Components of the current account of the balance of payments: trade in services

International Trade & Globalisation – Current Account of the Balance of Payments

Focus: Trade in Services (Current‑Account Component)

The current account records all transactions that involve the export or import of goods, services, primary income and secondary income. This note concentrates on the trade in services component and explains how it fits into the overall current‑account balance.

1. Structure of the Current Account

Each sub‑component is recorded as a credit (export/receipt) or a debit (import/payment). The net of the four gives the overall current‑account balance (CA).

2. What Are Services?

• Intangible, scarce products that cannot be stored, transported or physically possessed.
• Produced and consumed simultaneously; delivery across borders relies on:

  • Communication technologies (e‑mail, video‑conferencing, cloud computing)
  • Travel of people (tourists, students, consultants)
  • Movement of capital equipment (aircraft, ships, satellites)

2.1 Main Service Categories (Cambridge syllabus)

• Transport services – shipping, airlines, freight forwarding.
• Travel services – tourism, business travel, hospitality.
• Financial services – banking, insurance, investment, asset management.
• Telecommunications & information services – telephone, internet, software, cloud computing.
• Professional services – legal, consulting, engineering, accounting.
• Education & health services – overseas students, medical tourism, e‑learning.
• Environment‑related services (sustainability link) – eco‑tourism, renewable‑energy consulting, carbon‑offset services.

3. Recording Trade in Services

Every transaction is entered as either an export of services (credit) or an import of services (debit). The net figure that appears in the current‑account table is the Net Services Balance:

The overall current‑account balance is then:

\[

\text{CA}= (X-M){\text{goods}} + (X-M){\text{services}} + \text{Net Primary Income} + \text{Net Secondary Income}

\]

A surplus is a positive net figure; a deficit is negative.

4. Sample Current‑Account Table

5. Worked Example – Net Services Balance

Country A records the following annual service transactions (in US$ million):

• Export of transport services – 250
• Export of tourism services – 180
• Import of financial services – 120
• Import of telecommunications services – 90

Step‑by‑step calculation:

\[

\begin{aligned}

X_{\text{services}} &= 250 + 180 = 430 \\

M_{\text{services}} &= 120 + 90 = 210 \\

\text{Net Services} &= 430 - 210 = 220\ \text{million US$ (surplus)}

\end{aligned}

\]

If the other three components together give a net surplus of $150 m, the total current‑account balance is:

\[

\text{CA}=220\ \text{m}+150\ \text{m}=370\ \text{million US$ (overall surplus)}

\]

6. Why Trade in Services Matters

1. Many small or service‑oriented economies obtain a large share of foreign exchange from services.
2. Low transport costs mean services can reach distant markets easily.
3. Digital and knowledge‑based technologies (e‑learning, cloud computing, fintech) have dramatically expanded the tradable‑services market.
4. A strong services surplus can offset a goods‑trade deficit, helping to achieve an overall current‑account balance.
5. Environmental‑related services (eco‑tourism, green finance) add a sustainability dimension increasingly valued in global trade.

7. Causes of Current‑Account Imbalances (Goods + Services)

• Demand‑side factors – high domestic demand for imports, weak foreign demand for domestic exports.
• Competitiveness – relative price changes caused by exchange‑rate movements, productivity differences, quality of service provision.
• Structural factors – an economy’s resource endowment (resource‑rich vs. service‑rich) and stage of development.
• Policy influences – tariffs, subsidies, trade agreements, visa regulations, and environmental standards that affect travel, education and green‑service exports.

8. Consequences of a Current‑Account Deficit or Surplus

• GDP impact – a surplus adds to national income (net exports), a deficit subtracts.
• Employment – export‑oriented service sectors (tourism, finance, IT, green services) create jobs; a persistent deficit may lead to job losses in those sectors.
• Exchange‑rate pressure – a large deficit can cause depreciation (or force the use of foreign‑exchange reserves); a surplus can lead to appreciation.
• Inflation – an appreciating currency can lower import prices, reducing inflation; a depreciating currency can have the opposite effect.

8.1 Exchange‑rate terminology (required by the syllabus)

• Floating exchange rate – the market determines the currency’s value; it can move up or down.
• Appreciation – the domestic currency becomes stronger (its value rises relative to foreign currencies).
• Depreciation – the domestic currency becomes weaker (its value falls relative to foreign currencies).

9. Policy Tools for Balance‑of‑Payments Stability

• Exchange‑rate policy – intervention in foreign‑exchange markets to influence appreciation/depreciation.
• Trade policy – tariffs or quotas on imported services; export‑promotion schemes; negotiation of service‑trade agreements (e.g., WTO GATS).
• Fiscal & monetary policy – adjusting interest rates or government spending to influence domestic demand for imports.
• Supply‑side measures – investment in education, ICT infrastructure, professional training, and green‑technology R&D to improve the quality and competitiveness of service exports.
• Regulatory measures – easing visa restrictions for foreign students, simplifying licensing for foreign‑owned service firms, and adopting sustainability standards for eco‑services.

10. Key Points to Remember

• Services are intangible, scarce, and produced/consumed simultaneously.
• Six core categories (plus an environmental/sustainability sub‑category) are: transport, travel, financial, telecommunications & information, professional, education & health.
• Exports of services = credits; imports = debits. Net Services Balance = \(X{\text{services}}-M{\text{services}}\).
• The net services figure is one of four components that determine the overall current‑account balance.
• Digitalisation and green‑service trends are expanding the tradable‑services market, making the services component increasingly important for many economies.

11. Practice Questions

1. Identify three services that a country could export to improve its current‑account balance and explain why each has export potential.
2. Country B records the following service data (in £ billions):
   

   • Export of travel services – 1.2
   

   • Export of financial services – 0.8
   

   • Import of telecommunications services – 0.5
   

   • Import of professional services – 0.4
   

   Calculate the net services balance and state whether it is a surplus or a deficit.

3. Explain how a rise in online‑education platforms could affect the services component of the current account.
4. Evaluation: Discuss two policy measures a government could adopt to encourage growth in service exports and the possible drawbacks of each measure.