Question

Identify and describe the 3 components of the current account?

Answer 1

Ans)

Current account is the account which records the transactions relating to the import and export of goods, payment to foreigner holders of country's investments, payments received from investments abroad and transfers such as foreign aid and remittances.

Components of current account:

(I) Trade in goods and services:

The current account records the transactions relating to the import and export of the goods of a country.
For example, if united States export goods worth $100 million to another country(say,Japan), then the transaction gets recorded on the credit side of the United States current account.

If a country imports more goods than it exports, then it has trade deficit.

(II) Invesment incomes:

This component records all the incomes earned by the domestic residents on the assets purchased by them in a foreign country. It also includes the income earned by the domestic residents working in a foreign country.
The same scenario applies for the foreign residents as well, meaning the income paid to foreigners working in our country.Second, the income paid to the foreign investors who have purchased the assets of our country.  

(III) Transfers and aid:

This includes the transfers sent to domestic country by the workers living in a foreign country.It also includes the aids and grants sent by other countries.