IGCSE Economics 0455 – Current Account of the Balance of Payments
International Trade and Globalisation – Current Account of the Balance of Payments
1. What is the Current Account?
The current account records all transactions that involve the export or import of goods, services, income and current transfers between a country and the rest of the world during a given period (usually a year). It is one of the three main sections of the balance of payments, the others being the capital account and the financial account.
2. Main Components of the Current Account
Component
Description
Typical Inflow (Credit)
Typical Outflow (Debit)
Trade in Goods (Merchandise)
Exports and imports of physical products.
Export receipts
Import payments
Trade in Services
Exports and imports of services such as tourism, transport, banking, insurance, royalties.
Service export earnings
Service import payments
Primary Income
Factor income earned abroad (e.g., wages, dividends, interest) and paid to foreign investors.
Income received from abroad
Income paid to foreign owners
Secondary (Current) Transfers
One‑way transfers such as foreign aid, remittances, gifts.
Transfers received
Transfers sent
3. Calculating the Current Account Balance
The current account balance (CAB) is the net sum of all credits minus all debits in the four components above.
Mathematically:
\$\text{CAB} = (XG + XS + IR + TR) - (MG + MS + IP + TP)\$
where:
\$X_G\$ = Exports of goods
\$M_G\$ = Imports of goods
\$X_S\$ = Exports of services
\$M_S\$ = Imports of services
\$I_R\$ = Primary income received from abroad
\$I_P\$ = Primary income paid to foreign investors
\$T_R\$ = Current transfers received
\$T_P\$ = Current transfers paid
4. Deficit vs. Surplus
Current‑account surplus: When total credits exceed total debits (\$\text{CAB} > 0\$). The country is a net lender to the rest of the world.
Current‑account deficit: When total debits exceed total credits (\$\text{CAB} < 0\$). The country is a net borrower from the rest of the world.
5. Worked Example
Assume the following annual data (in £ millions):
Component
Credit (inflow)
Debit (outflow)
Exports of goods
120
–
Imports of goods
–
150
Exports of services
45
–
Imports of services
–
30
Primary income received
20
–
Primary income paid
–
25
Current transfers received
10
–
Current transfers paid
–
5
Calculate total credits and total debits:
\$\text{Total Credits}=120+45+20+10=195\$
\$\text{Total Debits}=150+30+25+5=210\$
Current‑account balance:
\$\text{CAB}=195-210=-15\ \text{million £}\$
The economy runs a current‑account deficit of £15 million.
6. Interpretation of Results
A surplus may indicate strong export competitiveness, high foreign investment income, or large remittance inflows.
A deficit can arise from high import demand, large overseas investment returns paid out, or substantial foreign aid sent.
Persistent deficits may lead to a buildup of external debt, while persistent surpluses can create foreign exchange appreciation pressures.
7. Link to Globalisation
Globalisation intensifies the flow of goods, services, capital and labour, which directly affects each component of the current account:
Trade liberalisation usually raises both exports and imports, potentially narrowing the trade‑goods balance.
Digital services and offshore outsourcing expand the services component.
Greater mobility of labour increases remittance flows (a major part of secondary transfers).
International investment portfolios affect primary income receipts and payments.
8. Summary Checklist for Examination
Identify the four components of the current account.
Know the sign convention: credits (+), debits (–).
Be able to write the formula for the current‑account balance.
Calculate surplus or deficit from given data.
Explain the economic implications of a surplus or deficit.
Relate changes in the current account to globalisation trends.
Suggested diagram: Flow diagram showing inflows (credits) and outflows (debits) for each current‑account component.