The Current Account in the Balance of Payments Flashcards
What does the current account track?
The flow of expenditure on goods, services, and income between residents and the rest of the world.
What does the current account measure?
Whether a country is earning sufficient income from its exports to cover its imports.
What are the main components of the current account?
- Trade Balance
- Primary Income Flows
- Secondary Income Flows
What is included in the Trade Balance?
- Goods
- Services
What are Primary Income Flows?
Investment income such as profits, dividends, and interest payments from international investments.
What are Secondary Income Flows?
Net current transfers such as remittances, foreign aid, or contributions to international organisations.
Why is the current account significant?
- Reflects international competitiveness
- Indicates living within means or reliance on external financing
- Persistent deficits or surpluses signal structural economic issues
What was the average current account balance as a percentage of GDP for the UK from 1948 to 2023?
-1.09% of GDP
What was the peak surplus for the UK’s current account and in what year?
+2.8% in 1950
What was the peak deficit for the UK’s current account and in what year?
-5.4% in 2016
What was the UK’s current account deficit in 2023?
£53.3 billion (2% of GDP)
What is the balance of trade in goods and services?
- Goods: Physical products traded internationally
- Services: Intangible trade
What contributed to the UK’s goods deficit in 2014?
Reliance on imports.
What were the figures for the UK’s goods and services in 2014?
- Goods deficit: £123 billion
- Services surplus: £89.14 billion
What were the figures for the UK’s goods and services in 2023?
- Goods deficit: £187.7 billion (6.9% of GDP)
- Services surplus: £172.6 billion (6.3% of GDP)
What does net primary income reflect?
Income from investments abroad versus payments to foreign investors in domestic assets.
What can declining foreign earnings do to the current account?
Widen the current account deficit.
What was the net primary income flow for the UK in 2014?
-£33.1 billion
What was the net primary income flow for the UK in 2023?
£18.3 billion (0.7% of GDP)
What do secondary income flows include?
Unilateral transfers like remittances, aid, and contributions to international institutions.
What is a trade deficit?
Imports > Exports
What is a trade surplus?
Exports > Imports
What does positive net primary income indicate?
Strengthens the current account.
What must persistent current account deficits be balanced by?
Inflows on the capital and financial accounts.
What is the Marshall-Lerner Condition?
A devaluation of the exchange rate improves the current account if the sum of price elasticities of demand for imports and exports > 1.
What is the J-Curve Effect?
Following a currency depreciation, the current account initially worsens before improving as trade adjusts.
What does the savings-investment balance equation represent?
Current account balance = National savings - Domestic investment.
Persistent deficits often reflect low savings rates or high domestic consumption.
What is Dutch Disease?
Resource exports may lead to currency appreciation, harming the competitiveness of other sectors.
What is a specific challenge faced by the UK regarding the current account?
Structural trade deficits in goods due to reliance on imports.
What policy implications arise from persistent current account deficits?
- Exchange rate adjustments
- Boosting export competitiveness
- Addressing low productivity growth
What external factors impact the current account?
- Global trade dynamics
- Foreign investment flows
What was the effect of the pound’s depreciation post-2016?
Initially worsened the deficit but later led to improvements due to the J-Curve effect.
What can exacerbate the goods trade deficit for the UK?
Reliance on energy imports and rising commodity prices.
What are the key policy debates regarding the current account?
- Fiscal consolidation
- Trade policy reforms
- Role of international agreements
