Current Account Meaning and Current Account Deficit
Current Account Meaning – One of the component of BOP which records Merchandise trade, services, income and transfer payments between residents of a country and rest of the world.
The current account component of Balance of Payment consists of three items. These are trade in visible items that is goods, trade in services, that is services and transfer payments. Transfer payments. Let’s discuss these components in detail.
Components of Current Account
In order to understand the current account meaning, let’s discuss in detail current account components.
Visible items or Mechandise Trade – If the merchandise or goods are exported, then it is credit. On the contrary, if goods are imported, then it records in the Debit side. Well, this is prepare on the basis of information supplied by government of India, DGCI&S and USAID.
Invisible items or Services – This records the receipts and payments made for delivering or receiving the services respectively. Just like merchandise trade, in case of receipts, the amount is credited and when payments are made, amount is debited. Example of services are – Banking, Insurance, Travel, Transportation, etc.
Transfer Payments – These involves those transaction which do not result in any claim of payment to the residents of the country. Example of transfer payments are grants, gifts, disaster relief funds, etc.
Current Account Deficit
A current account deficit occurs when the imports of a country exceeds the exports of the country. There could be various reasons behind this. One of the reason could be that country is not self reliant. In other words country’s production is not sufficient to sustain the economy. In such case the entire economy becomes dependent upon the foreign countries and the imports automatically increase.
However there are other components of current account as well which are income and transfer payments. But the portion of these two is comparatively very small when it comes to conclude whether the current account has surplus or deficit. Mostly it has been found that developed countries and less developing countries face deficit in current acccount. Developing countries are known for surplus in current account. However, the situations may vary. For example – India is a developing country but according to the latest stats of December quarter, the current account deficit of India is 1.4% of GDP.
Related Financial Terms of Current Account
- Capital Account Definition – Example and Capital Account Deficit
- Operating Expenses Definition – Meaning and Examples