The current account
The balance of payments is a record of all the money flowing into and out of a country in a period. The specification examines one part of it: the current account, which records trade in goods and services along with income and transfers.
The calculation is simply exports minus imports:
current account balance = total exports − total imports
Exports bring money in, so they are positive. Imports send money out, so they are negative.
Worked example
A country exports £180 billion of goods and £95 billion of services, and imports £220 billion of goods and £60 billion of services. Calculate the current account balance and state what it shows.
- Total exports: £180bn goods + £95bn services = £275bn.
- Total imports: £220bn goods + £60bn services = £280bn.
- Balance = exports − imports = £275bn − £280bn = −£5bn.
- A negative figure is a deficit.
- It is worth noting the split, because it changes the interpretation.
- Goods run a deficit of £40bn, while services run a surplus of £35bn.
Answer: The current account is in deficit by £5 billion, because total imports of £280 billion exceed total exports of £275 billion. Within that, trade in goods is £40 billion in deficit while trade in services is £35 billion in surplus, so the country's service industries are nearly offsetting the shortfall in goods.
Analysing export and import data is a named skill. Given a table or chart, look for the trend over the period, quote specific figures rather than describing shapes, identify the year the balance changed from surplus to deficit or back, and comment on whether the gap is widening or narrowing — a deficit that is shrinking is a different story from one that is growing.
- Balance of payments
- a record of all the money flowing into and out of a country in a period
- Current account
- the part of the balance of payments recording trade in goods and services along with income and transfers; a deficit means imports exceed exports
Causes of surpluses and deficits
Why it matters
The specification asks you to evaluate the importance of the current account to the UK economy, and the honest answer is that it depends on the size and the cause — which is exactly what an evaluation question rewards.
The case that a deficit matters. It has to be financed, by borrowing from abroad or by selling assets such as property and companies to foreign owners, so a persistent deficit means rising debt or a shrinking share of the country's assets in domestic hands. A large deficit can weaken confidence in the currency, causing the exchange rate to fall. And spending more on imports than is earned from exports means demand leaking abroad rather than supporting domestic firms and jobs.
The case that it matters less than it sounds. A deficit means consumers are enjoying more goods and services than the country produces, which is not obviously a hardship. If the imports are machinery and components, they raise future productive capacity. A country that is growing strongly will naturally import more, so a deficit can be a symptom of success rather than failure. And a country whose currency is widely held, as the UK's is, can finance a deficit far more easily than most.
A surplus is not automatically good either. It can mean domestic demand is weak, so people are simply not buying much of anything, including imports. A very large surplus can provoke retaliation from trading partners, and it means resources are being used to produce for others rather than for domestic consumption.
The judgement to reach: a small deficit in a growing economy is not a problem, while a large and persistent deficit caused by uncompetitive industries is, because it points to a weakness that will not correct itself.
Common mistake
A current account deficit is not the same as a budget deficit. The current account is the country's trade with the rest of the world; the budget deficit is the government spending more than it raises in tax (3.5). A country can run one without the other.
Before you practise
- The current account records trade in goods and services with the rest of the world.
- current account balance = total exports − total imports.
- Exports bring money in; imports send money out.
- A surplus means exports exceed imports; a deficit means imports exceed exports.
- The UK typically runs a deficit in goods and a surplus in services.
- A strong exchange rate, high inflation and strong domestic growth all push towards deficit.
- A deficit must be financed by borrowing or by selling assets abroad.
- A deficit can reflect strong growth or imports of productive machinery, so it is not automatically bad.
- A surplus can reflect weak domestic demand, so it is not automatically good.
- A current account deficit is not a budget deficit.