Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is NOT a component of the current account?

1. Balance of trade

2. Income from overseas investments

3. Transfers to and from the EU

4. Government borrowing

The correct answer is: Government borrowing

The current account is a key component of a country's balance of payments and includes several essential elements that reflect a nation's income, expenditure, and financial transactions with the rest of the world. The balance of trade, income from overseas investments, and transfers are all essential parts of the current account. The balance of trade measures the difference between a country's exports and imports of goods and services. It indicates whether a nation is a net exporter or importer. Income from overseas investments includes earnings that residents earn abroad, such as dividends, interest, and rents. Transfers refers to one-way transactions, such as remittances or foreign aid, that do not involve a quid pro quo or return service. In contrast, government borrowing pertains to the financing of the government’s budget deficit or funding public services and projects. This financial activity falls under the capital and financial account rather than the current account. Thus, it is not considered a component of the current account, making it the correct answer to the question.