CURRENT ACCOUNT: This is the part of the balance of payments that primarily records the trade in goods and services.

CAPITAL AND FINANACIAL ACCOUNTS: This is the part of the balance of payments the records capital flows in and out of the country.

 

So we know of the current account, but at A2 you’re going to have to make sure that you know what the capital and financial account is.  Both are basically the accounts that record the flows of financial capital arising from saving, investments and currency speculation.

 

When there is a Current Account DEFICIT, it means that the value of goods and services imported are higher than how much is being exported.

 

When there is a Current Account SURPLUS, it means that the value of exported goods and services is larger than how much is being imported. 

The current account also consists of net income flows and net current transfers.  This is not as important and what you need to know about most is the TRADE BALANCE.

This is because it gives an indication of how competitive an economy is.  If a country is trading successfully it automatically makes them more internationally competitive.

 

Balance of Trade in Goods:

This is the value of VISIBLE goods exported MINUS the goods that are imported, converted into domestic currency. 

As mentioned before:

Imports > Exports = Trade Deficit on the current account

Exports > Imports = Trade Surplus on the current account

The UK has been running a Trade Deficit for quite a few years now as imports have been higher than exports.  This is due to the reduction of the manufacturing sector over the years.

 

Balance of Trade in Services:

This is the value of INVISIBLE goods exported MINUS the goods imported.

 

The difference between Invisible and Visible goods:

Visible = Tangible goods that can be ‘touched’ for example; Steel and Cars etc

Invisible = Intangible services in particular that cannot be touched. For example, Intellectual property rights and telecommunications.

 

Although the UK exports more services than goods, this has also decreased because firms go and set up in foreign countries where the cost of labour and production itself is a lot cheaper.