Current account - balance of payments, Microeconomics

Current Account:

The Current Account can be broken down into two parts, viz., one, balance of trade, and, two, balance on invisibles. The Balance of Trade (BOT) deals only with exports and imports of merchandise (or visible items). The Balance on Invisibles (BOI) shows net receipts on account of invisibles. These include the remittances, net service payments, etc. It is not necessary that the BOT should always balance; more often than not, it will show either a surplus or a deficit. Similarly, the BOI will always show either a surplus or a deficit. A surplus on BOT may be matched with a surplus or deficit on BOI. If the surplus on BOI equals the deficit on BOT, the current account will show a net balance. But then there is no reason why these two balances should always be equal, again, always in opposite directions. As a matter of fact, the balance on current account can always show a deficit or a surplus. A surplus on current account leads to an acquisition of assets or repayment of debts previously contracted, and a deficit involves withdrawal of previously accumulated assets or is met by borrowings.   

Posted Date: 11/15/2012 12:20:51 AM | Location : United States







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