The current account
The trade balance
As we see in Table 1.1, the current account includes the trade balance, which comprises merchandise exports FOB minus imports FOB.Merchandise refers to all movable goods such as cars, textiles and appliances, and “FOB” means free on board.FOB implies that distributive services like transport and handling performed on goods end up at the customs frontier of the economy, from which the goods are exported.
Non-financial services
The next two items of the current account are exports and imports of non-financial services.Non-financial services include such things as freight, insurance, passenger and travel services.Freight refers mainly to the carriage or transport of goods between economies.Insurance covers risks that may occur on movable goods during the course of shipment, on the carriers themselves, and other risks which endanger such as life and property.The transportation of persons represents the largest component of passenger services.It includes services for which passengers pay on board a carrier and for which they pay carriers.Travel covers the goods and services acquired from an economy by non-resident travelers for their personal use during their stay in that economy.The most common goods and services are lodging, meals, entertainment and transportation within the economy, together with gifts, souvenirs and personal articles that travelers take out of the economies visited.
Investment income
The next item in the current account is about investment income, derived from owning foreign financial assets.It includes interest and dividends from portfolio investment but excludes the earnings of incorporated enterprises that are not formally distributed.If, for example, earnings per share on a portfolio investment are GBP 10 and a GBP 5 dividend is declared, only the GBP 5 dividend would be counted in the balance of payments.The same is not true for non-distributed earnings on direct investments, which are treated as investment income.The distinction between portfolio investment and direct investment revolves around the investor’s intentions concerning the management of the foreign company.When the investor’s purpose is to have an effective voice in the management of the foreign enterprise, it is considered as a direct investment; when there is no such purpose it is considered as a portfolio investment.We will have more to say later on about this distribution.
Unrequited transfers
The final components of the current account are private unrequited transfers and official unrequited transfers.Private unrequited transfers refer mainly to resident immigrant workers’ remittances to their country of origin as well as gifts, dowries, inheritances, prizes, charitable contributions, etc.Official unrequited transfers include voluntary subsidies, military aid, voluntary cancellation of debt, contributions to international organization, indemnities imposed under peace treaties, technical assistance, taxes and fines.Because of the non-market quality of unrequited transfers, adherence to the market price principle applied to the other accounts is often impossible.The general rule of thumb is that when unrequited transfers are offsets to real or financial resources, their value should be assumed to be the same as that of the real or financial resources, to which they correspond.If these resources themselves have no actual market value, they should be valued at cost or some national value determined by one of the parties to the transaction.
The current account as an income statement
This completes the components of the current account.We can see that the current account resembles the income statement of a private company.Exports of goods and non-financial services plus credits of unrequited transfers correspond to sales.Imports of goods and non-financial services plus debits of unrequited transfers correspond to non-financial expenses such as cost of goods sold, selling expenses and general administrative costs.Investment income corresponds to dividends and interest.One major difference does exist, however, in that there is no distinction between costs accruing to operations and costs associated with capital investment.Consequently, to the extent that there is no provision for depreciation and that imports of non-financial goods and services can include investment expenditure, it is not clear from the balance of payments whether there is a profit or loss.This type of question can only be answered in the context of the overall economy, a problem we will take up in the following chapter.