Current Account of Balance of Payments (Copy)

6.4 Current Account of Balance of Payments

6.4.1 Structure of the Current Account

• Trade in goods (visible trade): Exports and imports of physical goods (cars, oil, food).
• Trade in services (invisible trade): Exports and imports of services (tourism, banking, shipping).
• Primary income: Net income from abroad such as interest, dividends, and profits earned by residents.
• Secondary income (transfers): Payments not in exchange for goods/services (aid, remittances, pensions).
• Overall current account balance = (Exports – Imports of goods) + (Exports – Imports of services) + Net primary income + Net secondary income.

6.4.2 Causes of Current Account Deficit and Surplus

• Causes of Deficit:
  • High imports of consumer and capital goods.
  • Declining competitiveness of domestic industries.
  • Strong currency (appreciation) making exports expensive.
  • Domestic inflation higher than trading partners.
  • Rising demand for foreign goods due to income growth.
• Causes of Surplus:
  • Strong export industries with competitive prices.
  • Weak domestic demand leading to lower imports.
  • Depreciation making exports cheaper.
  • Abundant natural resources boosting exports.
  • High global demand for a country’s goods/services.

Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course

6.4.3 Consequences of Current Account Deficit and Surplus

• Consequences of Deficit:
  • Fall in GDP if domestic industries lose demand.
  • Rising unemployment in export industries.
  • Depreciation of the currency due to lower demand.
  • Inflation if imported goods (like oil/food) are essential.
  • Borrowing from abroad may increase foreign debt.
• Consequences of Surplus:
  • Higher GDP growth due to strong exports.
  • Rising employment in export sectors.
  • Appreciation of the currency (reduces competitiveness over time).
  • May cause trade tensions with other countries.
  • Could lead to inflation if demand exceeds supply.

6.4.4 Policies to Achieve Balance of Payments Stability

• Expenditure-reducing policies: Reduce domestic spending on imports.
  • E.g., higher taxes, reduced government spending.
• Expenditure-switching policies: Encourage consumers to switch from imports to domestic goods.
  • E.g., tariffs, quotas, subsidies, currency depreciation.
• Supply-side policies: Improve competitiveness of domestic industries.
  • Better education, training, infrastructure, innovation.
• Monetary and fiscal policies: Used to adjust demand in the economy.
• Effectiveness depends on:
  • Price elasticity of demand for exports and imports.
  • Size of measures taken.
  • Time lags for policies to show results.

Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course