6.3.1 Components of the current account and definition of balance and imbalances
The balance of payments (BOP) records all financial flows between a country and the rest of the world. The current account records the flows from trade and income:
| Component | Meaning | Examples |
|---|
| Trade in goods (visible trade) | Exports minus imports of tangible goods | Crude oil, electronics, gold, textiles, pharmaceuticals |
| Trade in services (invisible trade) | Exports minus imports of intangible services | Tourism, IT services, insurance, banking, transport |
| Primary income | Cross-border income from employment, investment (interest, profit, dividends) | Profits sent home by MNCs; income of workers abroad |
| Secondary income | One-way transfers with nothing received in return | Remittances, foreign aid, grants |
- Balance: inflows (credits) equal outflows (debits).
- Deficit: outflows exceed inflows; the country pays more abroad than it earns; must be financed by borrowing, selling assets or using reserves.
- Surplus: inflows exceed outflows; the country earns more than it pays abroad; builds foreign assets and reserves.
Example: India runs a large deficit on trade in goods (oil, gold, electronics imports) but a large surplus on trade in services (IT, business services) and on secondary income (remittances from Indians abroad, among the world's largest).
Analysis chain (AO2): Exports and income inflows are credits; imports and income outflows are debits → if total debits > total credits → current account deficit.
Evaluation (AO3):
- A deficit on goods can be offset by surpluses on services and income, so the overall current account balance matters more than any single part.
🔒 Also in the full notes
- 6.3.2 Calculation of balances
- 6.3.3 Causes of imbalances in the current account
- 6.3.4 Consequences of imbalances for the domestic and external economy
- Exam practice: 6 practice questions
- 3 exemplar answers with full model answers and mark breakdowns
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