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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)

Current Account in Balance of Payment - Teachoo.JPG

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 Goods - Teachoo.JPG

Example-Calculation of Balance of Trade - Teachoo.JPG

What is Trade Surplus - Teachoo.JPG

What is Trade Deficit - Teachoo.JPG

Difference between Trade Surplus and Trade Deficit - Teachoo.JPG

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

Difference between Visible and Invisible Trade - Teachoo.JPG

Different types of Trade in Services - Teachoo.JPG

Different Example of Export of Services - Teachoo.JPG

Different Example of Export of Services-Exercise 2 - Teachoo.JPG

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 are Transfer Payments - Teachoo.JPG

What are nilateral Transfers - Teachoo.JPG

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

 

Difference between Trade Surplus & Current Account Surplus - Teachoo.JPG

Difference between Trade Deficit & Current Account Deficit - Teachoo.JPG

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

Can we have Trade Deficit & Current Account Surplus - Teachoo.JPG

 

What are Invisibles - Teachoo.JPG

NCERT Questions

Question 1

Differentiate between balance of trade and current account balance.

View Answer

Question 17

Should a current account deficit be a cause for alarm?

Explain.

View Answer

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
View Answer

Question 2

Balance on 'Balance of Trade' can be:

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

Question 3

Export and Import of goods is also known as:

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

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
View Answer

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
View Answer

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
View Answer

Oswaal Questions

Question 1

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

Column A  Column B  
(1) Borrowings from IMF  (a) Current Account  
(2) Import of shipping services  (b) Invisible items  
(3) Export of machinery  (c) Accommodating items  
(4) Foreign aid  (d) Visible items  
  1. 1 - (a)
  2. 2 - (b)
  3. 3 - (c)
  4. 4 - (d)
View Answer

Question 2

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

Column A  Column B  
(1) Import of Petroleum from Iran  (a) Debit side of Current Account  
(2) BPO services provided by India to USA  (b) Credit Side of Capital Account  
(3) Investment by Saudi Aramco in RIL  (c) Debit Side of Capital Account  
(4) Export of Spices to Greece  (d) Debit Side of Current Account  
  1. 1- (a)
  2. 2 - (b)
  3. 3 - (c)
  4. 4 - (d)
View Answer

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.
View Answer

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Transcript

Current Account in Balance of Payment It records trade of goods, services and transfer payments Trade of Goods Trade of Service Transfer Payment It coves Export of goods Import of Goods It covers Export of Services Import of Services It covers Gift, Grant Remittance Difference of these 2 is called Balance of Trade These are called Invisibles (Services cant be Seen) These are amount received/paid without providing goods and service in return Trade in Goods It coves Export and Import of Goods (not service) Trade of Goods Export It means Selling goods to outside country Import It means Purchase of goods from outside country It is an Inflow It is outflow Difference is called Balance of Trade Example- Calculation of Balance of Trade Exports of India Item Name Spices Handcrafts IT Service Total Country UK USA Canada Amount 450 50 300 800 Imports of India Petrol Dry fruits Consultancy Total Item Name Country Saudi Arabia Afghanistan Germany Amount 200 100 400 700 Total Exports of goods Total Import of Goods Balance of Trade 200 100 400 (Balance of trade covers import export of goods total countries, not services) What is Trade Surplus If Balance of Trade is Positive, it is called Trade Surplus Export of Goods Export of Service Total Import of Goods Import of Service Total 1000 800 1800 600 200 800 Calculation of Balance of Trade What is Trade Deficit If Balance of Trade is Negative, it is called Trade Deficit Export of Goods Export of Service Total Import of Goods Import of Service Total Calculation of Balance of Trade Difference between Trade Surplus and Trade Deficit Balance of Trade if Export more than Import If Import more than Export It is called Trade Surplus It is called Trade Deficit Difference between Visible and Invisible Trade Trade Trade of Goods Trade in Service Example Export by Steel Company Example Export by IT Company This is called Visible Trade This is called Invisible Trade Because Goods are Visible (Can be seen) Because Services are Invisible (Cant be seen) Different types of Trade in Services Factor Income Non Factor income This income is earned by Factor of Production This income is earned other than by Factor of Production Example It is normally of 4 types Land Rent income Labor Wages Capital Interest Entrepreneurship Profit share Example It is normally of 3 types Shipping Transportation charges Banking Bank charges Insurance >Insurance Premium Different Example of Export of Services Example 1 An Indian employee works in Foreign Company and earns Salary Indian Employee Foreign Company This is Factor income (Income from Factor of Production called Labour) Different Example of Export of Services Example 2 An Indian Ship Transport Goods of Foreign Company & earns Transport charges Indian Ship Foreign Company Transport of Goods Transport Charges This is Non Factor Income (Income other than land, labour, capital, entrepreneurship) What are Transfer Payments It covers Amount Received or paid by Residents for free without providing goods/ services in Return Example - Gift, Grant, Remittance Example 1 A gift given by Indian citizen to his Canadian Friend Indian Citizen Canadian Citizen Example 2 USA Govt gave aid for Covid Relief to India. USA Govt Grant for COVID Relief Indian Govt Note It is also called Unilateral Transfers What are Unilateral Transfers It refers to 1 Way Transfers Note:- Transfer Payments are Also Called Unilateral Transfer Types of Transfer Two Way Transfers One Way Transfers Goods Money Money Here, One person provides goods/ service Other person provides money Example Factor Payment (Rent, Wages etc) Here, No goods or Services provided Only money is transferred Example Transfer Payment Gift/Remittance etc Difference between Trade Surplus & Current Account Surplus Receipt Export of Goods Export of Service Remittance Received Total Payments Import of Goods Import of Service Gift Given Total 1000 800 500 2300 600 200 700 1500 Difference between Trade Deficit & Current Account Deficit Receipt Export of Goods Export of Service Remittance Received Total Import of Goods Import of Service Gift Given Total Payments 1000 800 500 2300 1600 1200 700 3500 Can we have Trade Deficit & Current Account Surplus? Receipt Export of Goods Export of Service Remittance Received Total Import of Goods Import of Service Gift Given Total Payments 1000 900 300 2200 1600 200 100 1900 What are Invisibles? Trade in Services and Transfer Payments are called Invisibles For Calculation of Current Account Surplus/Deficit We consider 3 things Total Exports of goods Total Import of Goods Trade Deficit These 2 are called invisibles as we cant physically see them

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CA Maninder Singh is a Chartered Accountant for the past 12 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.