What Creates a Current Account Balance

The Economics Dictionary defines the balance of the Current Account as follows:

The current account balance is the difference between a country's savings and its investment. "[If the current account balance is] positive, it measures the portion of a country's saving invested abroad; if negative, the portion of domestic investment financed by foreigners' savings."

The current account balance is defined by the sum of the value of imports of goods and services plus net returns on investments abroad, minus the value of exports of goods and services, where all these elements are measured in the domestic currency.

In layman's terms, when a country's current account balance is positive (also known as running a surplus), the country is a net lender to the rest of the world. When a country's current account balance is negative (also known as running a deficit), the country is a net borrower from the rest of the world.

The U.S. current account balance has been in a deficit position since 1992 (see chart), and that deficit has been growing. Thus the United States and its citizens have been borrowing heavily from other countries such as China. This has alarmed some, though others have argued that it means eventually the Chinese government will be forced to raise the value of its currency, the yuan, which will help alleviate the deficit. For the relationship between currencies and trade, see A Beginner's Guide to Purchasing Power Parity (PPP).

U.S. Current Account Balance 1991-2004 (in Millions)

1991: 2,898
1992: -50,078
1993: -84,806
1994: -121,612
1995: -113,670
1996: -124,894
1997: -140,906
1998: -214,064
1999: -300,060
2000: -415,999
2001: -389,456
2002: -475,211
2003: -519,679
2004: -668,074
Source: Bureau of Economic Analysis