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Components and Causes of a Deficit in Current Account

Question

Describe the four components of the current account of the balance of payments. Explain what might cause a deficit in this account. [8]

Category:

International Trade and Exchange Rates

[CIE AS level November 2017]

Preview Answer


Step ➊ : Define ‘current account of the balance of payments’ and 'current account deficit' in the introduction.


The current account on the balance of payments measures the inflow and outflow of goods, services, investment incomes and transfer payments. The current account consists of four parts. A current account deficit means that the combined debit items on the four parts exceed the combined credit items on the four parts.


Step ➋ : Describe the four components of the current account of the balance of payments.


➤ 2.1 The first component of the current account is the trade in goods.

This covers the exports and imports of goods such as cars, TVs and clothing. Exports give rise to credit items while imports give rise to debit items. The trade-in goods balance is the revenue earned from exports of goods minus the expenditure on the imports of goods. The trade in goods balance can also be called the balance of trade, the visible balance and the merchandise balance.

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