The Current Account

The current account is one half of a country's balance of payments, the record of all its transactions with the rest of the world. It has three pieces. The biggest is net exports: exports of goods and services minus imports. Next is net income, the earnings residents make on foreign investments minus what foreigners earn on investments inside the country. Last is net transfers, things like foreign aid or remittances sent between countries with nothing bought or sold in return. Add these three and you get the current account balance. A country that imports more than it exports, spending more abroad than it earns, runs a current account deficit; one that sells more than it buys runs a surplus.

A trade deficit sounds alarming, but it isn't a scoreboard of winners and losers. Every dollar a country sends abroad to buy imports has to go somewhere, and most of it comes back as foreign investment: foreigners buy that country's stocks, bonds, real estate, or factories. That inflow shows up as a surplus in the financial account, the balance of payments' other half, and it offsets the current account deficit almost by accounting necessity. Meanwhile the country's own consumers get access to cheaper or more varied imported goods, which is a real gain, not a loss.

The current account connects directly to GDP through net exports, one of the four components of spending alongside consumption, investment, and government purchases. When net exports fall, that subtracts from GDP's spending side, same number that drives the current account down. Exchange rates tie in too: when a currency depreciates, exports become cheaper for foreigners and imports become pricier at home, which tends to push net exports and the current account toward surplus over time.