Current Account
1 Quick Explanation 1–3 min
The current account records trade in goods, services, income and current transfers.
Its balance shows whether the country earns or spends more foreign exchange on ongoing transactions.
2 Detailed Notes
Definition
Definition
The current account records all transactions related to the flow of goods and services, income and current transfers between residents and the rest of the world during a year.
Key points
Components
- Trade in goods (visible items) → Balance of Trade.
- Trade in services (invisible): travel, transport, insurance, software (IT services), banking.
- Income: investment income (interest, dividends) and employee compensation.
- Current transfers: remittances by Indians abroad, gifts, aid (one-way flows, no quid pro quo).
Formula
Current account balance
Current Account Balance = (Exports of goods & services + Income received + Transfers received) − (Imports of goods & services + Income paid + Transfers paid)Surplus = net earner of foreign exchange; deficit (CAD) = net spender — must be financed by capital inflows.
Example
India's context
India typically runs a current account DEFICIT (imports of crude oil > exports), but strong software exports and remittances reduce the gap.
Important
Current account surplus vs deficit
Current account deficit is not automatically bad — if financed by productive FDI, it supports growth. It's a problem when financed by volatile short-term flows.
In One Minute
Current account = goods + services + income + transfers. Balance = inflows − outflows. Surplus → net earner; deficit (CAD) → financed by capital account inflows.
Important for Exam
- ⭐ 1-mark: components of current account.
- ⭐ 3-marks: BOT vs current account balance.
- ⭐ Invisible trade (services) examples — IT, travel, transport.
- ⭐ Consequences of current account deficit.
Watch & Learn
Watch on YouTubeFundamentals - Partnership - Capital Account and Current Account - Class 12 - Accountancy 🔥🔥
by Rajat Arora
Why watch? Components and balance explained thoroughly.
Open on YouTube Watch on YouTubeFundamentals - Partnership - Capital Account and Current Account - Class 12 - Accountancy 🔥🔥
by Rajat Arora
Why watch? Clean distinction between the two accounts.
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