Question

Define and explain the subaccounts of the current account, financial account and official reserves transactions balance.

Answer 1

1. Current Account - Income and expenditures on goods and services and on property income and current transfers are recorded under the current account.
It consists of four subaccounts -
i). Visible balance/ Merchandise balance/ Trade-in goods/ Balance of trade - It is the difference between the export and import of goods.
ii). Services balance/ Invisible balance - It is the difference between the import and export of services.
Example- Sea transport services, communication, construction, insurance, and financial services.
iii). Net property income balance- It is the difference between income earned from the property of abroad and amount/ income paid to property earners of foreign.
iv). Current transfer balance- Unilateral payments or receipts between a country and the rest of the world comes under it.
Example - Remittances and inheritances.

2. Financial account- Claim on or liabilities to non-residents, with regard to financial assets, is covered under the balance of payment in the financial account. Direct investment, portfolio investment, reserve assets broken down by sector are the components of financial account.
Subaccounts of financial account are-
i). Domestic ownership of foreign assets - It includes deposits of foreign banks, securities in foreign companies.
ii). Foreign ownership of domestic assets- It includes the purchase of bonds of government by a foreign entity, loans provided by foreign institutions to domestic banks.

3. Official reserves- When the sum of capital and the current account is not equal to zero then a change in official reserves occurs.
There will be a surplus if the sum is greater than zero, it will be added to the official reserves.
There will be a deficit if the sum is less than zero, it will reduce the official reserves.