The current account

The balance of payments (BoP) records all of a country's transactions in goods, services and assets with the rest of the world over a year. It has two main parts. The first is the current account:

• trade in goods: merchandise exports and imports;
• trade in services: both factor income (interest, profit, wages earned abroad) and non-factor services (shipping, tourism, banking, software services);
• transfers: receipts and payments with nothing given in return, such as gifts and remittances from Indians working abroad.

Balance of trade (BOT) = exports − imports of goods only. Services, transfers and income flows together are called invisibles.

Current account balance = balance of trade + net invisibles.

Example: exports of goods 200, imports 280, net invisibles +60. Trade balance = 200 − 280 = −80 (a trade deficit); current account = −80 + 60 = −20 (a current account deficit).

A country with a current account surplus is lending to the rest of the world; one with a deficit is borrowing from it.