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.

View answer

Basis	Balance of Trade	Current Account Balance
Meaning	It refers to the difference between the exports and imports of goods.	It refers to the difference between the exports and imports of goods, services and Unilateral transfers.
Scope	It is a narrow concept and is a part of current account.	It is a wider concept and includes Balance of Trade.
Nature of Transactions	It includes only visible items	It includes visible and invisible items.

Question 17

Should a current account deficit be a cause for alarm?

Explain.

View answer

Current account deficit refers to the excess of total imports of goods, services and Unilateral transfers over total exports of

goods, services and unilateral transfers.

This situation implies that the country is a debtor to the rest of the world.

However, its not the case every time that it is a cause of alarm.

The country may be running in current account deficits to increase the possibility of future exports and productivity.

Also, investment will increase the capital stock of the country which will led to increased output in the future.

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

B. One-way Transfers

Explanation

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

Example

Gift/Grant Received from Outside country

Question 2

Balance on 'Balance of Trade' can be:

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

View answer

D. Either A, B or C

Explanation

Balance of Trade refers to the difference between exports and imports of goods.

If export > Import, then the balance is surplus

If export < Import, then the balance is deficit.

If export = Import, then the balance is balance

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

B. Visible Trade

Explanation

Since the goods in transfer are visible, they are called Visible Trade.

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

B. Debit Side of Current account

Explanation

Current Account includes Unilateral transfers that contains gifts and remittances.

Amt paid to Foreign Countries are Debited (shown in negative).

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

C. Rs1500 crores

Explanation

Balance of Trade = Exports of goods - Imports of goods

-300 = 1200 - Import of goods

Import of goods = 1200 + 300

Import of goods = 1500

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

A. Credit, Current

Explanation

Amt Received from foreign countries are credited (shown as positive figure)

Current account refers to the difference between total exports of goods, services and Unilateral transfers over total imports of

goods, services and unilateral transfers.

Receipt of rental income is the income received on export of services.

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)

View answer

B. 2 - (b)

Explanation

Invisible items refer to those items which cannot be seen, felt, touched or measured.

For example services of shipping, banking, insurance, etc.

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)

View answer

A. 1- (a)

Explanation

Import of goods and services are recorded in current account.

Import is recorded on the debit side as it leads to an outflow of foreign exchange in the country.

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

D. Assertion (A) is false, but Reason (R) is true.

Explanation

Balance of Trade is a part of current account.

Balance on Current Account = Trade balance + Invisibles balance