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59-521: (Redirected from Current Account ) [REDACTED] Look up current account in Wiktionary, the free dictionary. Current account or Current Account may refer to: Current account (balance of payments) , a country's balance of trade, net of factor income and cash transfers Current account (banking) , a checking account, held at a bank or other financial institution Current account mortgage ,

118-808: A "reckless fiscal policy or a consumption binge." China's financial system favors the accumulation of large surpluses while the United States carries "large and persistent current account deficits" which has created a trade imbalance. The authors note that, Moreover, in practice, private capital often flows from developing to advanced economies. The advanced economies, such as the United States ... run current account deficits, whereas developing countries and emerging market economies often run surpluses or near surpluses. Very poor countries typically run large current account deficits, in proportion to their gross domestic product (GDP), that are financed by official grants and loans. Capital account A surplus in

177-438: A country and entering abroad countries) or decreasing imports (goods coming from a foreign country into a country). Firstly, this is generally accomplished directly through import restrictions, quotas, or duties (though these may indirectly limit exports as well), or by promoting exports (through subsidies, custom duty exemptions etc.). Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly increase

236-569: A country's current account records the value of exports and imports of both goods and services and international transfers of capital . It is one of the two components of the balance of payments , the other being the capital account (also known as the financial account). Current account measures the nation's earnings and spendings abroad and it consists of the balance of trade , net primary income or factor income (earnings on foreign investments minus payments made to foreign investors) and net unilateral transfers, that have taken place over

295-404: A given period of time. A country is said to have a trade surplus if its exports exceed its imports, and a trade deficit if its imports exceed its exports. Positive net sales abroad generally contribute to a current account surplus ; negative net sales abroad generally contribute to a current account deficit . Because exports generate positive net sales, and because the trade balance is typically

354-417: A given period of time. The current account balance is one of two major measures of a country's foreign trade (the other being the net capital outflow ). A current account surplus indicates that the value of a country's net foreign assets (i.e. assets less liabilities) grew over the period in question, and a current account deficit indicates that it shrank. Both government and private payments are included in

413-431: A large surplus, as it had been the recipient of much foreign investment. If the reserve account is included, however, China's capital account has been in large deficit, as its central bank purchased large amounts of foreign assets (chiefly US government bonds) to a degree sufficient to offset not just the rest of the capital account, but its large current account surplus as well. In the financial literature, sterilization

472-1505: A narrower meaning by the International Monetary Fund (IMF) and affiliated sources. The IMF splits what the rest of the world calls the capital account into two top-level divisions: financial account and capital account , with by far the bulk of the transactions being recorded in its financial account. At high level: Capital Account = [ Change in foreign ownership of domestic assets ] − [ Change in domestic ownership of foreign assets ] {\displaystyle {\text{Capital Account}}=\left[{{\text{Change in foreign ownership}} \atop {\text{of domestic assets}}}\right]-\left[{{\text{Change in domestic}} \atop {\text{ownership of foreign assets}}}\right]} Breaking this down: Capital Account = [ Foreign Direct Investment ] + [ Portfolio Investment ] + [ Other Investment ] + [ Reserve Account ] {\displaystyle {\text{Capital Account}}=\left[{{\text{Foreign Direct}} \atop {\text{Investment}}}\right]+\left[{{\text{Portfolio}} \atop {\text{Investment}}}\right]+\left[{{\text{Other}} \atop {\text{Investment}}}\right]+\left[{{\text{Reserve}} \atop {\text{Account}}}\right]} Conventionally, central banks have two principal tools to influence

531-442: A non-IMF representation, these items might be grouped in the "other" subtotal of the capital account. They typically amount to a very small amount in comparison to loans and flows into and out of short-term bank accounts. Capital controls are measures imposed by a state's government aimed at managing capital account transactions. They include outright prohibitions against some or all capital account transactions, transaction taxes on

590-581: A permanent part of the global economy. Both advanced and emerging nations adopted controls; in basic theory it may be supposed that large inbound investments will speed an emerging economy's development, but empirical evidence suggests this does not reliably occur, and in fact large capital inflows can hurt a nation's economic development by causing its currency to appreciate, by contributing to inflation, and by causing an unsustainable "bubble" of economic activity that often precedes financial crisis. The inflows sharply reverse once capital flight takes places after

649-738: A reduction in borrowing by the national government. A current account deficit is not always a problem. The Pitchford thesis states that a current account deficit does not matter if it is driven by the private sector. It is also known as the "consenting adults" view of the current account, as it holds that deficits are not a problem if they result from private sector agents engaging in mutually beneficial trade. A current account deficit creates an obligation of repayments of foreign capital, and that capital consists of many individual transactions. Pitchford asserts that since each of these transactions were individually considered financially sound when they were made, their aggregate effect (the current account deficit)

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708-620: A reference resource produced by the Central Intelligence Agency that collects data and publishes online open reports comparing the current account balance of countries . According to World Factbook , "[c]urrent account balance compares a country's net trade in goods and services, plus net earnings, and net transfer payments to and from the rest of the world during the period specified. These figures are calculated on an exchange rate basis." The top ten on their list of countries by current account balance in 2014 were: On

767-634: A significant influence on the trade balance, and by extension, on the current account. An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit (or narrowing the surplus). An undervalued currency, on the other hand, boosts exports and makes imports more expensive, thus increasing the current account surplus (or narrowing the deficit). Nations with chronic current account deficits often come under increased investor scrutiny during periods of heightened uncertainty. The currencies of such nations often come under speculative attack during such times. This creates

826-480: A type of flexible mortgage loan Current Account (TV programme) , a British current affairs television programme that was broadcast in the 1970s and 1980s on BBC in Scotland Topics referred to by the same term [REDACTED] This disambiguation page lists articles associated with the title Current account . If an internal link led you here, you may wish to change the link to point directly to

885-486: A vicious circle where precious foreign exchange reserves are depleted to support the domestic currency, and this forex reserve depletion – combined with a deteriorating trade balance – puts further pressure on the currency. Embattled nations are often forced to take stringent measures to support the currency, such as raising interest rates and curbing currency outflows. Action to reduce a substantial current account deficit usually involves increasing exports (goods going out of

944-510: A view to the needs of the domestic economy, and moreover, changing the interest rate alone has only a limited effect. A nation's ability to prevent a fall in the value of its own currency is limited mainly by the size of its foreign reserves: it needs to use the reserves to buy back its currency. Starting in 2013, a trend has developed for some central banks to attempt to exert upward pressure on their currencies by means of currency swaps rather than by directly selling their foreign reserves. In

1003-522: Is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower from the rest of the world. A current account surplus increases a nation's net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount. A country's balance of trade is the net or difference between the country's exports of goods and services and its imports of goods and services, excluding all financial transfers, investments and other components, over

1062-421: Is a term commonly used to refer to operations of a central bank that mitigate the potentially undesirable effects of inbound capital: currency appreciation and inflation. Depending on the source, sterilization can mean the relatively straightforward recycling of inbound capital to prevent currency appreciation and/or a range of measures to check the inflationary impact of inbound capital. The classic way to sterilize

1121-422: Is absorbing (absorption = domestic consumption + investment + government spending) more than that it is producing. This can only happen if some other economies are lending their savings to it (in the form of debt to or direct/ portfolio investment in the economy) or the economy is running down its foreign assets such as official foreign currency reserve. On the other hand, if an economy

1180-436: Is also sound. A deficit implies we import more goods and services than we export. The current account equals: The current account is essentially exports – imports (+net international investment balance) If one has a current account deficit, in a floating exchange rate this must be balanced by a surplus on the financial / capital account. The balance of payments (BOP) is the record of a country's monetary transactions with

1239-413: Is driven by the desire of international investors to acquire US assets (see Ben Bernanke , William Poole links below). However, the main viewpoint undoubtedly remains that the causative factor is the current account and that the positive financial account reflects the need to finance the country's current account deficit. Current account surpluses are facing current account deficits of other countries,

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1298-586: Is labelled the "financial account" by the International Monetary Fund (IMF) and the United Nations System of National Accounts (SNA). In the IMF's definition, the capital account represents a small subset of what the standard definition designates the capital account, largely comprising transfers. Transfers are one-way flows, such as gifts, as opposed to commercial exchanges (i.e., buying/selling and barter). The largest type of transfer between nations

1357-409: Is running a current account surplus it is absorbing less than that it is producing. This means it is saving. As the economy is open, this saving is being invested abroad and thus foreign assets are being created. Normally, the current account is calculated by adding up the 4 components of current account: goods, services, income and current transfers. A country's current account can be calculated by

1416-553: Is typically foreign aid, but that is mostly recorded in the current account. An exception is debt forgiveness , which in a sense is the transfer of ownership of an asset. When a country receives significant debt forgiveness, that will typically comprise the bulk of its overall IMF capital account entry for that year. The IMF's capital account does include some non-transfer flows, which are sales involving non-financial and non-produced assets—for example, natural resources like land, leases and licenses, and marketing assets such as brands—but

1475-411: Is usually less than what it has to pay out on the bonds it issues domestically to check inflation. In some cases, however, a profit can be made. In the strict textbook definition, sterilization refers only to measures aimed at keeping the domestic monetary base stable; an intervention to prevent currency appreciation that involved merely buying foreign assets without counteracting the resulting increase of

1534-590: The Euro crisis by many Keynesian economists, such as Yanis Varoufakis , Heiner Flassbeck , Paul Krugman and Joseph Stiglitz . Since 1989, the current account deficit of the US has been increasingly large, reaching close to 7% of the GDP in 2006. In 2011, it was the highest deficit in the world. New evidence, however, suggests that the US current account deficits are being mitigated by positive valuation effects . That is,

1593-497: The financial crisis of 2007–2008 . By the second half of 2009, low interest rates and other aspects of the government led response to the global crises had resulted in increased movement of capital back towards emerging economies. In November 2009 the Financial Times reported several emerging economies such as Brazil and India had begun to implement or at least signal the possible adoption of capital controls to reduce

1652-502: The 20th century Great Britain's central bank, the Bank of England , would sometimes use its reserves to buy large amounts of pound sterling to prevent it falling in value. Black Wednesday was a case where it had insufficient reserves of foreign currency to do this successfully. Conversely, in the early 21st century, several major emerging economies effectively sold large amounts of their currencies in order to prevent their value rising, and in

1711-485: The US assets overseas are gaining in value relative to the domestic assets held by foreign investors. The net foreign assets of the US are therefore not deteriorating one to one with the current account deficits. The most recent experience has reversed this positive valuation effect, however, with the US net foreign asset position deteriorating by more than two trillion dollars in 2008, down to less than $ 18 trillion, but has since risen to $ 25 trillion. This temporary decline

1770-528: The absence of foreign reserves, central banks may affect international pricing indirectly by selling assets (usually government bonds) domestically, which, however, diminishes liquidity in the economy and may lead to deflation. When a currency rises higher than monetary authorities might like (making exports less competitive internationally), it is usually considered relatively easy for an independent central bank to counter this. By buying foreign currency or foreign financial assets (usually other governments' bonds),

1829-439: The balance of payments. Also, currency wars , a phenomenon evident in post recessionary markets is a protectionist policy, whereby countries devalue their currencies to ensure export competitiveness. Secondly, adjusting government spending to favor domestic suppliers is also effective. Less obvious methods to reduce a current account deficit include measures that increase domestic savings (or reduced domestic borrowing), including

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1888-542: The buying and selling of their currency at market rates are said to have full capital account convertibility . Following the Bretton Woods agreement established at the close of World War II, most nations put in place capital controls to prevent large flows either into or out of their capital account. John Maynard Keynes , one of the architects of the Bretton Woods system, considered capital controls to be

1947-399: The calculation. It is called the current account because goods and services are generally consumed in the current period. The current account is an important indicator of an economy's speed. It is defined as the sum of the balance of trade (goods and services exports minus imports ), net income from abroad, and net current transfers. A positive current account balance indicates the nation

2006-399: The capital account means money is flowing into the country, but unlike a surplus in the current account, the inbound flows effectively represent borrowings or sales of assets rather than payment for work. A deficit in the capital account means money is flowing out of the country, and it suggests the nation is increasing its ownership of foreign assets . The term "capital account" is used with

2065-490: The central bank has a ready means to lower the value of its own currency; if it needs to, it can always create more of its own currency to fund these purchases. The risk, however, is general price inflation. The term "printing money" is often used to describe such monetization, but is an anachronism, since most money exists in the form of deposits and its supply is manipulated through the purchase of bonds. A third mechanism that central banks and governments can use to raise or lower

2124-453: The crisis occurs. As part of the displacement of Keynesianism in favor of free market orientated policies, countries began abolishing their capital controls, starting between 1973–74 with the US, Canada, Germany and Switzerland and followed by Great Britain in 1979. Most other advanced and emerging economies followed, chiefly in the 1980s and early 1990s. An exception to this trend was Malaysia, which in 1998 imposed capital controls in

2183-403: The current account is the main causal factor, with capital and financial accounts simply reflecting financing of a deficit or investment of funds arising as a result of a surplus. However, more recently some observers have suggested that the opposite causal relationship may be important in some cases. In particular, it has controversially been suggested that the United States current account deficit

2242-428: The different types of capital. The United States, for example, gleans a substantially larger rate of return from foreign capital than foreigners do from owning United States capital. In the traditional accounting of balance of payments, the current account equals the change in net foreign assets . A current account deficit implies a reduction of net foreign assets: If an economy is running a current account deficit, it

2301-509: The domestic economy, the net capital inflow that would have influenced the currency's exchange rate has undergone sterilization. The above definition is the one most widely used in economic literature, in the financial press, by corporate and government analysts (except when they are reporting to the IMF), and by the World Bank . In contrast, what the rest of the world calls the capital account

2360-531: The domestic money supply would not count as sterilization. A textbook sterilization would be, for example, the Federal Reserve's purchase of $ 1 billion in foreign assets. This would create additional liquidity in foreign hands. At the same time, the Fed would sell $ 1 billion of debt securities into the US market, draining the domestic economy of $ 1 billion. With $ 1 billion added abroad and $ 1 billion removed from

2419-406: The financial account, assets pertaining to international monetary flows of, for example, business or portfolio investments are noted. Absent changes in official reserves, the current account is the mirror image of the sum of the capital and financial accounts. One might then ask: Is the current account driven by the capital and financial accounts or is it vice versa? The traditional response is that

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2478-420: The following formula: C A = ( X − M ) + N Y + N C T {\displaystyle CA=(X-M)+NY+NCT} Where CA is the current account, X and M are respectively the export and import of goods and services, NY the net income from abroad, and NCT the net current transfers. Better still a country can calculate its current account balance by simply adding

2537-446: The income account is negative, the country is paying more than it is taking in interest, dividends, etc. The various subcategories in the income account are linked to specific respective subcategories in the capital account, as income is often composed of factor payments from the ownership of capital (assets) or the negative capital (debts) abroad. From the capital account, economists and central banks determine implied rates of return on

2596-406: The indebtedness of which towards abroad therefore increases. According to Balances Mechanics by Wolfgang Stützel this is described as surplus of expenses over the revenues. Increasing imbalances in foreign trade are critically discussed as a possible cause of the financial crisis since 2007. The existing differences between the current accounts in the eurozone is considered to be the root cause of

2655-436: The inflationary effect of the extra money flowing into the domestic base from the capital account is for the central bank to use open market operations where it sells bonds domestically, thereby soaking up new cash that would otherwise circulate around the home economy. A central bank normally makes a small loss from its overall sterilization operations, as the interest it earns from buying foreign assets to prevent appreciation

2714-413: The intended article. Retrieved from " https://en.wikipedia.org/w/index.php?title=Current_account&oldid=1232905302 " Category : Disambiguation pages Hidden categories: Short description is different from Wikidata All article disambiguation pages All disambiguation pages Current account (balance of payments) In macroeconomics and international finance ,

2773-427: The international sale of specific financial assets, or caps on the size of international sales and purchases of specific financial assets. While usually aimed at the financial sector, controls can affect ordinary citizens, for example in the 1960s British families were at one point restricted from taking more than £50 with them out of the country for their foreign holidays. Countries without capital controls that limit

2832-501: The largest component of the current account, a current account surplus is usually associated with positive net exports. In the net factor income or income account, income payments are outflows, and income receipts are inflows. Income are receipts from investments made abroad (note: investments are recorded in the capital account but income from investments is recorded in the current account) and money sent by individuals working abroad, known as remittances , to their families back home. If

2891-427: The process built up large reserves of foreign currency, principally the US dollar. Sometimes the reserve account is classified as "below the line" and thus not reported as part of the capital account. Flows to or from the reserve account can substantially affect the overall capital account. Taking the example of China in the early 21st century, and excluding the activity of its central bank, China's capital account had

2950-474: 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

3009-471: The same list the bottom ten countries by current account balance in 2014 were In a 2012 article published by the International Monetary Fund (IMF) the authors argue that a current account deficit with higher investments and lower savings may indicate that the economy of a country is highly productive and growing. If there is an excess of imports over exports there may be problems in terms of competitiveness. Low savings and high investment can also be caused by

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3068-515: The sums involved are typically very small, as most movement in these items occurs when both seller and buyer are of the same nationality. Transfers apart from debt forgiveness recorded in the IMF's capital account include the transfer of goods and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets, the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies, and uninsured damage to fixed assets . In

3127-507: The trade balance (exports minus imports) is generally the biggest determinant of the current account surplus or deficit, the current account balance often displays a cyclical trend. During a strong economic expansion, import volumes typically surge; if exports are unable to grow at the same rate, the current account deficit will widen. Conversely, during a recession, the current account deficit will shrink if imports decline and exports increase to stronger economies. The currency exchange rate exerts

3186-493: The value of the visible balance of trade to that of the invisible balance of trade. the visible balance of trade is the sum total of the differences of all the imports and export of all tangible goods while the invisible balance of trade is the total gotten from the difference between exports and imports of services. A nation's current account balance is influenced by numerous factors – its trade policies, exchange rate, competitiveness, forex reserves, inflation rate and others. Since

3245-430: The value of their currency is simply to talk it up or down, by hinting at future action that may discourage speculators. Quantitative easing , a practice used by major central banks in 2009, consisted of large-scale bond purchases by central banks. The desire was to stabilize banking systems and, if possible, encourage investment to reduce unemployment. As an example of direct intervention to manage currency valuation, in

3304-441: The value of their nation's currency: raising or lowering the base rate of interest and, more effectively, buying or selling their currency. Setting a higher interest rate than other major central banks will tend to attract funds via the nation's capital account, and this will act to raise the value of its currency. A relatively low interest rate will have the opposite effect. Since World War II, interest rates have largely been set with

3363-411: The wake of the 1997 Asian Financial Crisis . While most Asian economies didn't impose controls, after the 1997 crises they ceased to be net importers of capital and became net exporters instead. Large inbound flows were directed "uphill" from emerging economies to the US and other developed nations. According to economist C. Fred Bergsten the large inbound flow into the US was one of the causes of

3422-566: The world" – produces quarterly reports on its 34 member nations comparing statistics on balance of payments and international trade in terms of current account balance in billions of US dollars and as a percentage of GDP. For example, according to their report the current account balance in billions of US dollars of several countries can be compared, The report also compares countries on services balance, exports of services, import of services, goods balance, export of goods and imports of goods in billions of US dollars. The World Factbook ,

3481-437: Was due primarily to the relative under-performance of domestic ownership of foreign assets (largely foreign equities) compared to foreign ownership of domestic assets (largely US treasuries and bonds). The Organisation for Economic Co-operation and Development , OECD – an international economic organisation of 34 countries, founded in 1961 to "promote policies that will improve the economic and social well-being of people around

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