Question:Consider the following statements.
1. Foreign Investment is under capital account but dividends and income from investment comes under current account.
2. Trade deficit is not a component of Current Account Deficit.
Which of the above statements is/are false?.
a) Only 1
b) Only 2
c) Both 1 and 2
d) Neither 1 Nor 2
Foreign Investment is under capital account but dividends and income from investment comes under current account in the category income from abroad as dividend is transferred periodically, does not result in creation of asset or liability.
Current Account Deficit - deficit on all 4 components of current account.
(Export – Import) + Net income from abroad + Net Transfers
(Export – Import) is trade deficit
CAD = Trade Deficit + Net Income From Abroad + Net transfers
Trade Deficit and CAD are not one and the same. Trade deficit is only a component of CAD.