Components of Balance of Payments: (1) Current Account; (2) Capital Account!

(1) Current Account :

Current account refers to an account which records all the transactions relating to export and import of goods and services and unilateral transfers during a given period of time.

Current account contains the receipts and payments relating to all the transactions of visible items, invisible items and unilateral transfers.

Components of Current Account:

The main components of Current Account are:

1. Export and Import of Goods (Merchandise Transactions or Visible Trade):

A major part of transactions in foreign trade is in the form of export and import of goods (visible items). Payment for import of goods is written on the negative side (debit items) and receipt from exports is shown on the positive side (credit items). Balance of these visible exports and imports is known as balance of trade (or trade balance).

2. Export and Import of Services (Invisible Trade):

It includes a large variety of non- factor services (known as invisible items) sold and purchased by the residents of a country, to and from the rest of the world. Payments are either received or made to the other countries for use of these services.

Services are generally of three kinds:

(a) Shipping,

(b) Banking, and

(c) Insurance.

Payments for these services are recorded on the negative side and receipts on the positive side.

3. Unilateral or Unrequited Transfers to and from abroad (One sided Transactions):

Unilateral transfers include gifts, donations, personal remittances and other one-way transactions. These refer to those receipts and payments, which take place without any service in return. Receipt of unilateral transfers from rest of the world is shown on the credit side and unilateral transfers to rest of the world on the debit side.

4. Income receipts and payments to and from abroad:

It includes investment income in the form of interest, rent and profits.

Current Account records all the actual transactions of goods and services which affect the income, output and employment of a country. So, it shows the net income generated in the foreign sector.

Difference between Balance of Trade and Current Account :