Which of the following statements are correct?
(A) A current account deficit means that receipts on current account are less than payments on current account.
(B) A country with a current account deficit must finance it by selling assets or by borrowing abroad.
(C) The purchase of foreign goods adds to the demand for domestic goods in our country.
(D) Net invisibles is the difference between the value of exports and imports of invisibles.
(E) The trade deficit of a country is equal to its current account deficit.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (D) only
The current account balance is the trade balance plus net invisibles. A deficit on it must be financed from the capital account.
(A) A current account deficit means that receipts on current account are less than payments on current account. — Correct. Equal receipts and payments mean balance; payments above receipts mean a deficit.
(B) A country with a current account deficit must finance it by selling assets or by borrowing abroad. — Correct. Just as a person spending more than income must sell assets or borrow.
(C) The purchase of foreign goods adds to the demand for domestic goods in our country. — Incorrect. Imports decrease the domestic demand for goods and services.
(D) Net invisibles is the difference between the value of exports and imports of invisibles. — Correct. Invisibles are services, transfers and income flows.
(E) The trade deficit of a country is equal to its current account deficit. — Incorrect. Net invisibles are added to the trade balance. For example, a trade balance of −90 with net invisibles of 52 gives a current account balance of −38.
NCERT (2026-27): “Balance on Current Account Current Account is in balance when receipts on current account are equal to the payments on the current account. A surplus current account means that the nation is a lender to other countries and a deficit current account means that the nation is a borrower from other countries.” “6.1.3 Balance of Payments Surplus and Deficit The essence of international payments is that just like an individual who spends more than her income must finance the difference by selling assets or by borrowing, a country that has a deficit in its current account (spending more than it receives from sales to the rest of the world) must finance it by selling assets or by borrowing abroad. Thus, any current account deficit must be financed by a capital account surplus, that is, a net capital inflow.” “Balance on Current Account … Net Invisibles is the difference between the value of exports and value of imports of invisibles of a country in a given period of time. …” “6.1.1 Current Account … Buying foreign goods is expenditure from our country and it becomes the income of that foreign country. Hence, the purchase of foreign goods or imports decreases the domestic demand for goods and services in our country. …”
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