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DAILY NEWS ANALYSIS

  • 11 July, 2020

  • 2 Min Read

Current Account

Current Account

The current account measures the flow of goods, services, and investments into and out of the country. It represents a country’s foreign transactions and, like the capital account, is a component of a country’s Balance of Payments (BOP).

A nation’s current account maintains a record of the country’s transactions with other nations that includes net income, including interest and dividends, and transfers, like foreign aid.

It comprises of following components -

  • Visible trade - Export and import of goods,
  • Invisible trade - Export and import of services
  • Unilateral transfers
  • Investment - Income from factors such as land or foreign shares

Current Account Deficit

There is a deficit in Current Account if the value of the goods and services imported exceeds the value of those exported. It is measured as a percentage of GDP, the formulae for calculating CAD is as follows

Current Account = Trade gap + Net current transfers + Net income abroad

Trade gap = Exports – Imports

  • A country with rising CAD shows that it has become uncompetitive, and investors may not be willing to invest there.
  • Current Account Deficit and Fiscal Deficit are together known as twin deficits and both often reinforce each other, i.e., a high fiscal deficit leads to higher CAD and vice versa.
  • For the fiscal year 2019-20, the current account deficit narrowed to 0.9% of the GDP, compared with 2.1% in FY2018-19.

Source: PIB


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