Current Account | A-Level Economics Notes
These revision notes cover everything you need to know about the Current Account for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.
What is the balance of payments?
The balance of payments is a record of a country’s financial transactions with the rest of the world.
The current account is the account that we learn about in detail.
What is the current account of the balance of payments?
The current account is one of the accounts on the balance of payments, and it has four components.
- trade in goods
- trade in services
- primary income (investment income) - income earned from investments abroad e.g. profit/dividends/interest
- secondary income (transfers) - transfers of money e.g. from governments/grants
The trade balance (goods and services) is the most important part of the current account in the long-run.
What is the financial account of the balance of payments?
The financial account includes direct investment, portfolio investment, financial derivatives, and reserve assets.
What is the capital account of the balance of payments?
The capital account is a relatively small part of the balance of payments.
What is a current account deficit?
A trade deficit is when the value of imports exceed the value of exports.
A current account deficit is when more there is more money leaving than entering the country in terms of: trade in goods and services, income flows and transfers.
What is a current account surplus?
A trade surplus is when the value of exports is greater than the value of imports of goods and services.
A current account surplus is when more there is more money entering than leaving the country in terms of: trade in goods and services, income flows and transfers.
What are three factors that can affect the current account?
Three factors that affect the current account are:
- Exchange rates (a weaker exchange rate makes exports cheaper and imports more expensive)
- interest rates
- demand for exports
- demand for imports
- Competitiveness (more competitiveness leads to an increase in exports)
- productivity
- costs of production
- relative inflation rates
- Economic growth (higher incomes leads to a higher marginal propensity to import)
What is competitiveness?
Competitiveness refers to the ability of a country to sell its exports to the rest of the world.
What are two advantages and two disadvantages of a current account deficit?
Two possible disadvantages of a current account deficit are:
- a decrease in aggregate demand
- a sign of poor international competitiveness (weak supply-side)
Two possible advantages of a current account deficit are:
- a sign of strong economic growth (high marginal propensity to import)
- a current account deficit often self-corrects automatically