Current account, Managerial Economics

The Current Account

This records all transactions involving the exchange of currently produced goods and services and is subdivided into

i.          Visibles:

A record of all receipts from abroad the export of goods and all expenditures abroad on the import of goods.  When these are compared, this is known as the "balance of  trade" (though it would be properly called the "balance of visible trade").

ii.          Invisibles:

A record of all receipts from abroad in return for services rendered and all expenditure abroad for foreign services.  It also includes receipts of profits and interest earned by investments abroad, and similarly profits and interest paid abroad to foreign owners of capital in the country are included in Expenditure.  The comparison of all the debits (Expenditure abroad) and credits (receipts from abroad) arising from visibles and invisibles is known as the "balance of payments on current account" and is the best indicator of the country's trading position.

If the value of exports exceeds the value of imports the balance of payments is said to be in Trade Surplus.   This is regarded as a favourable position because a persistent trade surplus means the country's foreign exchange reserves are rising and so its ability to pay for its imports and settle its international debts.  Also a trade surplus is regarded as a sign of success in the country's trade with other countries and is, therefore, politically desirable.

On the other hand, if the value of imports exceeds the value of exports, the balance of payments is in trade deficit.  This is an unfavourable position because a persistent balance of payments trade deficit means that the country's foreign exchange reserves are being run down and so is its ability to pay for its imports and settle its international debts. Also a persistent balance of payments trade deficit is regarded as a sign of failure in the country's trade with other countries and is therefore politically undesirable.

Posted Date: 11/30/2012 5:17:57 AM | Location : United States







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