What is Current Account?

Current Account is sum total of

Export Import of Goods            --> This is called Trade Balance

Export Import of Services         --> These 2 are called Invisibles

Transfer payments (Unilateral Transfers)

Lets learn about in Detail

TRADE IN GOODS

(Export, Import of Goods)

We know that Export means Selling Goods outside country

Import Means Purchasing goods from Outside country

Trade Balance = Export of Goods - Import of Goods

Example

Suppose country exported goods of 500 crores

It Imported goods for 300 Crores

In this case, Trade balance = Export - Import = 500-300 = 200 Crores

TRADE IN SERVICES

Export, Import of Services

Like Goods, Services may also be exported

Example

Software Companies in India provide technical service to USA

Similarly,

We can take Service from Outside country also

Example

A company in India takes consultancy from an architect based in France

Note -

Unlike goods, Services cannot be seen

Hence, they are called Invisibles or Invisible Trade

Note -These trade in services may be of 2 types

Net Factor Income

These are Income earned by Factors of Production like compensation to employees, dividend to shareholder,

interest on loan and profit to entrepreneurs

(We take Net income = Income Earned less Income Paid)

Net Non Factor Income

These include income other than those earned by Factors of Production

Example Shipping, Insurance, Banking, Tourism etc

Transfer payments (Unilateral Transfers)

It includes amt received by residents for free (without making any present or future payment in return)

Example

Gift/Grant Received from Outside country

They are also called One-way Transfers.

What is Trade Surplus and Deficit?

If exports of country are more than Import, it is called Trade Surplus

If Imports of a country are more than Export, it is called Trade Deficit

Here, we consider only goods not services

What is Current Account Surplus/Deficit?

In a current account, there are 3 types of income

Net Export of Goods (Export-Import of Goods)

Net Export of Services (Export - Import of Services)

Unilateral Transfers

If total of all 3 is positive, it is a Current account surplus

If total of all 3 is negative, it is a Current account deficit

Can a country have trade deficit and current account surplus?

Yes

A country may have Import of goods more than exports, hence trade deficit

However, if may have positive invisibles (Net Export of services and Transfer Income) to have current account surplus

Example

Net Export of Goods (Export - Import of goods)                 -5000 (Trade Deficit)

Net Export of Services (Export - Import of Services)           6000

Unilateral Transfers                                                             1000

Current Account Surplus                                                  2000

NCERT Questions

Question 1

Differentiate between balance of trade and current account balance.

Question 17

Should a current account deficit be a cause for alarm?

Explain.

Other Books

Question 1

In the following questions, select the correct answers:

"Unilateral Transfers" are also called :

1. Bilateral Transfers
2. One-way Transfers
3. Either A or B
4. Neither A nor B

Question 2

Balance on 'Balance of Trade' can be:

1. Surplus
2. Balanced
3. Deficit
4. Either A, B or C

Question 3

Export and Import of goods is also known as:

1. Indivisible Trade
2. Visible Trade
3. One-sided transactions
4. Unrequited transfers

Question 4

Gifts and Remittances to abroad are recorded on the:

1. Credit side of Current Account
2. Debit Side of Current account
3. Credit side of Capital Account
4. Debit Side of Capital account

Question 5

If balance of trade is showing a deficit of Rs300 crores and value of

exports is Rs1200 crores, then the value of imports would be:

1. Rs300 crores
2. Rs1200 crores
3. Rs1500 crores
4. Rs900 crores

Question 6

An Indian real estate company receives rent from Google in New York.

This transaction would be recorded on ___ side of ___ account.

1. Credit, Current
2. Credit, Capital
3. Debit, Current
4. Debit, Capital

Oswaal Questions

Question 1

Identify the correct sequence of alternatives given in Column B by matching them with respective Column A:

1. 1 - (a)
2. 2 - (b)
3. 3 - (c)
4. 4 - (d)

Question 2

Identify the correct matched pair from Column A to Column B:

1. 1- (a)
2. 2 - (b)
3. 3 - (c)
4. 4 - (d)

Question 3

Assertion (A): Current account is a part of Balance of Trade.

Reason (R): Current account records exports and imports of goods and services and transfer payments.

Mark the correct choice:

1. Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of the Assertion (A).
2. Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).
3. Assertion (A) is true, but Reason (R) is false.
4. Assertion (A) is false, but Reason (R) is true.