The Current Account of the Balance of Payments

The second video in a series focused on the balance of payments, a crucial macroeconomic topic for A-Level and IB students, delves into the current account:

Overview of the Balance of Payments

Purpose: Captures and measures all transactions between residents of one nation and non-residents during a period (e.g., a year).
Components: Comprises the current account, the capital account, and the financial account, with emphasis on the current account and financial account for educational purposes.

The Current Account Explained

Composition: Includes payments for trade in goods and services, plus net flows of primary and secondary income.
Key Components:
1. Trade Balance in Goods
2. Trade Balance in Services (addressed in a previous video)
3. Net Primary Income
4. Net Secondary Income

Net here signifies inflow minus outflow, or credit minus debit.

Key Points to Understand

Distinction: It’s crucial not to confuse the current account with the government’s budget balance; they are different entities.
Examples:
- A trade deficit in goods and services can impact the current account negatively.
- Primary income involves returns on overseas investments like dividends from shares or rental income from property abroad.
- Secondary income includes current transfers like foreign aid, contributions to international organizations, and net contributions to the EU budget.

The UK's Current Account

Trade Deficits: Has consistently run a deficit in goods and a smaller surplus or balance in services.
Primary Income: Recently shown a deficit, indicating more money flowing out than in from overseas investments.
Secondary Income: Historically a deficit area due to foreign aid and transfers to the EU and UN.

Implications and Comparisons

UK's Position: Has run a current account deficit for over 20 years, indicating a pattern of more money leaving the country than coming in, impacting its external payments balance.
Global Context: Countries like the United States also face current account deficits, whereas Germany, South Korea, Japan, and Norway experience surpluses.