Components of the Current Account (Cambridge (CIE) A Level Economics): Revision Note
Exam code: 9708
Components of the current account of the balance of payments
The balance of payments is a record of all financial transactions between a country and the rest of the world over a given time period
The current account records trade in goods and services and income flows between a country and the rest of the world - it has four components
Component | What it records | USA position |
|---|---|---|
Trade in goods |
|
|
Trade in services |
|
|
Primary income |
|
|
Secondary income |
|
|
Balance and imbalances
Exports of goods and services and income received from abroad are recorded as credits (money flowing in)
Imports of goods and services and income paid abroad are recorded as debits (money flowing out)
Surplus - total credits exceed total debits across all four components - the country is a net receiver of funds
Deficit - total debits exceed total credits - the country is a net payer of funds to the rest of the world; must be financed through the financial account or by running down foreign exchange reserves
Balance - total credits equal total debits
Calculation of the current account balance
Balance of trade in goods = exports of goods - imports of goods
Balance of trade in services = exports of services - imports of services
Balance of trade in goods and services = balance of trade in goods + balance of trade in services
Current account balance (CAB) = balance of trade in goods and services + primary income balance + secondary income balance
Worked Example
The table shows data from Country X's balance of payments accounts. Calculate the balance of trade in goods, balance of trade in services, balance of trade in goods and services and the current account balance. State whether each represents a surplus or deficit.
Component | $m |
|---|---|
Exports of goods | 450 |
Imports of goods | 580 |
Exports of services | 320 |
Imports of services | 210 |
Primary income - credit | 90 |
Primary income - debit | 140 |
Secondary income balance | -30 |
Calculation | Working | Result |
|---|---|---|
Balance of trade in goods | 450 - 580 | -$130m deficit |
Balance of trade in services | 320 - 210 | +$110m surplus |
Balance of trade in goods and services | -130 + 110 | -$20m deficit |
Primary income balance | 90 - 140 | -$50m deficit |
Current account balance | -20 + (-50) + (-30) | -$100m deficit |
Despite a surplus on trade in services, deficits on goods, primary income and secondary income produce an overall current account deficit of $100m
This illustrates why analysing all four components separately is essential before drawing conclusions about a country's external position
Worked Example
The table shows the current account of a balance of payments for January 2021.
Component | $m |
|---|---|
Exports of goods | 15,000 |
Imports of goods | 17,000 |
Services - credit | 2,500 |
Services - debit | 2,000 |
Primary income - credit | 100 |
Primary income - debit | 1,000 |
Secondary income balance | 60 |
What is the current account balance?
A. - a deficit of $2,340m
B. - a deficit of $2,000m
C. - a surplus of $2,000m
D. - a surplus of $2,340m
Answer: A
Worked solution
Balance of trade in goods: 15,000 - 17,000 = -$2,000m
Balance of trade in services: 2,500 - 2,000 = +$500m
Primary income balance: 100 - 1,000 = -$900m
Secondary income balance: +$60m
Current account balance: -2,000 + 500 + (-900) + 60 = -$2,340m deficit
Option B is the trap - students who only calculate the trade in goods balance (-$2,000m) and ignore the remaining three components will select B. This is the most common error on current account calculation questions and reflects the misconception that the current account consists only of trade in goods
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