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Question

Difficulty: HardIndustrial Policies, Infrastructure Sector, Balance of Payments, and External Trade

Consider the following transactions occurring within the external sector of an economy:

1. External Commercial Borrowings (ECBs) raised by domestic private corporations from international markets.
2. Private remittances received from non-resident workers residing overseas.
3. Foreign Portfolio Investment (FPI) equity inflows into domestic listed companies.
4. Investment income payouts made to foreign investors in the form of dividends.

Which of the statements given above correctly identify transactions categorized under the Capital Account of the Balance of Payments?

  1. 1 and 3 onlyAnswer
  2. B
    2 and 4 only
  3. C
    1, 2, and 3 only
  4. D
    1, 3, and 4 only

Answer

1 and 3 only
The correct answer identifies External Commercial Borrowings (ECBs) and Foreign Portfolio Investment (FPI) as the only Capital Account entries among the choices. In Balance of Payments accounting, the Capital Account records foreign borrowings, foreign investments, and loan transactions that result in changes to a country's external financial assets and liabilities.

Step-by-Step Solution

1
Define the fundamental distinction between Balance of Payments (BoP) Current Account and Capital Account items.
Current Account records transactions of goods, services, primary income (dividends, interest), and secondary income (transfers/remittances). Capital Account records foreign financial asset and liability transactions (FDI, FPI, loans/ECBs, banking capital).
Classification relies on whether the transaction alters foreign asset or liability positions.
2
Evaluate statements 1 and 3.
Statement 1 (ECBs) and Statement 3 (FPI) both involve foreign debt and equity capital flows, altering net debt and equity obligations to non-residents.
Borrowings and portfolio investments directly affect national capital liabilities/assets.
3
Evaluate statements 2 and 4.
Statement 2 (private worker remittances) is classified as secondary income (unilateral current transfers). Statement 4 (dividend payments) is classified as primary income on foreign investment. Both are Current Account transactions.
Income servicing and unrequited transfers do not constitute capital transactions.
4
Select the option containing only Capital Account transactions.
Only statements 1 and 3 are Capital Account transactions.
Statements 2 and 4 belong to the Current Account.

Key Concept

Classification of Balance of Payments (BoP) transactions into Current Account vs. Capital Account components
Estimated Time:1m 30s
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Topics

Industrial Policies, Infrastructure Sector, Balance of Payments, and External Trade