Question

Name the types of transactions recorded in the current account of the balance of payments.

Answer 1

The current account of the balance of payments records the following types of transactions:

1. Export and Import of Goods (Visible Trade): Visible trade refers to the trade of physical goods between countries. Exports of goods like cars, aluminium, tea, and iron ore bring foreign exchange into the country and are recorded as credit items. Imports of goods result in the use of foreign currency and are recorded as debit items. These transactions are part of a country’s balance of payments under visible trade.
2. Invisible Items: These are the items which are not tangible and cannot be seen. Hence, they are known as invisible.
   1. Export and Import of Services (Invisible Trade): Invisible trade includes the export and import of non-factor services like shipping, banking, insurance, and tourism. Payments received from foreigners for services provided by a country, such as tourism income or export of shipping services, are recorded as credit items in the balance of payments. Payments made by residents to foreign countries for similar services, like travel abroad or foreign banking services, are recorded as debit items. These transactions form part of the invisible trade of a country.
   2. Unilateral Transfers: Unilateral transfers are one-way transactions where a country receives or gives money without any service in return. These include both private transfers (like gifts, donations, and remittances from family abroad) and official transfers (like aid, grants, and indemnities).
      • Receipts of gifts and remittances are recorded on the credit side.
      • Payments of gifts, aid, and assistance to foreign countries are recorded on the debit side.
   3. Income Receipts and Payments: Income in the balance of payments is classified into investment income and compensation of employees.
      • Investment income includes interest, dividends, and profits earned from foreign investments, recorded as a credit item.
      • Compensation of employees includes wages and salaries received by residents from non-residents, also a credit item. Payments for interest and dividends to foreigners are recorded as debit items.