Question

Elaborate any two components of the Capital Account under the Balance of Payments Account.

Hint:

FDI and external borrowings are crucial components of the Capital Account, as they represent long-term capital inflows that contribute to the country's development.

Answer 1

The Capital Account of the Balance of Payments (BoP) records the flow of capital in and out of the country. It mainly includes the following components:
1. Foreign Direct Investment (FDI): Foreign Direct Investment refers to investments made by foreign entities in a country's businesses or assets, usually by acquiring a substantial shareholding. It is considered a long-term investment and is one of the primary sources of capital inflows. FDI plays a vital role in the economic development of a country by bringing in not only capital but also technology, management expertise, and employment opportunities.
2. External Borrowings: External borrowings refer to loans or credit taken by the government or private sector from foreign sources. These can include loans from international organizations, foreign governments, or private lenders. External borrowings are a means for countries to finance their development projects and bridge the gap between domestic savings and investment needs. However, they need to be managed prudently to avoid excessive debt burdens.
These components of the Capital Account help a country manage its international financial obligations and contribute to the overall balance of payments.