At the economic level, the term current account is understood to mean the summary and static comparison of all goods and services that have been exported or imported from abroad.
The balance forms an important economic progress when it comes to determining the efficiency of an economy. This corresponds to the sum of all partial balances, including:
- trade in goods (trade balance)
- Services (service balance)
- Balance of earned income and property income
- the transfer balance.
The current account is a partial account of the balance of payments, which provides information about the entire external economic interdependencies of a country.
The current account as part of the balance of payments
According to wholevehicles, in the balance of payments, services and consideration are divided into corresponding sub-balances and these are then combined to form the balance of payments. This includes all transactions between domestic companies in an economy and the rest of the world. The balance of payments can be divided into various sub-balances and in addition to the trade, service and capital account, the current account is also part of one of the sub-balances. If the balance of payments is viewed roughly, it can be broken down into the following two main sub-balances: the financial account, which includes financial transactions, and the current account, which includes goods imports and exports.
If the trade balance and the services balance are combined, then you get a balance and this is defined as the difference between the export and import value. This balance records all flows of goods and represents the so-called external contribution, which is also a component of the national product and has an impact on production and employment. This means that if the balance sheet deteriorates, then employment and production in the country also deteriorate.
The transfer balance is the last partial balance of the current account and this records the private and public transfers made and received, such as transfers from foreign workers to their home countries, the amounts to international organizations and development aid. In general, it can be said here that the transfer balance includes all free transfers between home and abroad.
All three partial balances of the current account result in the net export and this can be positive as well as negative.
The current account surplus
The current account balance is referred to as the current account surplus as soon as it is greater than zero, which means that net foreign assets increase. The wealth increases by the balance of the current account. If there is a current account surplus, then this means that the country exports more than it imports and thus the demands on foreign countries increase.
The current account deficit
A current account deficit arises when the current account balance is less than zero and that means that more is imported than exported. If a current account deficit arises, then the country consumes more than it produces and thus the foreign assets are reduced. This means that the country is in debt abroad.