Question

“Economic transactions that are recorded in the current account can be classified in two parts — merchandise and invisibles. Net inflows from both the transactions are referred to as Trade Surplus.”

Do you agree with the given statement ? Give valid arguments in support of your answer.

Hint:

Disagree. Trade surplus covers only merchandise exports minus imports. Merchandise plus invisibles together give the current account balance.

Answer 1

Step 1: Read the statement carefully:
The statement says two things. First, current account transactions are of two parts, merchandise and invisibles. This part is correct.
Second, it says net inflows from both parts together are called Trade Surplus. We have to test this second claim.

Step 2: Recall what the current account contains:
The current account records the trade in goods (merchandise or visible items) and the trade in services, income and transfers (invisibles).
Net inflow from merchandise and invisibles together gives the balance on the current account.

Step 3: Recall what trade balance means:
Trade balance, or balance of trade, covers merchandise exports and imports only. It does not cover invisibles.
Trade surplus means that the value of exports of merchandise is more than the value of imports of merchandise.

Step 4: Compare the two:
The statement joins merchandise and invisibles, but trade surplus uses merchandise alone.
So the combined net inflow from both parts is the current account balance, and not the trade surplus.

Step 5: Give the verdict:
No, we do not agree with the statement. It treats the current account balance as if it were the trade surplus.
Services such as software exports or tourism, income from abroad and remittances belong to invisibles. They change the current account balance but not the trade balance.

Final Answer:
No, we do not agree. Trade surplus covers merchandise only. Net inflows from merchandise and invisibles together give the current account balance.