BALANCE OF PAYMENTS

December 2018, Paper-II
Question
Balance of payment on capital account doesn’t include
a) Government loans to foreign governments
b) Net income transfers
c) Balancing foreign direct investment
d) Foreign portfolio investments
Answer B
The capital account is a record of the inflows and outflows of capital that directly affect a nation’s foreign assets and liabilities. It is concerned with all international trade transactions between citizens of one country and those in other countries. 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.
Foreign direct investment (FDI) refers to long-term capital investment, such as the purchase or construction of machinery, buildings, or whole manufacturing plants. Portfolio investment refers to the purchase of shares and bonds. It is sometimes grouped together with “other” as short-term investment. As with FDI, the income derived from these assets is recorded in the current account; the capital account entry will just be for any buying or selling of the portfolio assets in the international capital markets.