Q. With reference to Balance of Payments, which of the following constitutes/ constitute the Current Account?

  1. Balance of trade
  2. Foreign assets
  3. Balance of invisibles
  4. Special Drawing Rights

Select the correct answer using the code given below.

  • 1 only
  • 2 and 3
  • 1 and 3
  • 1, 2 and 4

Answer: (c) 1 and 3

Balance of Payments (BOP):
  • Balance of Payment (BoP) of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period usually one year.
  • The BoP record the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period typically a year.
  • It indicates whether the country has a surplus or a deficit on trade.
    • When exports exceed imports, there is a trade surplus and when imports exceed exports there is a trade deficit.
  • Purposes of calculation of BoP:
    • Reveals the financial and economic status of a country.
    • Can be used as an indicator to determine whether the country’s currency value is appreciating or depreciating.
    • Helps the Government to decide on fiscal and trade policies.
    • Provides important information to analyze and understand the economic dealings of a country with other countries.
  • BoP follows the Double Entry System to record transactions with the rest of the world and has two sides – Credit side and Debit side.
  • Accounts in the BoP includes
    1. Current account
    2. Capital account
Balance of Payments (BOP)
Current Account
  • It is the record of trade in goods and services and transfer payments.
  • It records all the transactions that relate to the actual receipts and payments of the visible items, invisible items, and unilateral transfers during a specific period of time.
  • Components of Current Account includes
    1. Trade in goods (Visible Trade or Merchandise Transactions) – It includes exports and imports of goods.
    2. Trade in services (Invisible Trade) – It includes factor income and non-factor income transactions.
      • Factor income – Includes net international earnings on factors of production (like labour, land and capital).
      • Non-factor income – It is net sale of service products like shipping, banking, tourism, software services, etc.
    3. Transfer payments – They are the receipts which the residents get for free without having to provide any goods or services in return. They consist of gifts, remittances and grants.
    4. Income receipts and payments to and from abroad – It involves investment income in the form of rent, profits, and interest.
Current Account Balance of Payments
Capital Account
  • It includes those transactions, which cause a change in the assets or liabilities of a country’s residents or its government.
  • Components of Capital Account includes
    1. Borrowings and Lendings to and from abroad – Includes all the transactions related to borrowings from abroad by the government, private sector, etc.
    2. Investments to and from abroad – Includes all the investments by the rest of the world in shares of Indian companies, real estate, etc. The investments to and from abroad are:
      • Foreign Direct Investment – FDI consists of the purchase of an asset, which gives direct control to the buyer over the asset. For example, purchase of land, building, etc.
      • Portfolio Investment – It is the cross-border transactions and positions involving equity or debt securities, other than direct investment or reserve assets. Ex – FII (Foreign Institutional Investment).
    3. Change in Foreign Exchange Reserves – The financial assets of the government held in the central bank are Foreign Exchange Reserves.
Capital Account Balance of Payments 1