Wednesday, May 4, 2016

Economics 101 – Current Account

The current account is an important indicator about an economy's health as it defines the the balance of trade, by looking at the sum of its goods and services exports minus its overall imports.

A positive current account balance indicates that a nation is a net lender to the rest of the world, while a negative current account balance indicates that it's a net borrower. A current account surplus increases a nation’s net foreign assets by the amount of the surplus while a current account deficit decreases accordingly.

The current account and the capital account are the two main components of a nation’s balance of payments. A nation’s current account balance is influenced by numerous factors – its trade policies, exchange rate, competitiveness, foreign exchange reserves and inflation rate among other factors. The currency exchange rate has a significant influence on the trade balance, and by extension, on the current account.

An overvalued currency makes imports cheaper and exports less competitive, widening the current account deficit or narrowing the surplus. Conversely, an undervalued currency boosts exports and makes imports more expensive, increasing the current account surplus or narrowing the deficit. Nations with chronic current account deficits become more vulnerable during periods of heightened uncertainty.

The table show that France isn't doing well compared to its European neighbors, while the UK does terrible, just like the US the world largest consumer of Chinese made stuff and to a lesser extent, both Canada and Australia.

No comments: