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Balance of payments: Current account

AP.MACRO:
MEA‑4 (EU)
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MEA‑4.A (LO)
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MEA‑4.A.1 (EK)
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MEA‑4.A.2 (EK)
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MEA‑4.A.3 (EK)
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MEA‑4.A.4 (EK)
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MEA‑4.A.5 (EK)
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MEA‑4.A.6 (EK)
Learn about the balance of payments (BOP) in this video that explores the current account for the United States in 2011. Topics include what is included in the current account balance and what a current account deficit is. Created by Sal Khan.

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  • marcimus pink style avatar for user Heidi Arctander
    If the government runs a budget surplus and the private sector invests less than it saves, is there a balance of payments surplus?
    (7 votes)
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    • blobby green style avatar for user jeffrey.dickinson
      If the private sector saves more than it invests private citizens/firms could be loaning their "savings" to their own central bank (holding government bonds). If a government is running a surplus it is not necessarily financed from abroad. The question is a bit vague but the answer is that it depends really on what the capital account and current account look like.
      (8 votes)
  • leaf orange style avatar for user Dmitry Gracy
    I would like to extend my previous question by adding another example where there is no real flow of currency out of the country. Let's say an Italian pizza maker has a pizzeria in the USA and let's imagine he has only Italian nationality. All money he earns he spends in the USA. So, in this case there is no money transfer, all money stay in the country. How does it influence the current account, or more precisely how does it influence the Income Payment line?Thanks)
    (5 votes)
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  • duskpin seed style avatar for user Tarab Shah
    at , when he says 'giving away to the rest of the world', does it include items and their monetary worth or is it just money? I.e if the Us sends barrels of food to Africa, does their monetary value get added into the Net Transfers?
    (3 votes)
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  • blobby green style avatar for user raghav.kheria
    Why is a Current Account Deficit generally considered a bad thing? A business imports some raw material, makes payment to the supplier and the transaction is over. Whats so bad about it? Also why does CAD lead to weakening of the home currency?
    (2 votes)
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    • male robot hal style avatar for user Andrew M
      It's not necessarily a bad thing, and it is common among developed countries. But if you are importing more than you are exporting, then the country you are importing from is building up a reserve of your currency, which eventually they are going to use either to buy assets in your country (Oh no, a Chinese company is buying out a US company! Oh no, a Japanese company bought a landmark building!) or to buy stuff that you produce. In the latter case, the importing country is basically building up a liability, because right now the importer is handing over slips of paper in exchange for televisions, and later it has to take back those slips of paper and hand over some good or service that it produces.

      The currency pressure simply arises from the fact that the importing country has to sell its currency to buy the currency of the country it wants to import from. You have to pay for imports from China with yuan, not dollars. True, the Chinese company might accept dollars, but still it will just need to convert those dollars to yuan to pay for supplies and labor in China. It's just currency supply and demand.
      (5 votes)
  • leaf orange style avatar for user Dmitry Gracy
    Sal is talking about all the reasons for money to enter or to get out the USA.For example Imports. But what if the importers who import, let's say, rice from Japan would buy yens in the USA and pay the Japanese exporters with yens in Japan. In this way USD won't leave the country but the amount of goods which the USA import will grow anyway (Imports grow). Does this operation have an impact on the current account or in other words will it increase the imports line in the current account? Thanks)
    (3 votes)
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    • male robot donald style avatar for user Noble Hwang
      Well money doesn't come from nothing and so there would have to be a conversion from dollars to yen. Since money is just a measure of value, theoretically, the value of the money would be the same, even if the amount or type of currency is different. And so even if this happens often in business, official records will measure this value in USD.
      (2 votes)
  • spunky sam blue style avatar for user Bob Page
    iIn the current account, if the net transfer is the difference between outflows (imports and income payments) and inflows (money from exports and income receipts), why is it then added to the other figures for the total current account? Isn't that counting the net transfer twice?
    (3 votes)
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  • aqualine seed style avatar for user hjain.jain007
    what basically is BOP account measuring?
    (2 votes)
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  • leafers seedling style avatar for user Anurag Poudel
    In income payments when the foreigner is owning an asset and making money in dollars in the us,will he exchange in the us itself or in his/her own country.Exchanging the currency in the us itself would make no sense at all as the dollar still remains in the us.The foreigner's country would not earn dollars as well.
    (2 votes)
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  • starky ultimate style avatar for user Yunus Gümüşsoy
    Is there anyone else having some problem with English subtitle?
    (2 votes)
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  • piceratops seedling style avatar for user Rahul Vashi
    Why would the U.S "just give away money to the rest of the world" (with regards to net transfers) if we are running a negative current account? Is this done in order to establish control/political sway in other countries?
    (2 votes)
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Video transcript

- [Instructor] What we are going to try to understand in this video is the balance of payments. And it's really how a country accounts for the different ways that money is flowing into the country or payments are happening into a country or payments are happening outside of a country. And right over here, I have information for the United States in 2011, all of the numbers right over here are denominated in dollars. And in green I have all of the reasons why currency or why payments would be made to the US either the government of the US, the federal reserve of the US, or to citizens of the US. And in orange, I have all the reasons why payments would be made to folks outside of the US, either the government, central banks, or private citizens. And for this video, I'm going to first focus on the left hand, these reasons right over here. And this you could view, this is the current account. The current account. And the current account focuses on things related to trade, so exports and imports, things related to income in that period, so if I'm getting dividends from a stock that's a German company or if someone in Germany is getting dividends from a stock that's an American company, and just transfers of money. I give money to my mom in France to help support her. So that's what factored in in the current account. In the next video, we will talk about the capital account, the capital account, which focuses on transfers or payments that are due to changes in ownership of assets and we'll see how they all balance out either in the next video or maybe the video after that. But let's first focus on the current account. So in green, I have all the reasons why the US got payments from the rest of the world in 2011. So the first one right over here is exports. You can imagine if we are exporting, and this is in billions, so this is 2.1, this is 2,105 billion which is the same thing as 2.1 trillion. If we're exporting 2.1 trillion dollars worth of goods and services, then the rest of the world is going to have to pay that much to us. So this is going to be an inflow, this is going to be a payment, this is a reason why we have more dollars after all the appropriate currency transactions take place, why more dollars have to come to the US, either to US private citizens, to the government, or to the federal reserve. And for the most part, this is going to be for private citizens or corporations. And this right over here is income that Americans get from owning assets abroad in other countries. So imagine that I, I'm an American citizen, I own an apartment complex in London, the folks in London have to pay rent on that, I convert that rent to dollars and I bring it back to the US, that would be an income receipt to me. It's the reason why currency or payments are being made to the US. And so once again, that's why I've colored these right over here in green. Now let's think about the other side of that coin. Obviously, we're not just selling stuff to the rest of the world, the rest of the world is selling stuff to us. And that's what imports are factoring in and the US actually runs a trade deficit. It imports more than it exports to the tune, if we wanted to round, of about 2.7 trillion dollars. And once again, if we're buying other people's goods and services, we needed to make payments to them. Currency needs to go to them. And so you see it's to the tune, and that's why I wrote it right over here of in orange. And once again, income payments, other side of income receipts. This is foreigners owning assets in the United States. If a foreigner owns a pizza parlor in the United States, that pizza parlor makes a $100,000 in a given year, and that $100,000 will go to that foreigner, it will be an income payment. And so that's what this factors in right over here. This is income on foreign-owned assets. It does not go into an American. It does not go to the American government or private citizen or corporation or the federal reserve. It goes to someone outside of the country. And so this would be an outflow of payments outside of the country. And so this last part right over here, this is net transfers. This is literally just on a net basis, Americans giving money away to the rest of the world. And it actually since Americans give away more than they receive from the rest of the world, we're not talking about transactions, this is kind of just pure I'm an American citizen, I give money to my mom and friends, or this could even be foreign aid, the US government giving aid to a country, and since the US does give more than it receives, we just write it down on a net transfer basis and it is right over here a net outflow. And so we can figure out looking at this, while just based on these causes, the trade deficit, the income receipts, and the net transfers, where the US is transferring more currency abroad or getting more currency onto, I guess you could say, into its ownership. And to do that, let's get our calculator out. Let me get the calculator out. And so let's think. Okay, so this is all of the money that we are getting. These are the payments, these are the inflows to the US. So let's add those up, 2,105 billion plus 739 billion, and now let's subtract out all of the outflows of capital or I should say all of the outflows of currency from the US. All of the payments that go out of the US. So let's subtract, so the payments we have to make due to imports, so 2.7 trillion and then we have the 518 billion of income that foreigners make on US assets. And then finally, or foreign-owned assets of the US, or in the US I should say, and then the money that the US just gives away to the rest of the world on a net basis. And you see here, when you just look at the current account, the US is running a current account deficit. For just these causes alone, the US is making more payments than it is receiving. And it's to the tune of 474 billion dollars. So let me write it right over here. So our current account, current account deficit is to the tune, I already forgot the number, 474 billion dollars. If that number was positive, I would call it a current account surplus.