Trade and the current account

	Trade data
	Imports of goods and services
	Exports of goods and services
	Trade balance
	Current-account balance
	Financing requirement

Trade data
National accounting practices vary, but in general governments produce two sets of figures relating to external flows.

Overseas trade statistics (OTS), which measure imports and exports of goods and services.

Balance of payments (BOP) accounts, which record all crossborder currency flows including movements of capital, with emphasis on transactions rather than physical movement.

Apart from the fact that balance of payments accounts have a wider coverage, the main difference is that BOP accounts exclude goods passing across borders where there is no change of ownership, but include changes of ownership which take place abroad (such as ships built and delivered abroad).

In addition, overseas trade statistics usually record the value of trade at the point of customs clearance, measuring exports fob (free on board) and imports cif (including cost, insurance and freight). For bop purposes insurance and freight are separated out and imports of goods are shown fob. Transport and insurance are shown as imports of services if the payments are made to overseas companies; otherwise they are domestic transactions which are excluded from the accounts.

Using OTS figures
Figures on an OTS basis are usually the first available and they are preferable for examining the effect of imports on domestic economic activity. They usually show imports cif which is the cost at the point of arrival and is directly comparable with the cost of goods produced at home.

Using BOP figures
BOP figures should be used for analysis of external trade in relation to GDP. Exports and imports of goods and services on a BOP basis match the figures in GDP. The total of rents, interest, profits and dividends plus net current transfers is shown as "net income from abroad" in national accounts statistics (the difference between GDP and GNP).

Imports of goods and services
Merchandise or visible imports relate to physical goods. Imports of services are payments to foreigners for invisibles such as shipping, travel and tourism; financial services including insurance, banking, commodity trading and brokerage; and other items such as advertising, education, health, commissions and royalties.

In practice, many countries give prominence to visible trade figures because they are among the most reliable and rapidly available figures on external flows. Even so, they are available only after a lag, are frequently revised as more information comes to hand and are subject to various errors and omissions. Figures for invisibles are harder to collect, less reliable and are published only quarterly by some countries.

Value and volume
Changes in import values reflect changes in foreign prices, exchange rates and quantity (volume). Real exchange rates are useful for identifying price and currency effects. Import volume indicates "real changes", and value gives the overall balance of payments position.

Exports of goods and services
Exports generate foreign currency earnings. Export growth boosts GDP which in turn implies more imports, so exports should never be considered in isolation. Merchandise or visible exports relate to physical goods. Exports of services are income from foreigners for invisibles such as shipping, travel and tourism; financial services including insurance, banking, commodity trading and brokerage; and other items such as advertising, education, health, commissions and royalties.

Value and volume
Demand for exports depends on economic conditions in foreign countries, prices (relative inflation and the exchange rate) and perceptions of quality, reliability, and so on. Real exchange rates help to identify inflation and currency effects. Export volume indicates "real changes", and value gives the overall balance of payments position.

Trade balance
The trade balance is the difference between exports and imports. It may measure visible (merchandise) trade only, or trade in both goods and services. Invisibles are difficult to measure, so the balance of trade in goods and services is less reliable and more likely to be revised than the visible balance.

Small variations in imports or exports can have a significant effect on the trade balance. For example, if exports are $10bn and imports are $11bn, a 10% rise in imports to $12bn will double the trade deficit from $1bn to $2bn.

Current-account balance
The current-account balance is the balance of trade in goods and services plus net rents, interest, profits and dividends and current transfer payments.

Countries which produce monthly current-account figures base their initial estimates on simple projections of previous rents, interest, profits, dividends and transfers, which themselves may be revised. Consequently this component of the current account is even less reliable than the goods and services balance and is subject to heavy revision.

Rents, interest, profits and dividends
These reflect past capital flows. Countries (including the Gulf oil exporters) with current-account surpluses acquire foreign assets which generate further current-account income in future periods.

Transfer payments
These include foreign workers' remittances to their home countries, pension payments to retired workers now living abroad, government subscriptions to international organisations and payments of foreign aid.

Host countries with large populations of foreign workers experience transfer outflows. However, for many developing countries workers' inward remittances save the current account from becoming an unmanageable deficit. Remittances were a particularly important source of foreign currency for poor Arab countries with workers in the rich oil exporting Gulf states during the oil boom years of the 1970s.

The EIU's current account presentation is shown in the table below.

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Financing requirement
The current-account deficit plus principal repayments due. This is one measure of a country's requirement for foreign exchange for the year in question. But other measures are possible - we could in theory include principal repayments due on short-term debt but data availability is poor.

The financing requirement can be meet via net inflows of foreign direct investment, portfolio investment, IMF credits, building up arrears (not repaying debt or meeting interest payments), other capital flows such as short term borrowing, or drawing down on official reserves.

Related topics:

Capital account

Prices

Debt

	Overseas trade statistics (OTS), which measure imports and exports of goods and services.

	Balance of payments (BOP) accounts, which record all crossborder currency flows including movements of capital, with emphasis on transactions rather than physical movement.