Which of the following is recorded in the capital account of the balance of payments?
- A.Export of software services
- B.Foreign direct investment
- C.Remittances sent home by workers abroad
- D.Import of crude oil
Correct answer
Explanation
The correct answer is B, foreign direct investment. The capital account records transactions that change the ownership of assets and liabilities between residents and non-residents, and foreign direct investment, along with portfolio investment, external commercial borrowings and deposits of non-resident Indians, falls squarely in that group. Option A is wrong because the export of software services is an invisible item of the current account, one of India's biggest earners. Option C is wrong because remittances are unilateral transfers and are also part of the invisibles in the current account; they help cover India's trade deficit. Option D is wrong because the import of crude oil is a visible merchandise item and the single largest entry on the import side of the trade balance. The rule to remember is simple: goods, services, income and transfers go to the current account, while assets and liabilities go to the capital account.
Read the full article: Balance of Payments and Foreign Trade: Key Concepts
Practice Questions
View allThe Balance of Payment Account of an economy is related to the ________.
- A.agriculture sector
- B.external sector
- C.government sector
- D.private sector
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The balance of payments is the statement that records every economic transaction between the residents of a country and the rest of the world in a given period, which is precisely what the external sector of an economy means; it covers merchandise trade, services, income, transfers and capital flows.
Read the full explanation →Which of the following is NOT a Trade Barrier?
- A.Subsidies
- B.Embargo
- C.Export Security
- D.Tariff Barriers
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Export security is not a recognised category of trade barrier; it is not a device that restricts the movement of goods across a border.
Read the full explanation →What are the two main forms of protection used to shield domestic industries from foreign competition in an inward looking trade strategy?
- A.Tariffs and subsidies
- B.Quotas and subsidies
- C.Tariffs and price controls
- D.Tariffs and quotas
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An inward-looking trade strategy, better known as import substitution, was the policy India followed from the Second Five Year Plan until 1991, and it rested on two instruments.
Read the full explanation →What is an indicator of self-reliance?
- A.Increase in imports of the goods which could be produced in the country.
- B.Avoiding imports of the goods which could be produced in the country.
- C.Increase in exports of the goods which could not be produced in the country.
- D.Avoiding exports of the goods which could be produced in the country.
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Self-reliance, the goal set out in India's early plans, means building the capacity to produce at home what the country would otherwise have to buy abroad, so the true indicator is that imports of such goods are avoided.
Read the full explanation →The balance of trade of a country includes which of the following?
- A.Only exports and imports of goods
- B.Exports and imports of goods and services
- C.All current and capital account transactions
- D.Only foreign investment flows
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The balance of trade, also called the merchandise or visible balance, is the difference between the value of goods exported and goods imported; nothing else enters it.
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