Current Account Balance

Definition


What is the Current Account Balance?

Goods, services, and assets flow from one country to another in the international economy. Consider some of the following examples: U.S. firms and consumers import automobiles manufactured in Japan, and clothing manufactured in China. U.S. firms export computer software and equipment to Indonesia and the European Union, and lumber and wood pulp to Japan. The American Red Cross sends millions of dollars in disaster aid to earthquake victims in Turkey. A British tourist pays for a hotel room and for restaurant meals while visiting San Francisco. A German automobile manufacturer invests millions to build a plant to produce cars in South Carolina. U.S. soldiers stationed in South Korea spend part of their pay on consumer goods and restaurant meals in Seoul. All of these transactions add to or subtract from the U.S. balance of payments, which is a bookkeeping account of all the international transactions between the U.S. and the rest of the world. The current account balance is the part of the balance of payments that includes international trade in currently produced goods and services. The current account balance has the following elements

The current account balance is negative (a deficit) for the U.S., largely because of the large U.S. merchandise trade deficit. In order for the balance of payments to equal zero, the current account deficit must be offset by a capital account surplus. A capital account surplus occurs when foreign purchases of U.S. assets such as stocks, bonds, and real estate exceed U.S. purchases of foreign assets.

©2004  South-Western.  All Rights Reserved   webmaster  |   DISCLAIMER