Explaining the Current Account

Learn about the current account

The current account is all about trade surpluses and trade deficits. If a country has a trade surplus, that means the country is exporting more than it imports. Vice versa, if the country has a trade deficit, that means they are importing more goods than exporting.

The US has historically been in a trade deficit. We can see this through the current account. The Current account is a part of a specific country’s balance of payments. It consists of three things: trade balance (exports - imports), net income (comes from investments), and net transfers (includes foreign aid, etc)

The trade balance is easy enough to understand, but let’s dive deeper into the net income and the net transfers. Net income especially comes from foreign investments, meaning it’s money that comes in or out from other countries. Suppose you, as an American, own a stock from a company that’s located in China. The money coming in or out of that stock would be a net transfer.

As for net transfers, these are considered one-way payments that a country sends or receives. Many people who are immigrants send money back to their home country (remittances), and this would be considered a net transfer. Another one would be supplying foreign aid to a country.

The biggest thing that makes up the Current Account is, in fact, the trade balance, which shows the difference between a country’s exports and imports. But the net income and the net transfers are big parts of the current account, as they show where money is being allocated to, and how much money is coming in versus how much is leaving. If more money is leaving, you are in a current account deficit, but if more money is coming in, you run a current account surplus.