Question

What do you understand by Current Account and Capital Account?

Hint:

The current account focuses on the flow of goods, services, and transfers, while the capital account tracks investments and financial transactions.

Answer 1

The Balance of Payments (BOP) of a country consists of two main accounts: the Current Account and the Capital Account. 

- Current Account: The current account records the flow of goods, services, income, and current transfers. It includes: - Trade Balance: Exports and imports of goods and services. - Income Transfers: Earnings on investments abroad (e.g., dividends, interest) and payments made to foreign investors. - Current Transfers: Remittances, foreign aid, and other transfers. 

- Capital Account: The capital account records the flow of capital (financial transactions) into and out of a country. It includes: - Foreign Direct Investment (FDI): Investment by foreign entities in the country's businesses or assets. - Foreign Portfolio Investment (FPI): Investment in the country's stocks and bonds. - Loans and Borrowings: Money lent or borrowed from foreign countries.