Economics
Chapter 27: Current account of the balance of payment
There are three parts of the balance of payment: the current
account, capital account and the financial account
We are going to learn about current
The balance of payment measures a country’s transactions
with the rest of the world.
Technically, the balance of payment always balances, but the
deficit of the balance of payment is the deficit of the current
account.
Current account of BOP
I. record payments for trade in goods and services plus net
primary and secondary income flows.
II. The current account is the sum of BOT (goods and
services), net primary income, and net secondary income.
Primary income: your investment income from foreign
investments. It includes:
III. Income direct investment: income from profit from
invested foreign company
IV. Income portfolio investment: income from dividends
and interest from portfolio investment.
V. Compensation of employees
VI. Taxes and Wealth’s
Secondary income in the context of BOP: current transfers
between residents and non-residents.
- Examples of secondary income transfers include foreign aid
and contributions to international organisations such as the
UN and EU.
- This is on the side of political and economic interests, such
as deregulation.
Secondary income includes:
VII. Remittances: money sent by foreign workers back to
their home countries
VIII. Foreign aid: Grants and loans from one country to
another
IX. Diaspora Contributions: Contributions made by a
country to support projects and family members in their
home country
X. Payments made to international institutions: membership
fees in international organisations, ASEAN, WTO, …
Remittances and the current account
Remittances are categorised as a credit item in the current
account. As it contributes positively to the current account
balance.
In stock phrases
“In the black” = in credit, means you have a positive balance
“In the red” = in debt, negative balance
*You can use these phrases in the text*
BOP calculation
Total BOT (X-M) (both from goods and services)
BOP (current account) = Total BOT + primary and secondary
income.
Activity 27.1
1. -$950B
2. $270B
3. -$680B
4. -$554B
What is a current account deficit?
A current account deficit means that the value of a country's
exports of goods and services, investment incomes, and transfer
inflows are lower than spending on imported goods and services.
investment income flow and outward transfer
Net outflow of income
A sign of economic weakness needs lending
Not always a bad thing, as it indicates strong economic
growth due to importing capital goods
How is the current account deficit financed?
1. Current account deficit = external deficit, a net borrows
2. Thus, the country attracts net financial inflows on the
financial account
3. This might be achieved when the stock market attracts
more investment through rising rice or property prices.
4. Or high interest rate (monetary policy)
5. Sell overseas assets
6. Selling the debt for the bond market.
Why are countries running a current account deficit?
XI. Depends on the difference in cyclical and structural causes
Cyclical causes: Rise in consumer spending when the economy is
getting well, so import rises
Structural causes: Supply-side weaknesses, such as low capital
investment, low productivity, innovation and rate of utilisation.
Short-run causes of current account deficit: (cyclical)
XII. A fall in the value of export
XIII. A boom in consumer spending
XIV. The exchange rate is appreciating, making the country's
export sector less price-competitive in the overseas market
XV. Broad-based economic boom leading to rising import
demand.
Long-run causes of current account deficit: (structural)
XVI. Low rate of capital investment
XVII. High cost and inflation
XVIII. Non-price competition
XIX. Decline of previously dominant exports, like
deindustrialisation.
Booming economy -> increase consumer spending -> import more ->
consumer saving reduced -> reduced investment -> supply becomes
more inelastic -> current account deficit.