The current account of country shows its profile in goods and services trade. Technically, the current account of the balance of payments explains the money value of goods and service (services is contained under invisibles) exported and imported by the country during an accounting period. To understand the Current Account Deficit (CAD), we should have an idea about Balance of Payments.
What is balance of payments (BoP) account?
Usually citizens and companies of a country make several types of transactions with other countries. Basically, there are three types of transactions: trade in goods, trade in services (or in a broader sense invisibles) and capital transactions. Balance of payment account of India is a systematic statement of all economic transactions between the residents of India and the residents of the rest of the world in an accounting period (say one year).
The BoP as a classification format, classifies the BoP account into two:
- Current account transactions that involves exports and imports of goods and services (services are incorporated under invisibles). And
- Capital account transactions that involve the flow of investable money to and from India.
What are the components of current account?
Current account has two components – exports and imports of goods and export and imports of invisibles (include services). Hence the current account has two subcomponents:
- Merchandise trade account ( for exports and imports of goods) and
- Invisible account ( for services, remittances and income)