UPSC Prelims 2014 Q30: Indian Economy – External Sector & Balance Of Payments
With reference to Balance of Payments, which of the following constitutes/constitute the
Current Account?
1. Balance of trade
2. Foreign assets
3. Balance of invisibles
4. Special Drawing Rights
Select the correct answer
using the code given below.
- (a) 1 only
- (b) 2 and 3
- (c) 1 and 3
- (d) 1, 2 and 4
Answer: (c) 1 and 3
Explanation
Current Account of the Balance of Payments
| Item | Part of the Current Account? | Where it belongs |
|---|---|---|
| 1. Balance of trade | Yes | Exports and imports of goods (visibles) |
| 2. Foreign assets | No | Capital account |
| 3. Balance of invisibles | Yes | Services, income and transfers such as remittances |
| 4. Special Drawing Rights | No | Reserves, shown in the capital account |
Structure of the Balance of Payments:
| Account | Items |
|---|---|
| Current account | Trade in goods + invisibles (services, income, transfers) |
| Capital account | FDI, portfolio investment, loans, banking capital, change in reserves |
Current account deficit means imports of goods and services exceed exports and transfers.
Answer: (c) 1 and 3.
Why each option is right or wrong
- (a) Incorrect. The balance of invisibles is also part of the Current Account.
- (b) Incorrect. Foreign assets belong to the capital account.
- (c) CORRECT. The Current Account is the balance of trade plus the balance of invisibles.
- (d) Incorrect. Foreign assets and Special Drawing Rights are not Current Account items.
Key point
Current account = balance of trade (goods) + invisibles (services, income, transfers). Capital account = investment, loans, reserves including SDRs.
Remember
Current account = trade + invisibles.
Common mistakes
- Putting Special Drawing Rights in the current account.
- Forgetting that remittances are invisibles.
- Confusing the trade balance with the whole current account.
Exam tip
Current = flows of goods, services and income. Capital = assets and liabilities.
Sources
- NCERT Class XII — Introductory Macroeconomics, Ch 6 (Open Economy Macroeconomics)
- Reserve Bank of India — Balance of Payments Manual for India