The current account and trade balance
| English | 中文 | Pinyin |
|---|---|---|
| current account/ˈkʌrənt əˈkaʊnt/ | 经常账户 | jīng cháng zhàng hù |
| trade deficit/treɪd ˈdefɪsɪt/ | 贸易逆差 | mào yì nì chā |
A decision you can investigate
- A country sells tourism services abroad but imports more machinery than it exports goods.
- A goods deficit can coexist with a services surplus.
Build the explanation
- The current account 经常账户 records trade in goods and services, primary income and current transfers with the rest of the world. Goods are sometimes called visibles; services, invisibles. A deficit means current-account debits exceed credits; a surplus reverses that.
- Domestic and foreign prices, product quality and the exchange rate affect export/import demand. A cheaper domestic currency can make exports cheaper abroad and imports dearer at home, but quantities need time to respond.
Work through the evidence
- Fictional exports of goods are 80 and imports 110: goods balance = −30. Service exports are 40 and imports 25: services balance = +15. Net primary income is −3 and net transfers +2.
- Current-account balance = −30+15−3+2 = −16. The trade balance alone is −15. Buying imports is a spending leakage from domestic production; low export demand can weaken domestic output.
What is the combined goods/services balance?
Add −30 goods to +15 services.
Test the limits
- A deficit must be matched by external financing or reserve movements across the balance of payments, allowing for measurement discrepancies. Difficulty financing it can create pressure on reserves or the currency. Higher foreign prices can raise imported inflation.
- A deficit is not automatically harmful: machinery imports may build future capacity. Its causes, persistence and financing matter. A price change does not guarantee an improved balance if demand responds little.
What is the full current-account balance in the case?
Include −3 primary income and +2 transfers.
Every current-account deficit proves that imported goods have no productive value.
Capital-goods imports may improve future productive capacity.
Apply and explain your answer
- Why is the goods balance not the complete current-account balance?
- Services, primary income and current transfers also enter the current account.
Why may higher foreign prices cause imported inflation?
Dearer imported inputs can also raise domestic production costs.
Use the terms precisely
- current account: The external account covering goods, services, primary income and current transfers.
- trade deficit 贸易逆差: Imports of goods and services exceed their exports in value.
Match the terms to their meanings.
Each term describes a specific mechanism in this lesson.
Fictional exports of goods are 80 and imports 110: goods balance = −30. Service exports are 40 and imports 25: services balance = +15. Net primary income is −3 and net transfers +2. Current-account balance = −30+15−3+2 = −16. The trade balance alone is −15. Buying imports is a spending leakage from domestic production; low export demand can weaken domestic output.
A deficit must be matched by external financing or reserve movements across the balance of payments, allowing for measurement discrepancies. Difficulty financing it can create pressure on reserves or the currency. Higher foreign prices can raise imported inflation. A deficit is not automatically harmful: machinery imports may build future capacity. Its causes, persistence and financing matter. A price change does not guarantee an improved balance if demand responds little.
The current account records trade in goods and services, primary income and current transfers with the rest of the world. Goods are sometimes called visibles; services, invisibles. A deficit means current-account debits exceed credits; a surplus reverses that.