Current_account, Current_account Information, Current


contact dermatitis, herpes simplex, basal cell sun tan, skin care, rash
adobe universal, Ppd files, bubblejet bjc, printer driver, canon bubblejet
home school supply - Shopping

This article is about the macroeconomic current account. For the day to day bank account, see current account (banking).

Capital exports in 2006

Capital imports in 2006

In economics, the current account of the balance of payments is the sum of the balance of trade (exports minus imports of goods and services), net factor incomes (such as interest and dividends) and net transfer payments (such as foreign aid).

\begin{align}

\mbox{Current account} = & \mbox{Balance of trade} \\
     & + \mbox{Net factor income from abroad} \\
     & + \mbox{Net unilateral transfers from abroad} \\

\end{align}

The current account balance is one of two major metrics of the nature of a country\'s foreign trade (the other being the net capital outflow). A current account surplus increases a country\'s net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation.

Components

The balance of trade is typically the most important part of the current account. This means that changes in the patterns of trade are key drivers in the current accounts of most of the world\'s economies. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant.

Positive net sales to abroad generally contributes to a current account surplus; negative net sales to abroad generally contributes to a current account deficit. Because exports generate positive net sales, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports.

The net factor income or income account, a sub-account of the current account, is usually presented under the headings income payments as outflows, and income receipts as inflows. Income refers not only to the money given back from investments made abroad (note: investments are recorded in the financial account but income from investments is recorded in the current account) but also to the money sent by individuals working abroad that send money to their families back home (this is usual only in diasporas and developing countries). (source: see book reference list) If the income account is negative, the country is paying more than it is taking in interest, dividends, etc. For example, the United States\' net income has been declining exponentially since it allowed the Dollar\'s price relative to other currencies to be determined by the market to a point where income payments and receipts are roughly equal. The difference between Canada\'s income payments and receipts have been declining exponentially as well since its central bank in 1998 began its strict policy not to intervene in the Canadian Dollar\'s foreign exchange. Bank of Canada - Intervention in the Exchange Market - Fact Sheet - The Bank in Brief. The various subcategories in the income account are linked to specific respective subcategories in the Financial account. From here, economists and central banks determine implied rates of return on the different types of capital exchanged in the Financial Account. The United States, for example, gleans a substantially larger rate of return from foreign capital than foreigners from domestic capital.

Theoretical analysis

When analyzing the current account theoretically, it is often written as a function X of the real exchange rate, p, domestic GDP, Y, and foreign GDP, Y*. Thus the current account can be written as X(p, Y, Y*). According to theory, the current account X should increase if (1) the domestic currency depreciates (p increases), (2) domestic GDP decreases, or (3) foreign GDP increases. A domestic currency depreciation makes domestic goods relatively cheaper, boosting exports relative to imports. A decrease in domestic GDP reduces domestic demand for foreign goods, lowering imports without affecting exports. An increase in foreign GDP increases foreign demand for domestic goods, increasing exports without affecting imports.

Reducing current account deficits

Action to reduce a substantial current account deficit usually involves increasing exports or decreasing imports. This may be accomplished directly through import restrictions, quotas, or duties (though these may indirectly limit exports as well), or subsidizing exports. Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly affect the balance of payments. This can be accomplished by increasing domestic inflation (e.g. by cutting interest rates), loosening monetary policy (making more money available), or adjusting government spending to favor domestic suppliers.

Less obvious but more effective methods to reduce a current account deficit include measures that increase domestic savings (or reduced domestic borrowing), including a reduction in borrowing by the national government.

It should be noted that 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. Some feel that this theory has held true for the Australian economy, which has had a persistent current account deficit, yet has experienced economic growth for the past 16 years (1991-2007). Others argue that Australia is accumulating a substantial foreign debt that could become problematic, especially if interest rates increase. A deficit in the current account also implies that the country is a net capital importer.

Interrelationships in the balance of payments

Main article: Balance of payments

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 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 is driven by the desire of international investors to acquire U.S. 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.