Question

What do you understand by Balance of Payments? Write the main items of Current account and Capital account related to it.

Hint:

A balance of payments surplus occurs when a country exports more than it imports, while a deficit happens when imports exceed exports.

Answer 1

The Balance of Payments (BoP) is a financial statement that records all economic transactions between a country and the rest of the world. It consists of two main accounts: the current account and the capital account. 

Current Account: The current account tracks the flow of goods, services, income, and current transfers. Major components include: \[\begin{array}{rl}  \\ \bullet & \text{Exports and imports of goods and services} \\ \bullet & \text{Income receipts and payments (e.g., wages, dividends)} \\ \bullet & \text{Transfers (e.g., remittances, foreign aid)} \\ \end{array}\] 

Capital Account: The capital account records transactions involving the purchase and sale of assets. Its major components are: \[\begin{array}{rl} \bullet & \text{Foreign direct investment (FDI) and portfolio investment} \\ \bullet & \text{Loans and borrowings from foreign countries} \\ \bullet & \text{Reserve assets (e.g., gold reserves)} \\ \end{array}\]