Trade balances and the current account
| English | 中文 | Pinyin |
|---|---|---|
| primary income/ˈpraɪməri ˈɪŋkʌm/ | 初次收入 | chū cì shōu rù |
| secondary income/ˈsekəndəri ˈɪŋkʌm/ | 二次收入 | èr cì shōu rù |
A decision you can investigate
- A country can have a deficit on goods trade and a surplus on services. Income from assets and current transfers can then change the current-account total again.
- Name the balance before judging its sign.
Build the explanation
- The balance of payments records transactions between residents and non-residents over a period. The current account includes goods, services, primary income 初次收入 such as labour/investment income, and secondary income 二次收入 such as current transfers. Its balance is not just merchandise trade. The capital account includes capital transfers and non-produced non-financial assets; the financial account records financial asset/liability transactions.
- A goods/services trade surplus means exports exceed imports for the stated scope; a deficit means the reverse. A current-account deficit requires counterpart financing or asset changes in the accounting framework, but this does not by itself explain its sustainability. Financial-account sign conventions vary; do not invent a plus sign for every inward flow without defining the convention.
Work through the evidence
- Fictional goods exports 120 and imports 150 give goods balance−30. Services exports 60 and imports 40 give services balance+20. Combined goods/services trade=−10. Primary income received 15 and paid 25 gives−10; secondary income received 8 and paid 3 gives+5. Current-account total=−10−10+5=−15.
- A foreign investor’s purchase of a domestic company share is a financial transaction, not an export of a newly produced service. A dividend payment abroad instead enters primary income. A migrant’s current remittance can enter secondary income under the applicable residence classification; immigration status alone does not decide statistical residence.
What is combined goods/services trade balance?
Add goods−30 to services+20.
Test the limits
- A deficit may reflect investment-related imports that support future capacity, weak competitiveness, high domestic demand or temporary shocks; the context matters. A surplus is not automatically evidence of higher living standards. Financing composition, future returns, debt service, exchange rates and external demand affect sustainability.
- Do not count a share purchase as both financial inflow and export. Distinguish stocks of foreign assets/debt from annual flows. Accounting counterparts, reserve transactions and errors/omissions must be interpreted using the published convention rather than assuming every component individually balances to zero.
What is the current-account balance?
Include primary−10 and secondary+5 in addition to trade−10.
A current-account deficit and a goods-trade deficit must have the same value.
Services, primary income and secondary income can change the total.
Apply and explain your answer
- Why is the current-account deficit 15 rather than the goods deficit 30?
- Services, primary income and secondary income contribute:−30+20−10+5=−15.
Where does the stated foreign share purchase belong?
It changes financial ownership rather than paying for current output or a current transfer.
Use the terms precisely
- primary income: Cross-border income from production inputs, including relevant labour and investment income.
- secondary income: Current transfers between residents and non-residents without a corresponding current exchange.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Fictional goods exports 120 and imports 150 give goods balance−30. Services exports 60 and imports 40 give services balance+20. Combined goods/services trade=−10. Primary income received 15 and paid 25 gives−10; secondary income received 8 and paid 3 gives+5. Current-account total=−10−10+5=−15. A foreign investor’s purchase of a domestic company share is a financial transaction, not an export of a newly produced service. A dividend payment abroad instead enters primary income. A migrant’s current remittance can enter secondary income under the applicable residence classification; immigration status alone does not decide statistical residence.
A deficit may reflect investment-related imports that support future capacity, weak competitiveness, high domestic demand or temporary shocks; the context matters. A surplus is not automatically evidence of higher living standards. Financing composition, future returns, debt service, exchange rates and external demand affect sustainability. Do not count a share purchase as both financial inflow and export. Distinguish stocks of foreign assets/debt from annual flows. Accounting counterparts, reserve transactions and errors/omissions must be interpreted using the published convention rather than assuming every component individually balances to zero.
The balance of payments records transactions between residents and non-residents over a period. The current account includes goods, services, primary income such as labour/investment income, and secondary income such as current transfers. Its balance is not just merchandise trade. The capital account includes capital transfers and non-produced non-financial assets; the financial account records financial asset/liability transactions.