What this lesson teaches
I can describe the parts of the current account and calculate a deficit or surplus.
Syllabus K343, 6.4.1. Structure of the current account of the balance of payments: components of the current account of the balance of payments: trade in goods, trade in services, primary income, secondary income; calculation of deficits and surpluses on the current account of the balance of payments and its component sections
Make a guess
A Filipino domestic worker in Singapore sends part of her pay home each month. Where does this appear in Singapore's current account?
- It does not appear, because no goods are traded.
- Trade in services, because she provides a service.
- Secondary income, as a transfer abroad.
Show the answer
Secondary income, as a transfer abroad.
Remittances are transfers with nothing given in return, so they are recorded as secondary income outflows.
The current account records trade in goods and services plus primary and secondary income flows with other countries.
The balance of payments records all money flows between a country and the rest of the world. Its main part for this syllabus is the current account.
The current account has four components. Trade in goods: exports minus imports of physical goods, such as machines and food. Trade in services: exports minus imports of services, such as tourism, shipping and banking.
Primary income: income earned from abroad minus income paid abroad. This includes wages, profits, interest and dividends. Secondary income: transfers with nothing given in return, such as workers' remittances and foreign aid.
Current account balance = trade in goods balance + trade in services balance + primary income balance + secondary income balance. A positive total is a surplus; a negative total is a deficit.
Sort these
Sort each flow into the part of Singapore's current account that records it.
Groups: Trade in goods, Trade in services, Primary income, Secondary income.
- A foreign worker sends part of her pay home to her family.
- A foreign-owned factory sends profits to its owners overseas.
- Singapore exports semiconductors to China.
- Tourists from Japan stay in Singapore hotels.
- Singapore imports rice from Thailand.
- A Singapore firm pays a US bank for financial advice.
- Singapore gives aid to a country hit by an earthquake.
- A Singapore resident earns dividends from shares in a US firm.
Show the answer
Trade in goods
- Singapore exports semiconductors to China. Physical goods sold abroad are trade in goods.
- Singapore imports rice from Thailand. Physical goods bought from abroad are trade in goods.
Trade in services
- Tourists from Japan stay in Singapore hotels. Foreigners buying hotel stays is an export of services.
- A Singapore firm pays a US bank for financial advice. Buying a service from abroad is an import of services.
Primary income
- A foreign-owned factory sends profits to its owners overseas. Profits paid abroad are primary income outflows.
- A Singapore resident earns dividends from shares in a US firm. Income from investments abroad is primary income.
Secondary income
- A foreign worker sends part of her pay home to her family. A remittance is a transfer with nothing given in return.
- Singapore gives aid to a country hit by an earthquake. Foreign aid is a transfer, so it is secondary income.
- Trade in goods
- Exports minus imports of physical goods.
- Trade in services
- Exports minus imports of services.
- Primary income
- Wages, profits, interest and dividends, in minus out.
- Secondary income
- Transfers such as remittances and aid, in minus out.
| Component | Inflow | Outflow | Balance |
|---|---|---|---|
| Trade in goods | 300 | 340 | -40 |
| Trade in services | 120 | 90 | +30 |
| Primary income | 25 | 35 | -10 |
| Secondary income | 5 | 15 | -10 |
| Current account | - | - | -30 |
Worked example: Calculating a current account balance
Use the figures in the table below (US$ billion).
- Trade in goods: 300 - 340 = -40.
- Trade in services: 120 - 90 = +30.
- Primary income: 25 - 35 = -10. Secondary income: 5 - 15 = -10.
- Current account balance = -40 + 30 - 10 - 10 = -30: a deficit of US$30 billion.
Watch out for this
A current account deficit means the government is spending more than it collects in tax.
That is a budget deficit. A current account deficit means more money flows out of the country than in through trade and income.
Check your understanding
A country receives dividends from shares its residents own in foreign firms. Which part of the current account records this?
- Primary income
- Trade in services
- Secondary income
Show the answer
Primary income
Right. Dividends, profits, interest and wages earned abroad are primary income.
Check your understanding
A country's trade in goods balance is -$12 billion, its trade in services balance is +$20 billion, its primary income balance is -$5 billion and its secondary income balance is -$1 billion. What is its current account balance?
- A deficit of $12 billion
- A surplus of $8 billion
- A surplus of $38 billion
- A surplus of $2 billion
Show the answer
A surplus of $2 billion
Right. -12 + 20 - 5 - 1 = +2, so the current account is in surplus by $2 billion.
Check your understanding
In which part of the current account is a payment of profits by a foreign-owned factory to its parent company abroad recorded?
- Trade in goods
- Primary income
- Trade in services
- Secondary income
Show the answer
Primary income
Right. Profits, interest and wages earned across borders are primary income.