UPSC Prelims 2013 Q41: Indian Economy – External Sector & Balance Of Payments
The balance of payments of a country is a systematic record of
- (a) all import and export transactions of a country during a given period of time, normally a year
- (b) goods exported from a country during a year
- (c) economic transaction between the government of one country to another
- (d) capital movements from one country to another
Answer: (a) all import and export transactions of a country during a given period of time, normally a year
Explanation
Balance of Payments
The balance of payments (BoP) is a systematic record of all economic transactions between the residents of a country and the rest of the world in a given period, normally a year.
| Option | Verdict | Reason |
|---|---|---|
| (a) All import and export transactions of a country during a given period | Correct (closest) | Covers goods, services and capital |
| (b) Goods exported from a country during a year | Incorrect | Only exports of goods |
| (c) Economic transaction between the government of one country to another | Incorrect | Only government dealings |
| (d) Capital movements from one country to another | Incorrect | Only the capital account |
Parts of the BoP:
| Account | Contains |
|---|---|
| Current account | Trade in goods, invisibles (services, income, transfers) |
| Capital account | FDI, portfolio investment, loans, banking capital |
| Reserves | Change in foreign exchange reserves |
Answer: (a) all import and export transactions of a country during a given period of time.
Why each option is right or wrong
- (a) CORRECT. The BoP records all import and export transactions over a period.
- (b) Incorrect. Goods exported alone is only one part of the trade account.
- (c) Incorrect. It is not limited to dealings between governments.
- (d) Incorrect. Capital movements form only the capital account.
Key point
Balance of payments: record of all economic transactions of residents with the rest of the world in a year; current account + capital account.
Remember
BoP = all transactions with the rest of the world.
Common mistakes
- Confusing balance of payments with balance of trade (goods only).
- Thinking it covers only government transactions.
- Forgetting that it always balances in an accounting sense.
Exam tip
Pick the widest option: BoP covers everything, not one part.
Sources
- NCERT Class XII — Introductory Macroeconomics, Ch 6 (Open Economy Macroeconomics)
- Reserve Bank of India — Balance of Payments Manual for India