What is Current Account in Balance of Payment?


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CURRENT ACCOUNT

The current account records exports and imports of goods and services and unilateral transfers. Exports whether of goods or services are by convention entered as positive items in the account. Imports accordingly are entered as negative items. Exports are normally calculated f.o.b i.e. cost from transportation, insurance etc are not included whereas imports are normally calculated c.i.f. i.e. transportation, insurance cost etc are included.

 

In many cases the payment for imports and exports will result in transfer of money between the trading countries. For example a UK firm importing a good from US may settle its debt by instructing its UK bank to make a payment to the US account of the exporter. This is not necessarily the case however. If the UK firm holds a bank account in the US, then it may make payment to the US exporter from that account. In the former case the financial side of the transaction will appear in the UK BOP account as part of the net change in UK foreign currency reserves. In the later it will appear as the part of the capital account since the UK firm has reduced its claims on the US bank.

 

BOP accounts usually differentiate between trades in goods and trade in services. The balance of imports and exports of the former is referred to in the UK accounts as the balance of visible trade in other countries it may be referred to as the balance of merchandise trade, or simply as the balance of trade. The net balance of exports and imports of services is called the balance of invisible trade in the UK statistics.

 

Invisible trade is a much more heterogeneous category than is visible trade. It helps in distinguishing between factor and non-factor services. Trade in the later of which shipping, banking and insurance services and payments by residents as tourists abroad are usually the most important, is in economic terms little different from trade in goods. That is, exports and imports are flows of outputs whose values will be determined by the same variables that would affect the demand and supply for goods. Factors services, which consist in the main of interest, profits and dividends, are on the other hand payments for inputs. Exports and imports of such services will depend in large part on the accumulated stock of past investment in and borrowing from foreign residents.

 

Unilateral transfer forms a major part of the current account. It refers to unrequited receipts or unrequited payments which may be in cash or in kind and are divided into official and private transactions. Unilateral transfers or ‘unrequited receipts’, are receipts which the residents of a country receive ‘for free’, without having to make any present or future payments in return. Receipts from abroad are entered as positive items, payments abroad as negative items.

 

The net value of the balances of visible trade and of invisible trade and of unilateral transfers defines the balance on current account.

 


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