The current account measures the flow of income into and out from a country. In this sense it is similar to an individual's income statement where the credits represent income and debits represent expenses.

The largest and most often publicized component of the current account is the Balance of Merchandise Trade (BOT) which is the difference between the $ value of merchandise exports and imports (X-M).  In 1992, the US ran a trade deficit of $96.138 billion, about half of what it was in 1997 ($197.954 billion). 

As for the balance, the US ran a balance of trade surplus consistently until 1971. After 1971, the trade deficit continued to grow, with only a brief interruption during the 1980-82 recessions, and by 1987 the balance of trade deficit had peaked at 3.5% of GDP. In large part, the ballooning of the trade deficit can be attributed to the precipitous slowdown in the growth of US exports that we will see accompanied a rather dramatic rise in the value of the dollar. In 1986 the value of exports remained virtually unchanged from their 1980 level, while imports had increased by nearly 50 percent. Since 1986, however, exports have rebounded and the balance of trade deficit for 1997 stood at 2.4% of GDP.

In addition to the growth in the levels of international transactions, there has also been a substantial change in its composition. Between 1965 and 1997, there has been nearly a 60% drop in agricultural products' share of exports that has been partially matched by increases in the exports of capital goods and automobiles. In 1997 agricultural products accounted for 10% of US exports, slightly less than the value of automobile exports (10.4%) and substantially less than the 40% share of capital goods.

On the import side, the two most politically sensitive categories are petroleum and automobiles. Petroleum's share of imports in 1992 was 12%, above where it was in 1965 (8%), but sharply lower than the rate in 1980. As a result of the two rounds of OPEC price increases in the 1970s and a fairly inelastic demand for oil, petroleum accounted for nearly one-third of all imports by 1980 (35%). Once the collapse of oil prices began in the recession of 1980-82, however, petroleum's share of exports began its slide back to 9%.  Automobiles, meanwhile, account for 21% of US imports, down sharply from the 35% range in the mid 1980s.  Finally, capital goods represent 37 percent of imports, up sharply from the 6% share in 1965.

Sectoral Breakdown of Commodity Trade
(millions of $s)

Geographic Breakdown of Trade
(millions of $s)

A less publicized, but more rapidly growing component of the BOPA, is the  balance in services. Included here are tourist expenses, transportation costs, and royalties and licensing fees.  In 1992 the balance on the service account was $56.411 billion and by 1997 it had grown to $87.748 billion. 

Sectoral Breakdown of Service Trade
(millions of $s)

The third component of the current account is the income received from investments abroad.  In 1970 the inflow of income into the US from control of foreign assets was more than twice the outflow, but by 1997 the imbalance had ended and  the US was running a $5.5 billion deficit on this account.  During this twenty-seven year period, the income on foreign assets grew twice as fast as imports and four times the rate of service growth and by 1997 income on foreign owned assets share of GDP was ten times higher than in 1960. 

The final component of the current account measures unilateral transfers. Included in this item are government transfers and grants and private remittances.  For an industrialized country such as the US, remittances tend to be small and the flow tends to be outward as 'guest workers' send money home.  In 1997 the net outflow totaled $39.691 billion.

The combined balance of these four components is called the Balance on Current Account. In 1997 the Balance on Current Account was $155.215 billion, smaller than the Balance on Merchandise Trade account due to the surplus in services.

When examining the second component of the balance of payments, the capital account, it may be helpful to think of the balance on capital account as the mirror image of the balance on current account. Returning to the case of the individual, if an individual is spending more than she is earning, then she must finance this by borrowing or selling off some of her existing assets. Similarly, if the US is running a trade deficit, the value of imports exceeds the value of exports and there is a flow of dollars out of the country. What will be done with these dollars? The holders of these dollars will try to invest the dollars because it makes no sense just to hold dollars because they earn no interest, although in the late 1980s the dollar was circulating as a world currency during the currency crises. Eventually, these dollars will make it back into the US as foreign investors attempt to buy US assets with their dollars. In this way the current account deficit will be offset by a capital account surplus.

The capital account consists of the net increase in US assets abroad, primarily an outflow of dollars to purchase foreign assets, and the net increase in foreign assets in the US, an inflow of currency to purchase US assets.   Included in both components of the capital account are figures for acquisitions of the government and private sectors.  Included in the government figure are the the net additions/subtractions from the reserve account, the central bank's holdings of foreign currency. The central bank of each country holds a portfolio of international currencies and during any period the level of these reserves is likely to change. 

In 1997, the net increase of US assets abroad was $478.502 billion, almost all of it in private assets.  Direct investment (new factories, land, businesses) was $121.843 billion while the purchase of foreign securities (stocks, bonds, government securities) totaled $87.981 billion - almost evenly split between stocks and bonds. The capital inflow, as measured by the net increase in foreign assets in the US, totaled $733.441 billion.  This included $146.710 billion for US Treasury securities, $93.449 billion in direct investment, and $196.845 billion for other securities - $66 billion in stocks and $131 billion in corporate and other bonds.

Accompanying the growth in foreign direct investment have been some significant changes in its composition. First, with regard to the regional composition of the investment, the regional shares remained fairly constant throughout this period. The South and West were clearly the favorite regions of foreign investors attracting nearly 40% and 26% of the foreign investment during this period.  The largest sources of foreign direct investment in the US are the UK and Japan, both with investments valued in excess of $100 billion and the Netherlands at $70 billion [1994 figures]. 

Before leaving the discussion of the capital account, let's take one final look at the change in the account in 1998 as the financial crises rolled through the world's financial markets.  In the table below there are some significant changes that seemed to have taken place between 1997 and the second quarter of 1998.  [Note: the 1998II figures are annual estimates based on second quarter figures].   By the second quarter of 1998  US purchases of foreign stocks virtually dried up in 1998, but this was offset by an increase in purchases of foreign bonds.  Foreign investors, meanwhile, have increased their holding of US bonds substantially, a factor in the rising price of US Treasury securities in late 1998. 

We have now looked at the books for international transactions and derived a few measures of the volume of transactions.   It is time to look at the prices of currencies which are used in these transactions.