Macro

Balance of Payments

Easy

Read the passage carefully and answer the question based on the passage:

Balance of Payment is defined as the statement of accounts of a country's inflow and outflows of foreign exchange during a specified period of time. It consists of two main accounts, i.e. Current Account and Capital Account. A deficit or surplus in the current account is determined by the country's exports and imports, whereas the capital account records transactions involving non-financial and financial assets.

India's BOP typically reflects its trade deficit, services surplus and capital inflows. To finance the deficit in its overall BOP, few transactions take place in its official reserves of foreign exchange.

What does capital account of BOP record?

Imports and exports of goods.

Transaction of capital and financial assets.

Income from investment.

Unilateral transfers.

✅ Correct Option: 2

Option 1 -> Records trade in goods, which belongs to current account.

Option 2 -> Records capital and financial asset transactions like FDI and portfolio investments.

Option 3 -> Records investment income, which is part of current account.

Option 4 -> Records transfers like remittances, which fall under current account.

Hence, Option 2: Transaction of capital and financial assets -> The capital account of Balance of Payments records all transactions involving capital and financial assets between a country and the rest of the world. This includes Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), loans, banking capital flows, and other capital transfers. These transactions represent changes in ownership of national assets and liabilities, distinguishing them from current account items which record flow of goods, services, and income. -> correct

Question 47

What is the role of official reserve account?

Question 48

What could persistent current account deficit lead to?

Question 49

What does the BOP record?

Question 50

How can a country reduce the BOP deficit?

What does capital account of BOP record?

Solution

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