Current account includes all of the following except _______________

The correct answer is C. FDI (Foreign Direct Investment). The current account is a major component of a country’s Balance of Payments (BoP), and it includes various economic transactions related to international trade in goods and services, income received or paid, and unilateral transfers.

Foreign Direct Investment (FDI) is not a part of the current account but is recorded in the financial account within the BoP. Let’s explore in detail why this answer is correct and why the other options, A, B, and D, are not part of the current account:

C. FDI (Foreign Direct Investment) –

This option is correct. FDI refers to the direct investment made by a foreign entity or individual in a country’s economy, typically in the form of capital, technology, or expertise used to establish businesses, acquire assets, or gain ownership stakes in companies.

FDI falls under the financial account of the Balance of Payments, as it involves financial investments and reflects changes in a country’s ownership of foreign assets.

Now, let’s examine why the other options are not correct:

A. Merchandise Balance –

This option is incorrect because the merchandise balance, also known as the trade balance, is a fundamental part of the current account. It records the value of goods (merchandise) exported and imported by a country. The merchandise balance is a key component of the current account and represents trade in physical goods.

B. Service Balance –

This option is incorrect because the service balance is also a part of the current account. The service balance accounts for international trade in services, such as tourism, transportation, and financial services. It reflects income earned from providing services to foreign entities and payments made for services received from abroad.

D. Unilateral Transfers –

This option is incorrect because unilateral transfers are included in the current account. Unilateral transfers encompass various non-reciprocal transfers of wealth between countries, including remittances, foreign aid, and gifts. They represent one-way transfers of funds that affect a country’s balance of payments and are recorded in the current account.

The current account is one of the primary components of the Balance of Payments, which is a systematic record of all economic transactions between a country and the rest of the world. It is divided into several sub-accounts, and each of these accounts tracks specific types of transactions.

The current account includes four main components:

1. Merchandise Balance:

This records the trade balance, which reflects the difference between the value of goods a country exports and the value of goods it imports.

2. Service Balance:

This accounts for the trade in services, such as travel, financial services, and transportation. It includes both income received from providing services to foreign entities and payments made for services received from abroad.

3. Income Balance:

The income balance tracks income earned from foreign investments, such as dividends on stocks and interest on foreign loans, as well as income earned by foreign investors within the country.

4. Unilateral Transfers:

Unilateral transfers capture one-way transfers of funds between countries, including remittances from foreign workers, foreign aid, and gifts.

Foreign Direct Investment (FDI) is a distinct category of economic transactions. FDI involves the establishment of new businesses, acquisition of assets, or ownership stakes in foreign companies.

These investments have a long-term focus and impact on a country’s economic and financial structure, which is why FDI is recorded in the financial account of the Balance of Payments, rather than the current account.

In conclusion, the correct answer is C. FDI (Foreign Direct Investment) because it is not a part of the current account but is recorded in the financial account of the Balance of Payments. The other options, A, B, and D, are components of the current account and are used to track various types of international economic transactions, such as trade in goods and services, income, and unilateral transfers.