Current account consist
- Net trade in goods( visible trade, exporting and importing tangible products)
- Net trade in services ( exporting and importing intangible products such as Banking , finance, Air travel)
- Net investment income from abroad (British investment abroad, IPD come back to UK)
- Net transfers
Current account deficit occurs when the country`s expenditure to abroad exceeded the revenue from abroad, as the result of sales of its exports , income and current transfers from abroad is being less than imports, income and current transfer going abroad.
Causes of current account deficit:
- change in income at home and abroad.
If there is a fall in income abroad, the demand for the country`s export is likely to be reduced since people`s purchasing power is less.
- Exchange rates.
If the exchange rate is high( such as UK), the exports would expensive, the price is less competitive, the imports would be cheap. therefore, people in the country would buy more imports , and people abroad would not buy so much exports.
- Investment income.
An outflow of investment income, it occurs if the investment that the foreign residents made in the country earns more interest, profits and dividends than the investment made by the country to other country.
How to reduce current account deficit.
- devaluation
- deflation
- investment
- control income
- tariffs
Current account surplus, when a country revenue from abroad exceed the expenditure abroad.It is all opposite of current account deficit, however, there is a important note to take into account.
Current account surplus may happen when the economy is in a recession, people in the country may not want to buy many products , including imports. Therefore, the firms find that it is difficult to sell the products, they may competing more vigorously in export markets.
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