Balance of Trade (BoT),Current Account Deficit (CAD),

 

                     

Balance on Current Account has two components:

1. Balance of Trade or Trade Balance
2. Balance on Invisibles

Balance of Trade (BoT) =

• Value of Goods Exported out - Value of Goods Imported into the country.

Balance of Trade is in Deficit or Trade Deficit:

• Imports of Goods in Country >>>> Exports of Goods out of Country 

Trade deficit is unfavorable for a country.

Balance of Trade is in Surplus:

Exports of Goods out of Country >>>> Imports of Goods in Country

•  Surplus BoT is said to be favorable.
•  BOT is typically the biggest bulk of a country's Balance of Payments (BoP). 

Balance of Trade is balanced:

• Imports of Goods in Country = Exports of Goods out of Country

RBI uses the term Balance of Trade in Merchandise and Balance of Trade in services separately.

Factors that affect the Balance of Trade include:

• Cost of factors of production in the exporting economy vis-à-vis those in the importing economy.
•  Exchange rate movements; 
• Multilateral, Bilateral and Unilateral Taxes or restrictions on Trade; 
• Non-tariff barriers such as environmental, health or safety standards; 
• The availability of adequate foreign exchange with which to pay for imports.

IS World Balance of Trade (BoT) always Balanced:

• It is not easy to measure the ‘Balance of Trade’ accurately because of problems in recording and collection of data.  
• When official data for all the world's countries are added up, exports exceed imports by almost 1% giving an impression of positive Balance of Trade (BoT) .
• This is despite of the fact that all transactions involve an equal credit or debit in the account of each nation. 
• The discrepancy can only be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems. 

Net Invisibles: 

• Invisibles include services, transfers and flows of income that take place between different countries. 
• Services trade includes both Factor and Non-Factor income.
• 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. 

Current Account can be either:

1. Current Account Surplus if  Current Account Receipts > Payments
2. Balanced Current Account if Current Account Receipts = Payments
3. Current Account Deficit if Current Account Receipts < Payments

Current Account Deficit (CAD):

Current Account Deficit (CAD) comprises deficit in:

• Trade Account, 
• Services Account ,
• Net Income and Transfer from abroad. 

Out of these three components, Trade Account/Balance of Trade is the largest.

Implications of Current Account Deficit (CAD) :

• Current Account Deficit (CAD) means that India is importing more goods and services than it is exporting. 
• India typically runs a current account deficit as it is a developing economy which relies on imports of several commodities like crude oil. 
• India saw a rare current account surplus in FY2020-21.
• Current Account Deficit (CAD) is not necessarily a bad thing. 
• For India, a current account deficit of around 2.5-to-3 percent of the gross domestic product is said to be sustainable. 
• Deficits beyond this threshold are a cause for concern. 
• Sustained period of CAD  led to currency depreciation, high rates of inflation which further effects the incoming foreign investment. 
• Current Account Surplus implies the country is a net lender to the rest of the world, while Current Account Deficit (CAD) indicates it is a net borrower.