RAS question
Balance of Payments (BOP) consists of:
Correct answer: (C) Current Account and Capital Account.
The Balance of Payments consists of the current account and the capital account, which record an economy's transactions with the rest of the world.
Explanation
The Balance of Payments is a systematic statement of economic transactions between residents of an economy and the rest of the world. The Reserve Bank of India states that India's BoP records transactions involving goods, services and income, financial claims and liabilities, and transfers. The essential BoP split is between the current account and the capital account. The current account covers exports and imports of goods, services, income and current transfers. The capital account covers assets and liabilities such as direct investment, portfolio investment, loans, banking capital and other capital. Option C gives the correct BoP structure, while narrower items such as trade balance or foreign exchange reserves cannot stand for the whole BoP.
Why the other options are wrong
- (A) Trade balance covers only the goods trade part of the current account, while BoP also covers services, income, transfers and capital account transactions.
- (B) The current account is only one side of the BoP structure; the capital account records assets and liabilities such as investment, loans and banking capital.
- (D) Foreign exchange reserves are connected to BoP reporting, but the RBI lists reserves separately from the current and capital account components, so reserves alone are not the BoP.
Concept
The external sector component of the Indian Economy syllabus covers how India's transactions with the rest of the world are classified. RAS uses BoP because it links trade, services, investment flows, loans and reserves in one framework.