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Glossary of terms

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Current Account

The current account is an important grouping of accounts within the balance of payments. The current account shows flows of goods, services, primary income, and secondary income between residents and nonresidents.
  • Goods and Services
    • Goods: general merchandise, goods for processing, repairs on goods, goods procured in ports by carriers, nonmonetary gold.
    • Services: transportation,travel, communications services, construction services, insurance services, financial services, computer and information services, royalties and license fees, other business services, personal, cultural, and recreational services, government services.
  • Primary income
    • Compensation of employees, investment income.
  • Secondary income (current transfers)
    • general government (e.g., current international cooperation between different governments, payments of current taxes on income and wealth, etc.).
    • Other transfers (e.g., workers' remittances, premiums less service charges, and claims on non-life insurance).
 
The current account balance shows the difference between the sum of exports and income receivable and the sum of imports and income payable.
 
In lay terms, a current account surplus is equivalent to an excess of earnings relative to expenditure. Since by definition the balance of payments must balance, that current account surplus is compensated by increased lending to foreign partners, either by acquiring foreign assets (capital account), or by accumulating foreign reserves or swelling the investment portfolio abroad (financial account).
 
Conversely, a current account deficit means that the country's spending surpasses its earnings. Accordingly, at the balance of payments level, the deficit is compensated by heavier borrowing from abroad, either by selling assets (capital account), or by selling debt securities, e.g. bonds (financial account). In the case that the country's currency is an international reserve currency, such as the US dollar, the current account deficit may be largely compensated by a corresponding "export" of banknotes of the country's currency, which the partners will keep as international reserves.
 
The current account balance can also be seen equivalently as the gap between disposable income and expenditure. The implication of this relationship for balance of payments analysis is that improvement in an economy's current account requires either an increase of income relative to expenditure, or a reduction in expenditure relative to income.
 
[Quoted or adapted from Balance of Payments and International Investment Position Manual (BPM6), IMF - International Monetary Fund, Washington D.C. 2011]