Consider the following statements and choose the correct option:
Statement 1: A surplus on the current account indicates that the country is lending to the rest of the world.
Statement 2: A current account is said to be in balance when payments exceed receipts.
Show answer & explanation
Correct answer: A
Explanation
Answer: Only Statement 1 is correct.
Explanation:
- Statement 1 is correct: A current account surplus occurs when a country's exports exceed its imports. This implies that the country is receiving net income from abroad. This surplus capital can be utilized to repay foreign debt or to lend to other nations. Consequently, a country with a surplus becomes a 'net lender' to the rest of the world.
- Statement 2 is incorrect: The current account is said to be 'in balance' or 'balanced' when receipts and payments are equal to one another. If payments exceed receipts, it is termed a 'Current Account Deficit,' rather than a balanced account.
Additional Points:
- Components of the Current Account: It comprises trade in goods (visible trade), trade in services (invisible trade), income (such as profits and dividends), and transfer payments (such as remittances).
- Capital Account: A current account deficit is often financed through the capital account—specifically via foreign investments (FDI/FPI) or by borrowing.
- India's Position: India typically operates with a 'Current Account Deficit' (CAD) because our imports of crude oil and gold exceed our exports.
Potential Q&A:
Question: If a country's imports exceed its exports, what is this situation called?
Answer: A Trade Deficit, which constitutes a major component of the Current Account Deficit (CAD).
Question: Under which account category does money sent by Indians living abroad fall?
Answer: It falls under 'Transfer Payments' within the Current Account.