NCERT Class 12 Economics — Chapter 8: Open Economy Macroeconomics

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In the context of the Capital Account, the purchase of foreign assets by an Indian resident is recorded as:

Official previous-year question

Verified 1 Aug 2026.

Options

AA debit item because foreign exchange flows out of India.
BA debit item because it decreases the country's liabilities.
CA credit item because it increases the country's wealth.
DA credit item because it brings an asset to India.

Did you get this right?

Solution

The correct option is A debit item because foreign exchange flows out of India..

Explanation

The Balance of Payments (BoP) is a systematic record of all economic transactions between the residents of a country and the rest of the world. It operates on the principle of double-entry bookkeeping, where transactions are categorized based on the flow of foreign exchange:

Credit Items (Inflows): Transactions that bring foreign exchange into the country (e.g., exports, foreign investment in India).
Debit Items (Outflows): Transactions that result in foreign exchange leaving the country (e.g., imports, Indian investment abroad).

Analysis of the Transaction

The question refers to the purchase of foreign assets by an Indian resident. To acquire an asset abroad (such as property, shares, or bonds), the Indian resident must make a payment to the foreign entity.

Direction of Flow: This payment necessitates the transfer of funds from India to the foreign country, resulting in an outflow of foreign exchange.
Classification: Because the transaction causes money to leave the domestic economy, it is recorded as a debit item in the Capital Account.
Asset Creation: Although the transaction creates an asset for the Indian resident (a claim on the rest of the world), the BoP recording is determined by the monetary flow, which is negative (outward) in this case.

Key Takeaway

In Balance of Payments accounting, the purchase of assets abroad by domestic residents leads to an outflow of foreign currency and is therefore recorded as a Debit item.

Your note

More from Chapter 8: Open Economy Macroeconomics

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 following statements regarding the Balance of Payments (BoP): 1. It records only the transactions involving the government sector with the rest of the world. 2. It typically records transactions for a specified time period, usually a year. 3. The Reserve Bank of India currently publishes data according to the new classification of three accounts: current, financial, and capital. Which of the statements given above is/are correct?

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The correct option is A debit item because foreign exchange flows out of India..

Explanation

Credit Items (Inflows): Transactions that bring foreign exchange into the country (e.g., exports, foreign investment in India).
Debit Items (Outflows): Transactions that result in foreign exchange leaving the country (e.g., imports, Indian investment abroad).

Analysis of the Transaction

Direction of Flow: This payment necessitates the transfer of funds from India to the foreign country, resulting in an outflow of foreign exchange.
Classification: Because the transaction causes money to leave the domestic economy, it is recorded as a debit item in the Capital Account.
Asset Creation: Although the transaction creates an asset for the Indian resident (a claim on the rest of the world), the BoP recording is determined by the monetary flow, which is negative (outward) in this case.

Key Takeaway

In Balance of Payments accounting, the purchase of assets abroad by domestic residents leads to an outflow of foreign currency and is therefore recorded as a Debit item.