The Current Account is an economic indicator that summarizes the flow of all goods, services, income, and payments to and from the country. The report acts as an indicator of how the country’s economy interacts with the rest of the world.
Let us dig in to understand the concept of current account economic indicator in forex a little better.
What is the current account?
The current account is one of the three components that make up the country’s Balance of Payments. This includes a detailed accounting of all international interactions measured with the Financial Account, Capital Account, and Current Account.
The capital and financial account refer to accounts mainly with financial assets and investments. On the other hand, the current account presents a detailed breakdown of the country’s relations with the rest of the world economy. It shows the relationship on a routine basis, without investment products.
The Current Account is made up of four sub-balances: The Trade Balance, the Services Balance, the Income Balance, and the Direct Transfer Balance.
Balance of Trade
It collects the balance of the exchange of goods with the outside, both the purchase of products and the sale.
Trade Balance = Export of Goods – Import of Goods
Balance of Services
The balance of services includes the export and import of the following services:
- passenger cars and travel
- other services
- financial services
- computer services
- services provided to companies
- personal, cultural and recreational services
- government services
- royalties and income from intangible property
The balance of the Services would be:
Balance of Services = Export of Services – Import of Services
The income balance includes revenue from the following sections:
- Work income
- Investment income
- Direct investments
- Portfolio investments (dividends)
- Interest on loans and deposits
Income Balance = Perceived Income – Income Paid
Balance of Direct Transfers
The balance of direct transfers refers to the difference between capital outflows and inflows without a counterparty. It can be said that they are capital flows without an “exchange” of products (although this is not always real). For example, donations, international aid transfers, sending money by immigrants (or money received sent by immigrants), prizes, etc.
Current Transfer Balance = Perceived Transfers from abroad – Transfers Paid
Causes of Surplus and Deficit in the Current Account
As we have seen in some paragraphs above, the current account surplus or deficit is very useful. It helps in predicting changes in the value of the national currency. There will be a surplus when the Current Account has a positive balance, and there will be a deficit when the Current Account has a negative balance.
Among the causes that can cause a deficit are:
- Low export prices or low export volume
- The decrease in savings (which can be due to good economic prospects)
- Bad fiscal policies that increase national spending
- Failure in the financial system that generates a disproportionate increase in credit operations
On the other hand, among the most common causes that cause a current account surplus is:
- Increase in private savings
- Low investments in the country
- Insufficient liquidity supply by monetary authorities
- Aging population
- Low national investment within the country
- Strong foreign trade sector with high exports that exceed national demand
Hopefully, you have got a basic idea of the current account economic indicator in forex. Don’t worry, the more you study, the more you will understand.