Question 46 from UPSC CSE 2014 - Economy

Question

With reference to Balance of Payments, which of the following constitutes/constitute the Current Account?
1. Balance of trade
2. Foreign assets
3. Balance of invisibles
4. Special Drawing Rights
Select the correct answer using the code given below.

Accepted Answer

Correct Option: C. 1 and 3

Strategy: Identify the core components of the Current Account. Both 'balance of trade' (exports and imports of goods) and 'balance of invisibles' (services, remittances, and income) are classic entries of the Current Account. 'Foreign assets' and 'Special Drawing Rights' are capital/financial assets, not payment flows — these pertain to the Capital or Financial Account. Thus, only statements 1 and 3 are correct.

Key Info: The Balance of Payments (BoP) is a systematic record of all economic transactions between a country and the rest of the world over a period of time. It is divided mainly into two accounts:

1. Current Account:
  - Includes transactions related to goods, services, income, and current transfers.
  - Balance of trade: Refers to the difference between exports and imports of goods (merchandise trade). It is a major component of the current account.
  - Balance of invisibles: Includes net trade in services (such as IT, tourism, transport), net income from abroad (interest, dividends), and net current transfers (remittances, gifts, grants).

2. Capital and Financial Account:
  - Covers transactions that involve ownership of financial and real assets between countries.
  - Foreign assets: These refer to investments or holdings such as foreign currency reserves, deposits, and bonds held by residents in other countries. They are not part of the current account but belong to the capital/financial account.
  - Special Drawing Rights (SDRs): International reserve assets created by the IMF; these appear under the reserve assets in the capital/financial account, not in the current account.

## Key distinctions
- The current account tracks the flow of goods, services, income, and current transfers. It reflects a nation's earning and spending abroad.
- The capital/financial account records changes in ownership of assets and liabilities.

Major international institutions monitoring BoP include the IMF and central banks (e.g., Reserve Bank of India).

## Examples
- Exporting software services (Current Account, Invisibles)
- Acquiring foreign government bonds (Capital Account)

Answer

Option A: 1 only

Answer

Option B: 2 and 3

Answer

Option D: 1, 2, and 4

With reference to Balance of Payments, which of the following constitutes/constitute the Current Account? Balance of trade Foreign assets Balance of invisibles Special Drawing Rights Select the correct answer using the code given below.

With reference to Balance of Payments, which of the following constitutes/constitute the Current Account?

Balance of trade

Foreign assets

Balance of invisibles

Special Drawing Rights
Select the correct answer using the code given below.