Current account of the balance of payments — common mistakes

When asked to analyse the effect of a current account deficit, state that this means the value of imports is greater than exports (M>X), making (X-M) negative. This is a net withdrawal from the circular flow of income, causing AD to shift left. Always support your explanation with a correctly labelled AD/AS diagram showing a fall in real GDP and the price level.

When calculating current account components, show each line clearly — examiners award method marks. Always state whether a figure is a surplus (+) or deficit (−).

Not necessarily. A deficit can be a sign of a strong, growing economy where consumers have high incomes and a strong demand for imported goods. It can also be sustained if the country is attracting significant foreign investment (a financial account surplus). However, a large, persistent deficit that is difficult to finance can become a serious problem, potentially leading to currency depreciation and a build-up of foreign debt.

No. While the balance of trade is the largest component, it is possible for a country to have a trade deficit but still run a current account surplus. This would happen if the country has a sufficiently large surplus on its primary income account (e.g., from profits on extensive overseas investments) and/or its secondary income account that outweighs the deficit on the trade balance.

No, the overall balance of payments must, by definition, always balance to zero. A current account deficit must be matched by an equal and opposite surplus on the combined capital and financial accounts. This surplus shows how the current account deficit is financed – for example, through foreign direct investment or borrowing from abroad. It signifies that the country is a net borrower from the rest of the world.