Given below are two statements, one labeled as Assertion (A) and the other as Reason (R): Assertion (A): When the payments made by a country exceeds its receipts from the trade of goods, services, transfer, and net income are called Current Account Deficit (CAD). Reason (R): Current Account Deficit (CAD) occurs when a country exports more goods, services, and capital. Choose the correct answer from the codes given below:

Given below are two statements, one labeled as Assertion (A) and the other as Reason (R): Assertion (A): When the payments made by a country exceeds its receipts from the trade of goods, services, transfer, and net income are called Current Account Deficit (CAD). Reason (R): Current Account Deficit (CAD) occurs when a country exports more goods, services, and capital. Choose the correct answer from the codes given below: Correct Answer A is true but R is false

The correct answer is A is true but R is false.

  • R is false because the Current Account Deficit occurs if the value of the goods and services imported exceeds the value of those exported. 
  • Current Account deals with current, ongoing, short-term transactions like trade in goods, services (invisible), etc.
  • Current Account = Trade gap + Net current transfers + Net income abroad
  • Current Account Deficit and Fiscal Deficit are known as Twin Deficit.

Additional Information

  • Balance of Payment (BoP) Account:
    • It is a systematic record of all economic transactions of a country with the residents of other countries in a financial year.
  • There are two components of BoP:
    • Current Account:
      • There are 4 components of the Current Account:
        • Goods 
        • Services (invisible) 
        • Income – investment income
        • Current unilateral transfers – donations, gifts, grants, remittances
    • ​​Capital Account:
      • It also has broadly 4 components
        • Foreign Direct Investment (FDI)
        • Foreign Portfolio Investment (FPI)
        • External Borrowings such as ECB
        • Reserve Account with the Central Bank.​

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