Current Account: Definition and 4 Components

current account
The current account includes these imported onions, but not the homegrown cat. Photo: Silvestre Machado/Getty Images

Definition: The current account is a country's trade balance plus net income and direct payments. It measures a country's imports and exports of goods, services and trade in capital.

It is in balance when the country's residents have enough to fund all purchases in the country. Residents include the people, businesses and government. Funds include income and savings. Purchases include all consumer spending as well as  business growth and government infrastructure spending.

The goal for most countries is to accumulate money by exporting more goods and services than they import (trade balance). It wants to take in more earnings. A deficit occurs when a country's government, businesses, and individuals export fewer goods and services than they import. They take in less capital from foreigners than they send out. 

The current account is part of a country's balance of payments. The other two parts are the capital accounts and the financial accounts.

The Four Current Account Components

The Bureau of Economic Analysis divides the current account into four components: trade, income, direct transfers of capital, and asset income. 

1. Trade: Trade in goods and services is the largest component of the current account. Therefore, a trade deficit is enough to create a current account deficit. That occurs when a country imports more goods and services than it exports. 

2. Net Income: These are interest and dividend payments to foreigners who own assets in the country.

It's also wages paid to foreigners who work in the country. These include:

  • Income earned on foreign assets owned by a nation's residents and businesses. That's receipts, such as interest and dividends, earned on investments.
  • Income earned by a country's residents who work overseas.

 If the income paid out by a country's individuals, businesses and government to their foreign counterparts are more than they receive, it contributes to a deficit.

  The opposite will cut the deficit.

3. Direct Transfers: This includes remittances from workers to their home country. For example, Mexico receives $25 billion from abroad. Although there are no exact figures, it's probable that most are from immigrants living in the United States. President Trump threatened to stop those payments if Mexico did not pay for a border wall he wants to build. He would use the Patriot Act to confiscate Western Union payments. That would reduce 1 percent of Mexico's economic output. But would double the country's current account deficit of $29 billion.

Direct transfers also include a government's direct foreign aid. For example, the United States spends $22 billion a year on foreign aid. That adds to America's $502 billion current account deficit, the largest in the world.

A third direct transfer is foreign direct investments. That's when a country's residents or businesses invest in ventures overseas. It has to be more than 10 percent of the foreign company's capital. If it's less, it doesn't count as FDI. 

The fourth direct transfer is bank loans to foreigners.

4. Asset Income: These are increases or decreases in assets such as bank deposits, securities, real estate and central bank and government reserves.

U.S. assets owned by foreigners add to the deficit. These include:

  • A country's liabilities to foreigners such as deposits of foreign residents at the country's banks.
  • Loans made by foreign banks abroad to domestic banks.
  • Foreign private purchases of a country's government bonds (such as U.S. Treasury securities).
  • Sales of the securities, such as stocks and bonds, made by a nation's businesses to foreigners.
  • Foreign direct investment, such as reinvested earnings, equities, and debt.
  • Other debts owed to foreigners.
  • Assets, like those described, held by foreign governments.
  • Net shipments of the country's currency to foreign governments.

Again, the opposite will subtract from the deficit: More specifically, this includes:

  • Deposits at foreign banks.
  • Bank loans to foreigners.
  • Sales of foreign-based securities.
  • Direct investment made in foreign countries.
  • Debts owed to a country's residents and businesses by foreigners.
  • Foreign assets owned by a country's government.
  • A country's official reserve assets of foreign currency. (Source: "Current Account," Bureau of Economic Analysis.)

How the Current Account Is Part of the Balance of Payments

What Is the Balance of Payments?

  1. Current Account
  2. Capital Account
  3. Financial Account