The Current Account is the difference between a nation’s total exports of goods, services, and transfers, versus its total imports. Transactions in financial assets and liabilities are excluded.
The level of the current account is followed as an indicator of trends in foreign trade so it is considered a big market mover.
The Current Account Balance (CAB) is a function relating to a country’s Balance of Payments (BOP), others being the Capital Account and the Financial Account.
Basically, it is the broadest measure of international flows of capital, goods, and services in and out of a country.
What is the Current Account?
It is a country’s way to determine economic activity and can allow us to form a clear picture of the current extent of activity of a country’s industries, services, and capital market, as well as credit or debt to other countries.
The current account is the broadest measure of trade because it covers not only trade in goods and services but also investment flows between countries.
It also represents the amount of U.S. assets that have been transferred into foreign hands to cover the gap between American exports and imports.
The formula used for calculating the current account balance is:
X = Exports of goods and services
M = Imports of goods and services
NY = Net income abroad
NCT = Net current transfers
Why is the Current Account important?
The Current Account Balance can strongly reflect a country’s overall economic position. If the CAB of a country is standing at a surplus, then it indicates that the economy is a net creditor to the rest of the world.
It also demonstrates how much that country is saving as opposed to investing, meaning that the country is providing an abundance of resources to other economies, and is owed money in return.
A CAB level that is in deficit, however, shows that an economy that is a net debtor to the rest of the world meaning that it is investing more than it is saving and so is using resources from other economies in order to meet its own domestic consumption and investment requirements.