veneers rons uy MUL Ive HIDE LO TUTUTe Clams. components of Current Account Tremain components of Current Account are: 1. Export and Import of Goods (Merchandise Transactions or Visible Trade): A major part oftransactions 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 ‘s known as balance of trade (or trade balance). Trade Balance can be of two types: \i) Trade Deficit: It refers to the excess of the payments for imports of visible items over the value of receipts of exports of visible items. i) Trade Surplus: it refers to the excess of the receipts of exports of visible items over the value of Payments for imports of visible items. ncepe) 2. Export and Import of Services (Invisible Trade): It includes a large Maisies 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 un 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, grants, 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. It must be noted that Unilateral Transfers are treated as part of ‘Invisibles’ in the BOP Account. 4, Income receipts and payments to and from abroad: It includes investment income in the form of interest, rent and profits.The components of this type are Borrowing and lending Investments Changes in foreign exchange reserves 1. Borrowing and lending. It involves transactions of loans. These may be (@) Private Transactions. These affect assets and liabilities of non-government entities or Private sector. For example, Private sector of the country receives short-term ang long-term foreign loans, Receipts of such loans are recorded as positive (credit) items and their repayment is recorded as negative (debit) items of BOP. (6) Official Transactions. These affect assets and liabilities status of government of a country For example, government borrows loans from foreign government and international ‘organisations to finance the deficit in the balance of payments. Receipts of such loans are recorded on the positive (credit) side and repayment of loans is recorded on the negative (debit) side, 2 Investments. It involves transactions of investments. These may be : Private or offical transactions. There are two types of investments abroad (@) Foreign Direct Investment. It refers to purchase of an asset in the rest of the world which gives full control to the buyer over the asset. For example, acquisition of a foreign firm by ITC limited. This investment is foreign direct investment as it gives director full control to the Indian firm over this asset. Purchase of assets abroad is recorded on the ‘negative (debit) side and sale of assets abroad is recorded on positive (credit side) of BOP. (©) Portfolio Investment. It refers to purchase of an asset in the rest of the world which does ‘not give full control over the asset. For example, purchase of shares of a foreign firm by TATA industry. Purchase of shares of a foreign firm is portfolio investment by the Indian firm as it gives only partial control over the asset. Purchase of assets abroad is recorded on the negative (debit) side and sale of assets abroad is recorded on positive (credit side) of BOP. 3. Changes in foreign exchange reserves (official reserve transactions), These transactions ate undertaken by monetary authority of a country. Foreign exchange reserves are the financial assets of a country held in the central bank. When addition to these reserves is mace. it implies negative item and entered in the debit side of BOP because there is outflow of foreign exchange from BOP account to foreign exchange reserves. Any withdrawal from these reserves is recorded ‘on the positive (credit) side of BOP because there is inflow of foreign exchange to BOP account from foreign exchange.