Question

A current account of any economy is in deficit when?

• A. Receipts $>$ Payments
• B. Receipts $=$ Payments
• C. Receipts $<$ Payments
• D. Receipts $=$ Zero

Hint:

Deficit: Receipts $<$ Payments (Net debit balance).
Surplus: Receipts $>$ Payments (Net credit balance).
Balance: Receipts $=$ Payments.

Answer 1

The Correct Option is C

Concept:
The Current Account of the Balance of Payments records all cross-border transactions involving visible trade (merchandise exports and imports), invisible trade (shipping, banking, tourism services), factor income flows, and unilateral current transfers.
The balance represents the net difference between current inflows and outflows.

Step 1: Conditions for Current Account Deficit:
The balance on the current account is defined mathematically as:
\[ \text{Current Account Balance} = \text{Current Inflows (Receipts)} - \text{Current Outflows (Payments)} \] When the receipts generated from exporting goods, providing services, and receiving transfers fall short of the payments made for imported goods, services, and transfers, the balance becomes negative.
This condition of negative balance is known as a Current Account Deficit (CAD):
\[ \text{Receipts} < \text{Payments} \]

Step 2: Evaluation of Other Cases:
When Receipts $>$ Payments, the current account exhibits a surplus.
When Receipts $=$ Payments, the current account is in exact equilibrium or balance.
Receipts $=$ Zero indicates a total absence of foreign income, which is unrealistic for an operational open economy.
Final Answer:
Therefore, a current account deficit occurs unambiguously when Receipts $<$ Payments.