UPSC Prelims 2014 Question:

With reference to the 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:

Explanation:

• The balance of payment of a country is a systematic record of all its economic transactions with the outside world in a given year. The term ‘all transaction’ refers to transactions of the government as well as private.
• The external transactions are classified as current account and capital account transactions. Current account transactions are like revenue receipts and revenue expenditures and capital account transactions are like capital receipts and capital expenditures.

The main components of the current account are:

• Trade in goods (visible balance). So, point 1 is correct.

• Trade in services (invisible balance), e.g. insurance and services
• Investment incomes, e.g. dividends, interest and migrants remittances from abroad. So, point 3 is correct.
• Net transfers – e.g. International aid.

The main components of the capital account are:

• The components of the capital account include foreign investment and loans, banking, and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve. The capital account flow reflects factors such as commercial borrowings, banking, investments, loans, and capital.
• The Special Drawing Rights (SDRs) is an international reserve asset created by the IMF to supplement the official reserves of its member countries.
  

Therefore, option (3) is the correct answer.

Subject: Economics | Balance of Payments and Foreign Reserves