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Components of the Current Account | Economics for GCSE/IGCSE - Year 11 PDF Download
The Current Account
- The Balance of Payments (BoP) tracks all financial transactions between a country and the rest of the world.
- It consists of two primary sections: the current account, which covers transactions related to goods, services, and income transfers, and the financial and capital account, which is beyond the scope of this discussion.
- In the BoP, money inflows are recorded as credits (+), while outflows are recorded as debits (-).
- A surplus in the current account happens when credits exceed debits.
- Conversely, a deficit in the current account occurs when credits are lower than debits.
The Current Account of the Balance of Payments
- The Current Account, a crucial component of the BoP, tracks a nation's net income from international dealings.
- Goods, also known as visible exports/imports, form a part of this account.
- Likewise, services, termed as invisible exports/imports, are also included.
- Net income encompasses income transfers by individuals and firms. Credits represent income received from citizens abroad, while debits denote funds sent by foreign workers in the country.
- Current transfers typically entail government-level payments between nations, such as contributions to international organizations.
- The current account balance is derived from the sum of net trade in goods, net trade in services, net primary income, and net secondary income.
Question for Components of the Current AccountTry yourself: What is recorded as credits in the Balance of Payments?View Solution
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FAQs on Components of the Current Account - Economics for GCSE/IGCSE - Year 11
| 1. What are the main components of the Current Account? |  |
Ans. The main components of the Current Account include the balance of trade, net income from foreign investments, net transfers, and net services.
| 2. How does the balance of trade affect the Current Account? | |
Ans. The balance of trade, which represents the difference between a country's exports and imports, directly impacts the Current Account balance. A surplus in the balance of trade leads to a positive impact on the Current Account, while a deficit contributes to a negative balance.
| 3. What is the significance of net income from foreign investments in the Current Account? | |
Ans. Net income from foreign investments refers to the earnings that a country receives from its investments abroad minus the payments made to foreign investors. It is an essential component of the Current Account as it reflects the income generated from overseas assets.
| 4. How do net transfers impact the Current Account balance? | |
Ans. Net transfers include remittances, aid, and other unilateral transfers received from abroad. A positive net transfer balance contributes to an increase in the Current Account surplus, while a negative balance leads to a decrease in the surplus or an increase in the deficit.
| 5. How can a country improve its Current Account balance? | |
Ans. A country can improve its Current Account balance by promoting exports, reducing imports, attracting foreign investments, increasing tourism revenues, and enhancing the efficiency of its services sector. Implementing trade policies and exchange rate adjustments can also help in improving the Current Account balance.
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Dec 26, 2024 Last updated |
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