Q. Which of the following is/are the components of the current account of the balance of payment (BoP)?
Select the correct answer using the codes below:
Q. Which of the following is/are the components of the current account of the balance of payment (BoP)?
Select the correct answer using the codes below:
The correct option is C 1, 2 and 3 only
Explanation:
The current account contains the receipts and payments relating to all the transactions of visible items, invisible items, and unilateral transfers. The components of the current account are discussed below:
- Visible trade: A major part of transactions in foreign trade is in the form of export and import of goods (visible items).
- Invisible trade: It includes a large variety of non-factor services (known as invisible items) sold and purchased by the residents of a country, to and from the rest of the world. Payments are either received or made to the other countries for use of these services.
- Unilateral transactions: Unilateral transfers include gifts, donations, personal remittances, and other ‘one-way’ transactions. These refer to those receipts and payments, which take place without any service in return. Receipt of unilateral transfers from the rest of the world is shown on the credit side and unilateral transfers to the rest of the world on the debit side.
- Income receipts and payments to and from abroad: It includes investment income in the form of interest, rent, and profits.
Note: Changes in the foreign exchange reserves are not included in the current account of the BoP. The foreign exchange reserves are the financial assets of the government-held in the central bank. A change in reserves serves as the financing item in India’s BOP. So, any withdrawal from the reserves is recorded on the positive (credit) side and any addition to these reserves is recorded on the negative (debit) side of the capital account. It must be noted that ‘change in reserves’ is recorded in the BOP account and not ‘reserves’.
Explanation:
The current account contains the receipts and payments relating to all the transactions of visible items, invisible items, and unilateral transfers. The components of the current account are discussed below:
- Visible trade: A major part of transactions in foreign trade is in the form of export and import of goods (visible items).
- Invisible trade: It includes a large variety of non-factor services (known as invisible items) sold and purchased by the residents of a country, to and from the rest of the world. Payments are either received or made to the other countries for use of these services.
- Unilateral transactions: Unilateral transfers include gifts, donations, personal remittances, and other ‘one-way’ transactions. These refer to those receipts and payments, which take place without any service in return. Receipt of unilateral transfers from the rest of the world is shown on the credit side and unilateral transfers to the rest of the world on the debit side.
- Income receipts and payments to and from abroad: It includes investment income in the form of interest, rent, and profits.
Note: Changes in the foreign exchange reserves are not included in the current account of the BoP. The foreign exchange reserves are the financial assets of the government-held in the central bank. A change in reserves serves as the financing item in India’s BOP. So, any withdrawal from the reserves is recorded on the positive (credit) side and any addition to these reserves is recorded on the negative (debit) side of the capital account. It must be noted that ‘change in reserves’ is recorded in the BOP account and not ‘reserves’.
