What Is a Current Account? - Definition & Examples

Instructor: Tara Schofield
Every country that trades with another country, has an account that they use to keep track of trade in goods, services, money received from investments, and money donated. In this lesson, we will learn more about current accounts and look at some examples.

What is a Current Account?

A current account is an economic term that helps indicate how well a country is able to trade with foreign markets. Taking into consideration the balance of trade, it looks at the amount of products a country exports versus how much it imports. The current account represents the net effect of this transaction on the given country.

In other words, if a country exports more than it imports, its current account will have a positive balance. Likewise, if it imports more than it exports, the current account balance will be negative. A negative balance in the current account is much like a negative balance in a personal checking account. It means the country is overdrawn or has spent more than it has earned. A long-term deficit can bankrupt a country and destroy a national economy.

The current account provides valuable information about the economic and financial wellness of a country. The higher the balance of the current account, the more the country is exporting, and making money, rather than spending it. Focusing on growing the current account, allows countries to look for more ways to use their own resources and cuts the amount of products they have to import. It also allows countries to look for more goods to sell in the world market.

Examples of a Current Account

For instance, let's imagine that you manage importing and exporting for a small country in Europe. The Prime Minister of your country wants to have a positive current account. She reinforces the importance of ensuring that your country is exporting more goods to the world, than importing products for your needs. As you consider the assets in your area, you realize your country has natural resources that could easily be exported without negatively affecting the land, not to mention, greatly increasing your country's income as well. You also realize that by increasing the use of solar power, you could reduce the amounts of natural resources you have to purchase from other countries.

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