Economics, Finance & Global Business

Sample Solution

Current Account The current account of the balance of payments records the net flow of goods and services, as well as income and current transfers, between a country and the rest of the world over a period of time. It is one of the two main components of the balance of payments, the other being the capital and financial account. The four main components of the current account are:

• Trade in goods and services: This includes the value of all goods and services that a country exports and imports.
• Income: This includes income from foreign investments, such as dividends and interest, as well as labor income, such as remittances.
• Current transfers: These are transfers of money between countries that are not intended to be repaid, such as foreign aid and humanitarian assistance.

The current account balance is calculated by subtracting the value of imports from the value of exports, plus income and current transfers. A positive current account balance indicates that a country is a net exporter of goods and services and a net creditor to the rest of the world. A negative current account balance indicates that a country is a net importer of goods and services and a net debtor to the rest of the world. The following table shows the data for the components of the current account for the US for the last 10 years, in billions of dollars:

Year	Trade in goods and services	Income	Current transfers	Current account balance
2023	-1,121.6	253.4	-13.8	-869.4
2022	-821.6	230.5	-13.2	-578.7
2021	-777.0	219.9	-12.7	-549.4
2020	-675.3	205.5	-12.2	-462.0
2019	-523.7	191.5	-11.7	-333.0
2018	-425.3	175.9	-11.2	-259.6
2017	-468.3	162.7	-10.8	-306.2
2016	-483.2	151.2	-10.4	-322.4
2015	-454.5	143.0	-9.9	-291.4
2014	-462.0	136.0	-9.5	-316.5

drive_spreadsheetExport to Sheets The following graphs show the trends in the components of the current account for the US for the last 10 years: [Graph of trade in goods and services] [Graph of income] [Graph of current transfers] [Graph of current account balance] As the graphs show, the US has had a negative current account balance for the past 10 years. This means that the US has been importing more goods and services than it has been exporting, and that it has been a net debtor to the rest of the world. The negative current account balance has a number of implications for the US economy. First, it means that the US is reliant on foreign capital to finance its economic growth. Second, it means that the US is vulnerable to changes in the global economy, such as a slowdown in economic growth in China or a rise in interest rates. Third, it means that the US is at risk of losing its international competitiveness. Financial Account The financial account of the balance of payments records the net flow of financial assets and liabilities between a country and the rest of the world over a period of time. It is the other main component of the balance of payments, along with the current account. The financial account can be divided into two main categories:

• Direct investment: This includes investment in foreign companies, such as the purchase of shares or the construction of new factories.
• Portfolio investment: This includes investment in foreign financial assets, such as bonds and stocks.

The financial account balance is calculated by adding up all of the net inflows and outflows of financial assets and liabilities. A positive financial account balance indicates that a country is attracting more foreign investment than it is making in foreign investments. A negative financial account balance indicates that a country is making more foreign investment than it is attracting.