In the context of economics, the current account describes the condition of foreign trade in a country, which is recorded in a balance of payments sheet. To compute for a country’s current account, one must combine its balance of trade with its net factor income.
The balance of trade is determined by subtracting the country’s imports from that of its exports. A trade surplus, which simply means that exports are higher than imports, is favorable. The opposite condition is that of a trade deficit.
Transfer payments, such as foreign aid, should also be factored into the equation when determining the current account.
Generally, there is a current account surplus whenever the value of exports is higher than that of imports. The reverse situation is known as a current account deficit.
A deficit in a country’s current account is reversed or reduced either by efforts to decrease imports or increase exports. These two modes of action are not mutually exclusive and may be implemented simultaneously. To reduce importation, authorities may implement stricter restrictions on imports. Additional taxes may also be imposed. On the other hand, to increase exports, a country may take steps to devalue its own currency in order to lower prices on exports. Governments can also provide subsidies in order to boost its industries and promote exportation.
