Current Account Balance

Connections


Connections to Key Topics with Additional Resources

Topic Connections and Additional Resources
Production Possibilities Frontiers

The largest component of the current account balance is the balance of trade. Specialization and trade based on the law of comparative advantage creates a gain from trade that can be illustrated as an outward shift in a production possibilities frontier.

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Output, Income, and the Price Level

Gross domestic product (GDP) is made up of consumption spending, investment spending, government spending, and net exports. Net exports are a major element of the current account balance. When the U.S. runs a trade deficit with the rest of the world, U.S. import purchases exceed foreign purchases of U.S. goods and services, and so net exports make a negative contribution to U.S. GDP.

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International Trade Most countries engage in international trade with the rest of the world. A country's current account balance tracks the net flows of goods, services, and unilateral transfers between the country and the rest of the world.

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International Finance

The U.S. has had a deficit in its current account balance since the 1980's, primarily because of a persistently large merchandise trade deficit. In order for the balance of payments to equal zero, a deficit in the current account must be offset by a surplus in the capital account. Thus foreign purchases of U.S. assets such as stocks, bonds, and real estate must exceed U.S. purchases of foreign assets.

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Developing and Transitional Economies Many developing countries have specialized in exporting commodities such as coffee, lumber, and beef, the value of which has declined relative to manufactured consumer good imports. Thus many developing countries have found themselves having a current account deficit, which must be offset by foreign loans and other injections into the capital account in order to achieve a balance of payments. The International Monetary Fund (IMF) was created as a part of the Bretton Woods agreement to provide loans to countries having short-term balance of payments difficulties.

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