Current account balance

Current account is one of the two major parts of the balance of payments (the other being capital account). The current account balance, in essence, is trade balance plus net factor income plus net transfer payments.

The trade balance refers to exports minus imports; positive net sales abroad contribute to a current account surplus, whereas negative sales abroad contribute to a current account deficit.

Net factor income refers to returns received on production; rent, wages, capital, etc.

Transfer payment refers to the redistribution of income in the market system.

Current account can also be defined as the changes in net foreign assets.

Reducing a current account deficit can be done through exporting more, or putting tariffs or quotas on imports - in essence, reducing free trade.

The US has traditionally run a current account deficit, whereas countries that focus on exports such as Germany, China, Japan and Russia have current account surpluses.