6.4 Current Account of the Balance of Payments

2026 Syllabus Objectives

By the end of this topic, you should be able to:

  • 6.4.1 Structure — Identify the four components of the current account and calculate deficits/surpluses on the current account and its sections.
  • 6.4.2 Causes — Explain the reasons why a country may have a current account deficit or surplus.
  • 6.4.3 Consequences — Describe the impact of a deficit or surplus on GDP, employment, inflation, and the foreign exchange rate.
  • 6.4.4 Policies — Explain the range of policies available to achieve balance of payments stability and evaluate how effective they might be.

6.4.1 Structure of the Current Account

https://cambridgeassistant.com

What is the Balance of Payments?

The Balance of Payments (BoP) is a record of all financial transactions between one country and the rest of the world over a period of time, usually one year. Think of it as a giant account book that tracks all the money flowing in and out of a country through trade, investment, and transfers.

The BoP is made up of three accounts:

  • The Current Account
  • The Capital Account
  • The Financial Account

In this topic, we focus entirely on the Current Account.

What is the Current Account?

The Current Account is the most important part of the Balance of Payments. It records all transactions related to:

  • The buying and selling of goods
  • The buying and selling of services
  • Income earned from investments abroad
  • Transfers of money with nothing received in return

Money flowing into the country is called a credit (+). Money flowing out of the country is called a debit (−).

The Four Components of the Current Account

1. Trade in Goods (Visible Trade)

This records the export and import of physical goods — things you can touch and see, like cars, wheat, rice, machinery, and electronics.

  • Exports of goods = money coming in → credit (+)
  • Imports of goods = money going out → debit (−)

Example: If Pakistan sells rice to the UK, that is a visible export for Pakistan (money comes in). If Pakistan buys machinery from Germany, that is a visible import (money goes out).

Visible Trade Balance = Value of Goods Exported − Value of Goods Imported

  • If exports > imports → visible trade surplus
  • If imports > exports → visible trade deficit

Sign in to view full notes