Consider the following statements regarding the Capital Account of the Balance of Payments: 1. It records only the export and import of goods and services. 2. External Commercial Borrowings (ECBs) are a component of the Capital Account. 3. A surplus in the capital account arises when capital inflows are greater than capital outflows. Which of the statements given above is/are correct?

Correct Option The correct option is 2 and 3 only. Explanation The Balance of Payments (BoP) is a systematic record of all economic transactions between residents of a country and the rest of the world. It is primarily divided into two accounts: the Current Account, which deals with the trade of goods, services, and transfer payments, and the Capital Account, which records transactions involving financial assets and liabilities. Statement-wise Analysis - Statement 1 is Incorrect: The export and import of goods (visible trade) and services (invisible trade) are recorded in the Current Account. The Capital Account does not record trade in commodities; instead, it records cross-border movements of capital that alter the asset or liability status of a country (e.g., investments, loans). - Statement 2 is Correct: The Capital Account consists of three main components: 1. Investments: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). 2. Loans: Sovereign loans and External Commercial Borrowings (ECBs). 3. Banking Capital: NRI deposits and other banking capital. Thus, ECBs are explicitly a component of the Capital Account. - Statement 3 is Correct: A surplus in the Capital Account indicates a net inflow of capital. This occurs when the total capital inflows (receipts from foreign investments, loans taken, etc.) exceed the total capital outflows (investments made abroad, repayment of loans, etc.). Key Takeaway: The fundamental distinction in BoP is that the Current Account tracks "actual" trade (goods/services), while the Capital Account tracks "financial" flows (investments/debt). ECBs represent debt creation and fall under the Capital Account.

Consider the following statements regarding the Capital… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 8: Open Economy Macroeconomics

mcqmedium

Consider the following statements regarding the Capital Account of the Balance of Payments:

It records only the export and import of goods and services.
External Commercial Borrowings (ECBs) are a component of the Capital Account.
A surplus in the capital account arises when capital inflows are greater than capital outflows.

Which of the statements given above is/are correct?

NCERT textbook question

From NCERT Introductory Macroeconomics · Page 4

Options

A1, 2 and 3
B2 and 3 only
C1 and 2 only
D2 only

Did you get this right?

Solution

Correct Option

The correct option is 2 and 3 only.

Explanation

The Balance of Payments (BoP) is a systematic record of all economic transactions between residents of a country and the rest of the world. It is primarily divided into two accounts: the Current Account, which deals with the trade of goods, services, and transfer payments, and the Capital Account, which records transactions involving financial assets and liabilities.

Statement-wise Analysis

Statement 1 is Incorrect: The export and import of goods (visible trade) and services (invisible trade) are recorded in the Current Account. The Capital Account does not record trade in commodities; instead, it records cross-border movements of capital that alter the asset or liability status of a country (e.g., investments, loans).
Statement 2 is Correct: The Capital Account consists of three main components:
1. Investments: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).
2. Loans: Sovereign loans and External Commercial Borrowings (ECBs).
3. Banking Capital: NRI deposits and other banking capital.
Thus, ECBs are explicitly a component of the Capital Account.
Statement 3 is Correct: A surplus in the Capital Account indicates a net inflow of capital. This occurs when the total capital inflows (receipts from foreign investments, loans taken, etc.) exceed the total capital outflows (investments made abroad, repayment of loans, etc.).

Key Takeaway: The fundamental distinction in BoP is that the Current Account tracks "actual" trade (goods/services), while the Capital Account tracks "financial" flows (investments/debt). ECBs represent debt creation and fall under the Capital Account.

Your note

More from Chapter 8: Open Economy Macroeconomics

With reference to 'Transfer Payments' in the Balance of Payments, consider the following statements: 1. They require the recipient to provide goods or services in return. 2. They are receipts which the residents of a country get for free. 3. They consist exclusively of payments made for the import of capital goods. Which of the statements given above is/are correct?

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In a fixed exchange rate system, if there is an excess supply of foreign currency, the Central Bank must:

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Consider the effect of income on the exchange rate. If domestic income increases: 1. Consumer spending on imported goods decreases significantly. 2. The demand curve for foreign exchange shifts to the right. 3. The domestic currency is likely to depreciate. Which of the statements given above is/are correct?

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Which of the following items are included in the 'Current Account' of the Balance of Payments? 1. Export of goods 2. Import of services 3. Remittances and grants 4. External Commercial Borrowings

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Consider the following statements regarding the Balance of Trade (BOT): 1. It is the difference between the value of exports and imports of goods only. 2. Export of goods is entered as a debit item in BOT. 3. A Trade Deficit arises if a country imports more goods than it exports. Which of the statements given above is/are correct?

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