question_answer

Name the broad categories of transactions recorded in the 'capital account' of the Balance of Payments Accounts.

Or

Name the broad categories of transactions recorded in the 'current account' of the Balance of Payments Accounts.

 

Answer:

The following are the three broad categories of transactions recorded under capital account of BOP.

1. Foreign direct investment (FDI) and portfolio investment: Foreign Direct Investment refers to the investment in the assets of a foreign country. By investing, the government or any resident of domestic country owns the control over the asset of the foreign country. On the contrary, Portfolio Investment refers to the investment in the assets of a foreign country without any control over that asset. FDI and Portfolio Investment cause an Inflow of foreign exchange into the country. Thus, they are recorded as positive items in the Capital Account of BOP. It should also be noted that FDI and Portfolio Investment are die non-debt creating capital transactions.

2. Loans and Borrowings: Loans and borrowings by a country from the foreign countries or from the international money market are recorded in the Capital Account of the BOP. These borrowings can be in the form of commercial borrowings or in the form of assistance. When a country borrows with the consideration of assistance, the transaction would involve a lower rate of interest as compared to the prevailing market rate of interest. As against this, commercial borrowings involve open market rate of interest. Loans and borrowings result in inflow of foreign exchange into the country. Hence, they are recorded as positive items in the Capital Account of BOP. Unlike FDI and Portfolio Investments, loans and borrowings are debt creating capital transactions.

3. Banking Capital Transactions: Another form of Capital Account transactions are banking capital Transactions. Such transactions refer to the transactions of external financial assets and liabilities of the commercial banks and co-operative banks that operate as authorised dealers in the foreign exchange market.

Or

The following are the broad categories of transactions recorded under current account of BOP.

1. Export and import of goods: The transactions of a country in the form of export and import of goods is recorded in the current account of the BOP. This record of export and import of goods is also called the ?Balance of Visible Trade?. The export of goods is recorded as a positive item in the Current Account of BOP. This is because exports result in the inflow of foreign exchange into the country. On the other hand, imports of goods are recorded as negative items in the Current Account of BOP, as they result in an outflow of the foreign exchange from the country.

2. Export and import of services: Another component of the Current Account is the export and import of services. The record of export and import of services is also called the ?Balance of invisible trade?. Similar to the export of goods, export of services is also recorded as positive items in the Current Account of BOP. As against this, the import of services is recorded as negative items in the Current Account of BOP The following are some of the major services that are included in the Current Account of BOP.

(a) Shipping services, insurance and banking services, etc.

(b) Income from investment (i.e. income from profits and dividends)

(c) Foreign travel

(d) Miscellaneous transactions such as royalties, consultancy services, telephone services, etc.

3. Unilateral Transfers: Unilateral transfers refer to the one-sided transfers such as rifts, donations, grants from foreign governments, etc. A country makes such transfers to rest of the world as well as receives transfers of the world. Receipts of unilateral transfers are recorded as positive items in the Current Account of BOP, while payments of unilateral transfers are recorded as negative items in the Current Account of BOP.