CAPF AC 2023 Q26: Indian Economy – External Sector & Balance Of Payments
- (a) Balance of Trade, but not in Balance of Payments.
- (b) Balance of Payments, but not in Balance of Trade.
- (c) both Balance of Payments and Balance of Trade.
- (d) neither Balance of Payments nor Balance of Trade.
Answer: (b) Balance of Payments, but not in Balance of Trade.
Explanation
Balance of Trade and Balance of Payments
How to think: the Balance of Trade records only goods exported and imported.
The Balance of Payments records every transaction with the rest of the world.
Buying shares is not trade in goods; it is an investment.
| Account | What it records | Shares in a British company? |
|---|---|---|
| Balance of Trade | Exports and imports of goods only | No |
| Current account | Goods, services, income and transfers | No |
| Capital account | Investments (FDI, portfolio), loans, banking capital | Yes |
| Balance of Payments | Current account + capital account | Yes |
So the purchase appears in the capital account of the Balance of Payments, but not in the Balance of Trade.
Answer: (b).
Why each option is right or wrong
- (a) Incorrect. The Balance of Trade is a part of the Balance of Payments, so this cannot happen.
- (b) CORRECT. Buying shares is a capital account item: in the Balance of Payments, not in the Balance of Trade.
- (c) Incorrect. Shares are not goods, so the Balance of Trade does not record them.
- (d) Incorrect. Every transaction with foreigners enters the Balance of Payments.
Key point
BoP = current account (trade in goods, invisibles: services, income, transfers) + capital account (FDI, portfolio investment, loans). Balance of Trade = exports of goods − imports of goods. Buying foreign shares is an outflow on the capital account.
Remember
Shares = capital account of the BoP, not the Balance of Trade.
Common mistakes
- Treating the purchase of shares as an import of goods.
- Thinking the Balance of Trade can include something the Balance of Payments does not.
- Mixing up the current account with the capital account.
Exam tip
Educated guess: the Balance of Trade sits inside the Balance of Payments, so (a) is impossible. Shares are plainly not merchandise, so (c) is out; and all foreign dealings are recorded somewhere, so (d) is out.
Sources
- NCERT Class XII Economics — Introductory Macroeconomics, Chapter 6: Open Economy Macroeconomics (balance of payments)
- Reserve Bank of India — Balance of Payments Manual for India