Econ Grapher

Current Account

What is the Current Account?
The current account (along with the capital account) forms part of a country's balance of payments. The current account is the sum of the balance of trade (exports minus imports), net investment income (interest and dividends), and transfer payments (e.g. foreign aid). A current account suplus will increase a country's net foreign assets, and a deficit will decrease a country's net foreign assets. Typically a current account balance is driven by the trade balance, but in open economies varying proportions of investment income will influence the balance (e.g. much of New Zealand's banks and major companies are foreign owned, so a time of high profits (and thus dividends) will lead to a larger deficit unless the trade surplus is high enough to offset it). In a free and open integrated global economy the current account will be regulated by exchange rates and supply and demand.

How does it relate to Markets?
The current account balance is often closely watched in markets because of its implications on the currency (for instance, countries with large deficits are likely to see a depreciation in their currency - which will in turn make exports more attractive and result in a reduction of the current account deficit). It is also symptomatic of how the economy is tracking - especially for countries that have a lot of foreign ownership of assets, and it also has the trade balance embedded in it. The current account will also be of relevance to interest rates, because e.g. a persistent deficit will lead to (or rather be symptomatic of) a higher use of foreign savings to finance domestic investment. 

Sources and further reading:
About.com - What is the Current Account?
CIA World Factbook Country Comparison - Current Account Balance
Wikipedia - Current Account
Are Trade Deficits a Drag on U.S. Economic Growth?
Roubini Global Economics - Current Account Analysis

Graph Library:
Metric - Current Account

Original Source: http://www.econgrapher.com/encyclopedia-currentaccount.html

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