in a foreign currency will be either long or short in that currency, depending on whether they receive more revenue than they pay out in expenses (long) or less revenue than they pay out (short). 

Currency Exchange RatesChanges in currency exchange rates can have a huge impact on both business profits and on securities prices. These rates are expressed as the ratio of the price of one currency against the price of the other.

When the U.S. dollar weakens against another currency, that currency is worth more dollars. In this case, foreign investment in the U.S. dollar will decline. Imports will also decline as they will be more expensive to U.S. businesses and consumers. On the other hand, a weaker dollar makes importing U.S. goods more attractive to foreign countries. Therefore, exports will increase. 

When the U.S. dollar strengthens against another currency, the dollar will buy more of that currency. Foreign investment will increase as foreign investors will be attracted to a strong U.S. dollar. U.S. imports will increase as it is cheaper for U.S. businesses and consumers to purchase foreign goods. Finally, U.S. exports will decrease as U.S. goods will be expensive for consumers in many foreign countries.

Balance of TradeThis is the largest component of a country's balance of payments. (The balance of payments is a record of all transactions made by one particular country during a certain period of time. It compares the amount of economic activity between a country and all other countries.)

Balance of trade is the difference between exports and imports. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy.

A country has a trade deficit if it imports more than it exports, and a trade surplus if it exports more than it imports.

The balance of trade is one of the most misunderstood indicators of the U.S. economy. For example, many people believe that a trade deficit is a bad thing. However, whether a trade deficit is bad thing or not is relative to the business cycle and economy. In a recession, countries like to export more, creating jobs and demand. In a strong expansion, countries like to import more, providing price competition, which limits inflation and, without increasing prices, provides goods beyond the economy's ability to meet supply. Thus, a trade deficit is not a good thing during a recession but may help during an expansion.

Find out what it means when more funds are exiting than entering a nation in the article Current Account Deficits.

Read more: http://www.investopedia.com/exam-guide/finra-series-6/economic-factors/international-economic-indicators.asp#ixzz1yhSg2SwE

Current Account Deficits: Government Investment Or Irresponsibility?

 

Current Account Deficits: Government Investment Or Irresponsibility?

by Reem Heakal

The current account is a section in a country's balance of payments (BOP) that records its current transactions. The account is divided into four sections:

• goods,
• services,
• income (such as salaries and investment income) and
• unilateral transfers (for example, workers' remittances).

 

A current account deficit occurs when a country has an excess of one or more of the four factors making up the account.

• When a current transaction enters the account, it is recorded as a credit; when a value leaves the account, it is marked as a debit.
• Basically, a current account deficit occurs when more money is being paid out than brought into a country.

 

What a Deficit Implies

When a current account is in deficit, it usually means that a country is investing more abroad than it is saving at home. Often, the logic dictating a country's investment decisions is that it takes money to make money.

• In order to try and boost its gross domestic production (GDP) and future growth, a country may go into debt, taking on liabilities to other countries. It then becomes what is termed as a "net debtor" to the world.
• However, a problematic deficit can result if a government has not planned out a sound economic policy and used its debts for consumption purposes, not future growth. (For more insight, see What Fuels The National Debt?)

 

A current account deficit implies that a country's economy is functioning on borrowed means.
In other words, other countries are essentially financing the economy, and hence sustaining the deficit.

When determining the economic health of a nation, it is important to understand

• where the deficit stems from,
• how it's being financed and
• what possible solutions exist for its alleviation.

To do so, we need to look at not only the current account, but also the other two sections of the BOP,

• the capital account and
• the financial account.

 

The Capital and Financial Accounts
Foreign funds entering a country from the sale or purchase of tangible assets - as opposed to non-physical assets such as stocks or bonds - are recorded in the capital account of the BOP. (Again, money entering the account is noted as a credit, and money leaving the account is a debit.)

Financial transactions such as money leaving the country for investment abroad are recorded in the financial account.

Together, these two accounts provide financing for a current account deficit.


Why Is There a Deficit?
Is a current account deficit simply a matter of a government's bad planning and/or uncontrollable spending and consumption?

• Well, sometimes.
• But more often than not, a deficit is planned for the purpose of helping an economy's development and growth.
• It can also be a sign of a strong economy that is a safe haven for foreign funds (we'll explain this below).
• When an economy is in a state of transition or reform, or is pursuing an active strategy of growth, running a deficit today can provide funding for domestic consumption and investment tomorrow.

Here are some of the types of deficits, both planned and unplanned, that countries experience.

 

Balance of Trade Deficit
With the long-term in mind, a country may run a deficit by importing more than it's exporting, with the ultimate goal of producing finished goods for export. In this scenario, the country will plan to pay off the temporary excess of imports at a later time with proceeds made from future export sales. The proceeds made from these sales would then become a current account credit. (To Learn more, read In Praise Of Trade Deficits.)

 

Investing for the Future
Instead of saving money now, a country could also choose to invest abroad in order to reap the rewards in the future. The outing funds would be recorded as a debit in the financial account, while the corresponding incoming investment income would eventually be earmarked as a credit in the current account. Often, a current account deficit coincides with depletion in a country's foreign reserves (limited resources of foreign currency available to invest abroad).

 

Foreign Investors
When foreign investors send money into the domestic economy, the latter must eventually pay out the returns due to the foreign investors. As such, a deficit may be a result of the claims foreigners have on the local economy (recorded as a debit in the current account).

 

This kind of deficit could also be a sign of a strong, efficient and transparent local economy, in which foreign money finds a safe place for investment. The United States capital market, for example, was seen as such when "quality assets" were sought out by investors burned in the Asian crisis. The U.S. experienced a surge of foreign investment into its capital markets. And while the U.S. received money that could help increase domestic productivity and hence expand its economy, all of those investments would have to be paid off in the form of returns (dividends, capital gains), which are debits in the current account. So a deficit could be the result of increased claims by foreign investors, whose money is used to increase local productivity and stimulate the economy.

 

Overspending Without Enough Income
Sometimes governments spend more than they earn, simply due to ill-advised economic planning. Money may be spent on costly imports while local productivity lags behind. Or, it may be deemed a priority for the government to spend on the military rather than economic production. Whatever the reason, a deficit will ensue if credits and debits do not balance.

 

Financing the Deficit

 

Public and Private Foreign Funds
Funding channeled into the capital and financial accounts (remember, these accounts finance the deficits in the current account) can come from both (1) public (official) and (2) private sources.

• Governments, which account for official capital flows, often buy and sell foreign currencies. Credit from these sales is recorded in the financial account.
• Private sources, whether institutions or individuals, may be receiving money from some sort of foreign direct investment (FDI) scheme, which appears as a debit in the income section of the current account but, when investment income is finally received, becomes a credit.

 

Balanced Financing
To avoid unnecessary extra risks associated with investing money abroad, the financing of the deficit should ideally rely on a combination of long-term and short-term funds rather than one or the other.

• If, for example, a foreign capital market suddenly collapses, it can no longer provide another country with investment income.
• The same would be true if a country borrows money and political differences cut the credit line.
• However, by planning to receive recurrent investment income over the years, such as by means of an FDI project, a country could intelligently finance its current account deficit.

 

Capital Flight
In times of global recession, the financing of a deficit can sometimes be traced to capital flight, that is, private individuals and corporations sending their money into "safe" economies.

• This money is recorded as a credit in the current account but, in reality, it is not a reliable source of financing.
• In fact, it is a strong indication that the world economy is slowing and may not be able to provide financing in the near future.

 

Conclusion

• In order to determine whether a country's economy is weak, it is important to know why there is a deficit and how it is being financed.
• A deficit can be a sign of economic trouble for some countries, and a sign of economic health for others.
• To support the current account deficits of countries around the world, the global economy must be strong enough so that exports can be bought and investment income repaid.
• Often, however, a current account deficit cannot be sustained for too long - it is widely debated whether the consumption of today will result in chronic debt for future generations.

by Reem Heakal, (Contact Author | Biography)

 

 

http://www.investopedia.com/articles/04/012804.asp

What is a trade deficit and what effect will it have on the stock market?

What is a trade deficit and what effect will it have on the stock market?

 

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A trade deficit, which is also referred to as net exports, is an economic condition that occurs when a country is importing more goods than it is exporting. The deficit equals the value of goods being imported minus the value of goods being exported, and it is given in the currency of the country in question. For example, assume that the United Kingdom imports 800 billion British pounds worth of goods, while exporting only 750 billion pounds. In this example, the trade deficit, or net exports, would be 50 million pounds.

 

Measuring a country's net imports or net exports is a difficult task, which involves different accounts that measure different flows of investment. These accounts are the current account and the financial account, which are then totaled to help form the balance of payments figure. The current account is used as a measure for all of the amounts involved in importing and exporting goods and services, any interest earned from foreign sources, and any money transfers between countries. The financial account is made up of the total changes in foreign and domestic property ownership. The net amounts of these two accounts are then entered into the balance of payments. (To learn more, see What Is The Balance Of Payments?, Understanding The Current Account In The Balance Of Payments and Understanding The Capital And Financial Accounts In The Balance Of Payments.)

 

In terms of the stock market, a prolonged trade deficit could have adverse effects.

• If a country has been importing more goods than it is exporting for a sustained period of time, it is essentially going into debt (much like a household would).
• Over time, investors will notice the decline in spending on domestically produced goods, which will hurt domestic producers and their stock prices.
• Given enough time, investors will realize fewer investment opportunities domestically and begin to invest in foreign stock markets, as prospects in these markets will be much better. This will lower demand in the domestic stock market and cause that market to decline.

 

 

http://www.investopedia.com/ask/answers/03/110603.asp

What Is The Balance Of Payments?

What Is The Balance Of Payments?

by Reem Heakal

The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time.

• Usually, the BOP is calculated every quarter and every calendar year.
• All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country.
• If a country has received money, this is known as a credit, and, if a country has paid or given money, the transaction is counted as a debit.
• Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance.
• But in practice this is rarely the case and, thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming.

The Balance of Payments Divided
The BOP is divided into three main categories:

• the current account,
• the capital account and
• the financial account.

Within these three categories are sub-divisions, each of which accounts for a different type of international monetary transaction.

The Current Account
The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account.

• Within the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold or given away (possibly in the form of aid).
• Services refer to receipts from tourism, transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from lawyers or management consulting, for example), and royalties from patents and copyrights.
• When combined, goods and services together make up a country's balance of trade (BOT).
• The BOT is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports.
• If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports. 
• Receipts from income-generating assets such as stocks (in the form of dividends) are also recorded in the current account.
• The last component of the current account is unilateral transfers. These are credits that are mostly worker's remittances, which are salaries sent back into the home country of a national working abroad, as well as foreign aid that is directly received.

The Capital Account
The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of

• non-financial assets (for example, a physical asset such as land) and
• non-produced assets,

which are needed for production but have not been produced, like a mine used for the extraction of diamonds.

The capital account is broken down into the monetary flows branching from

• debt forgiveness,
• the transfer of goods, and financial assets by migrants leaving or entering a country,
• the transfer of ownership on fixed assets (assets such as equipment used in the production process to generate income),
• the transfer of funds received to the sale or acquisition of fixed assets,
• gift and inheritance taxes,
• death levies, and,
• finally, uninsured damage to fixed assets.

The Financial Account
In the financial account, international monetary flows related to investment in

• business,
• real estate,
• bonds and stocks

are documented.

Also included are government-owned assets such as

• foreign reserves,
• gold,
• special drawing rights (SDRs) held with the International Monetary Fund,
• private assets held abroad, and
• direct foreign investment.

Assets owned by foreigners, private and official, are also recorded in the financial account.

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The Balancing Act
The current account should be balanced against the combined-capital and financial accounts. However, as mentioned above, this rarely happens.

• We should also note that, with fluctuating exchange rates, the change in the value of money can add to BOP discrepancies.
• When there is a deficit in the current account, which is a balance of trade deficit, the difference can be borrowed or funded by the capital account.
• If a country has a fixed asset abroad, this borrowed amount is marked as a capital account outflow. However, the sale of that fixed asset would be considered a current account inflow (earnings from investments). The current account deficit would thus be funded.

When a country has a current account deficit that is financed by the capital account, the country is actually foregoing capital assets for more goods and services. If a country is borrowing money to fund its current account deficit, this would appear as an inflow of foreign capital in the BOP.

Liberalizing the Accounts
The rise of global financial transactions and trade in the late-20th century spurred BOP and macroeconomic liberalization in many developing nations. With the advent of the emerging market economic boom - in which capital flows into these markets tripled from USD 50 million to USD 150 million from the late 1980s until the Asian crisis - developing countries were urged to lift restrictions on capital and financial-account transactions in order to take advantage of these capital inflows.

• Many of these countries had restrictive macroeconomic policies, by which regulations prevented foreign ownership of financial and non-financial assets.
• The regulations also limited the transfer of funds abroad.
• But with capital and financial account liberalization, capital markets began to grow, not only allowing a more transparent and sophisticated market for investors, but also giving rise to foreign direct investment.
• For example, investments in the form of a new power station would bring a country greater exposure to new technologies and efficiency, eventually increasing the nation's overall gross domestic product by allowing for greater volumes of production.
• Liberalization can also facilitate less risk by allowing greater diversification in various markets.

by Reem Heakal, (Contact Author | Biography)

http://www.investopedia.com/articles/03/060403.asp

Also read:
http://www.investopedia.com/terms/c/currentaccountdeficit.asp

Understanding The Current Account In The Balance Of Payments

 

Understanding The Current Account In The Balance Of Payments

by Reem Heakal

The balance of payments (BOP) is the place where countries record their monetary transactions with the rest of the world. Transactions are either marked as a credit or a debit. Within the BOP there are three separate categories under which different transactions are categorized:

• the current account: goods, services, income and current transfers are recorded.
• the capital account:  physical assets such as a building or a factory are recorded.
• the financial account: assets pertaining to international monetary flows of, for example, business or portfolio investments, are noted.

In this article, we will focus on analyzing the current account and how it reflects an economy's overall position. (For background reading, see What Is The Balance Of Payments?)

 

The Current Account
The balance of the current account tells us if a country has a deficit or a surplus. If there is a deficit, does that mean the economy is weak? Does a surplus automatically mean that the economy is strong? Not necessarily. But to understand the significance of this part of the BOP, we should start by looking at the components of the current account: goods, services, income and current transfers.

 

Goods - These are movable and physical in nature, and in order for a transaction to be recorded under "goods", a change of ownership from/to a resident (of the local country) to/from a non-resident (in a foreign country) has to take place. Movable goods include general merchandise, goods used for processing other goods, and non-monetary gold. An export is marked as a credit (money coming in) and an import is noted as a debit (money going out).

 

Services - These transactions result from an intangible action such as transportation, business services, tourism, royalties or licensing. If money is being paid for a service it is recorded like an import (a debit), and if money is received it is recorded like an export (credit).

 

Income - Income is money going in (credit) or out (debit) of a country from salaries, portfolio investments (in the form of dividends, for example), direct investments or any other type of investment. Together, goods, services and income provide an economy with fuel to function. This means that items under these categories are actual resources that are transferred to and from a country for economic production.

 

Current Transfers - Current transfers are unilateral transfers with nothing received in return. These include workers' remittances, donations, aids and grants, official assistance and pensions. Due to their nature, current transfers are not considered real resources that affect economic production.

Now that we have covered the four basic components, we need to look at the mathematical equation that allows us to determine whether the current account is in deficit or surplus (whether it has more credit or debit). This will help us understand where any discrepancies may stem from, and how resources may be restructured in order to allow for a better functioning economy.

 

The following variables go into the calculation of the current account balance (CAB):

 

X = Exports of goods and services
M = Imports of goods and services
NY = Net income abroad
NCT = Net current transfers

 

The formula is:

 

CAB = X - M + NY + NCT

 

 

 

What Does It Tell Us?
Theoretically, the balance should be zero, but in the real world this is improbable, so if the current account has a deficit or a surplus, this tells us something about the state of the economy in question, both on its own and in comparison to other world markets.

 

A surplus is indicative of an economy that is a net creditor to the rest of the world. It shows how much a country is saving as opposed to investing. What this means is that the country is providing an abundance of resources to other economies, and is owed money in return. By providing these resources abroad, a country with a CAB surplus gives other economies the chance to increase their productivity while running a deficit. This is referred to as financing a deficit.

 

A deficit reflects an economy that is a net debtor to the rest of the world. It is investing more than it is saving and is using resources from other economies to meet its domestic consumption and investment requirements. For example, let us say an economy decides that it needs to invest for the future (to receive investment income in the long run), so instead of saving, it sends the money abroad into an investment project. This would be marked as a debit in the financial account of the balance of payments at that period of time, but when future returns are made, they would be entered as investment income (a credit) in the current account under the income section. (For more insight, read Current Account Deficits.)

 

A current account deficit is usually accompanied by depletion in foreign-exchange assets because those reserves would be used for investment abroad. The deficit could also signify increased foreign investment in the local market, in which case the local economy is liable to pay the foreign economy investment income in the future.

 

It is important to understand from where a deficit or a surplus is stemming because sometimes looking at the current account as a whole could be misleading.

 

Analyzing the Current Account
Exports imply demand for a local product while imports point to a need for supplies to meet local production requirements. As export is a credit to a local economy while an import is a debit, an import means that the local economy is liable to pay a foreign economy. Therefore a deficit between exports and imports (goods and services combined) - otherwise known as a balance of trade deficit (more imports than exports) - could mean that the country is importing more in order to increase its productivity and eventually churn out more exports. This in turn could ultimately finance and alleviate the deficit.

 

A deficit could also stem from a rise in investments from abroad and increased obligations by the local economy to pay investment income (a debit under income in the current account). Investments from abroad usually have a positive effect on the local economy because, if used wisely, they provide for increased market value and production for that economy in the future. This can allow the local economy eventually to increase exports and, again, reverse its deficit.

 

So, a deficit is not necessarily a bad thing for an economy, especially for an economy in the developing stages or under reform: an economy sometimes has to spend money to make money. To run a deficit intentionally, however, an economy must be prepared to finance this deficit through a combination of means that will help reduce external liabilities and increase credits from abroad. For example, a current account deficit that is financed by short-term portfolio investment or borrowing is likely more risky. This is because a sudden failure in an emerging capital market or an unexpected suspension of foreign government assistance, perhaps due to political tensions, will result in an immediate cessation of credit in the current account.

 

Conclusion

• The volume of a country's current account is a good sign of economic activity.
• By scrutinizing the four components of it, we can get a clear picture of the extent of activity of a country's industries, capital market, services and the money entering the country from other governments or through remittances.
• However, depending on the nation's stage of economic growth, its goals, and of course the implementation of its economic program, the state of the current account is relative to the characteristics of the country in question.
• But when analyzing a current account deficit or surplus, it is vital to know what is fueling the extra credit or debit and what is being done to counter the effects (a surplus financed by a donation may not be the most prudent way to run an economy).
• On a separate note, the current account also highlights what is traded with other countries, and it is a good reflection of each nation's comparative advantage in the global economy.

by Reem Heakal, (Contact Author | Biography)

 

 

http://www.investopedia.com/articles/03/061803.asp