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Q30 (IAS/2014) Economy › External Sector & Trade › Balance of payments Official Key

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.

Result
Your answer: —  ·  Correct: C
Explanation

Balance on Current Account has two components: Balance of Trade or Trade Balance and Balance on Invisibles[1]. Current Account is the record of trade in goods and services and transfer payments[2], which means it includes both visible trade (goods) and invisible trade (services and transfers).

Balance of Trade (BOT) is the difference between the value of exports and value of imports of goods of a country in a given period of time[1]. Invisibles include services, transfers and flows of income that take place between different countries, and services trade includes both factor and non-factor income[3].

Foreign assets, on the other hand, are part of the Capital Account, not the Current Account. Capital Account is a record of the inflows and outflows of capital that directly affect a country's foreign assets and liabilities, and capital account transactions are those which alter residents' assets or liabilities outside the country[4].

Special Drawing Rights (SDRs) are reserve assets and form part of a country's international reserves, not the Current Account. Therefore, only statements 1 (Balance of trade) and 3 (Balance of invisibles) constitute the Current Account, making option C correct.

Sources
  1. [1] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Balance on Current Account > p. 87
  2. [2] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > 6.1.1 Current Account > p. 86
  3. [3] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Balance on Current Account > p. 88
  4. [4] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.27 Balance of Payment (BoP) > p. 107
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Q. With reference to Balance of Payments, which of the following constitutes/constitute the Current Account? 1. Balance of trade 2. Foreign …
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 5/10 · 5/10

This is a foundational 'Sitter' question testing the core definition of Balance of Payments. It relies entirely on the static distinction between 'Flows' (Current Account) and 'Asset/Liability Changes' (Capital Account). If you understand the 'Asset Test', this question requires zero rote memorization.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Is the balance of trade (exports minus imports of goods) included in the Current Account of the Balance of Payments?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Balance on Current Account > p. 87
Presence: 5/5
“Current Account is in balance when receipts on current account are equal to the payments on the current account. A surplus current account means that the nation is a lender to other countries and a deficit current account means that the nation is a borrower from other countries. • Current Account: Surplus; Balanced Current: Account; Current Account: Deficit • Current Account: Receipts > Payments; Balanced Current: Receipts = Payments; Current Account: Receipts < Payments Balance on Current Account has two components: • ·Balance of Trade or Trade Balance• ·Balance on Invisibles Balance of Trade (BOT) is the difference between the value of exports and value of imports of goods of a country in a given period of time.”
Why this source?
  • Explicitly states Balance on Current Account has two components: Balance of Trade and Balance on Invisibles.
  • Defines Balance of Trade as the difference between value of exports and imports of goods — directly linking BOT to the Current Account.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > 6.1.1 Current Account > p. 86
Presence: 5/5
“Current Account is the record of trade in goods and services and transfer payments. Figure 6.1 illustrates the components of Current Account. Trade in goods includes exports and imports of goods. Trade in services includes factor income and non-factor income transactions. Transfer payments are the receipts which the residents of a country get for 'free', without having to provide any goods or services in return. They consist of gifts, remittances and grants. They could be given by the government or by private citizens living abroad.”
Why this source?
  • Defines the Current Account as the record of trade in goods and services and transfer payments.
  • Specifies trade in goods includes exports and imports of goods, which are the elements of BOT.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.27 Balance of Payment (BoP) > p. 107
Presence: 5/5
“Current Account: Current account deals in those transactions which do not alter Indian residents' assets or liabilities, including contingent liabilities, outside India and foreign resident's assets or liabilities inside India. Current account comprises of visible trade (export and import of goods), invisible trade (export and import of services), unilateral transfers and investment income (income earned from factors of production such as land, foreign shares, loans etc.). Capital Account: This account is a record of the inflows and outflows of capital that directly affect a country's foreign assets and liabilities. Capital account transactions are those transactions which alter Indian residents' assets or liabilities, including contingent liabilities, outside India and foreign resident's assets or liabilities inside India.”
Why this source?
  • States Current Account comprises visible trade (export and import of goods), invisible trade, transfers and investment income.
  • Identifies visible trade (exports−imports of goods) as an explicit component of the Current Account.
Statement 2
Are foreign assets included in the Current Account of the Balance of Payments?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"The Capital account shows the net change in ownership of foreign assets and transactions in financial instruments."
Why this source?
  • Directly states which account records ownership changes in foreign assets.
  • Places net change in ownership of foreign assets in the Capital account, not the Current account.
Web source
Presence: 4/5
"The current account is calculated by finding the balance of trade and adding it to net earnings from abroad and net transfer payments."
Why this source?
  • Defines the components of the Current Account (trade, net earnings from abroad, net transfers).
  • By listing Current Account components, implies ownership of foreign assets is not part of it.
Web source
Presence: 4/5
"The current account is the section of a country’s balance of payments that records its exports and imports of goods and services, its net investment income, and its net transfers."
Why this source?
  • Specifies Current Account records exports/imports, net investment income, and net transfers.
  • Does not list ownership of foreign assets, supporting that such asset changes belong to capital/financial accounts.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.27 Balance of Payment (BoP) > p. 107
Strength: 5/5
“Current Account: Current account deals in those transactions which do not alter Indian residents' assets or liabilities, including contingent liabilities, outside India and foreign resident's assets or liabilities inside India. Current account comprises of visible trade (export and import of goods), invisible trade (export and import of services), unilateral transfers and investment income (income earned from factors of production such as land, foreign shares, loans etc.). Capital Account: This account is a record of the inflows and outflows of capital that directly affect a country's foreign assets and liabilities. Capital account transactions are those transactions which alter Indian residents' assets or liabilities, including contingent liabilities, outside India and foreign resident's assets or liabilities inside India.”
Why relevant

Defines current account as transactions that do NOT alter residents' assets or liabilities abroad and defines capital account as those that alter foreign assets/liabilities.

How to extend

A student can infer that changes in foreign assets (which alter residents' assets abroad) would therefore belong to the capital/financial account, not the current account.

Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Errors and Omissions > p. 90
Strength: 4/5
“Box 6.1: The balance of payments accounts presented above divide the transactions into two accounts, current account and capital account. However, following the new accounting standards introduced by the International Monetary Fund in the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) the Reserve Bank of India also made changes in the structure of balance of payments accounts. According to the new classification, the transactions are divided into three accounts: current account, financial account and capital account. The most important change is that almost all the transactions arising on account of trade in financial assets such as bonds and equity shares are now placed in the financial account.”
Why relevant

Notes BPM6 reclassification: most transactions from trade in financial assets (bonds, equity) are placed in the financial account.

How to extend

Using this rule, a student can extend that transactions involving foreign assets (financial assets) are recorded outside the current account, in the financial/ capital accounts.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > BALANCE OF PAYMENTS > p. 471
Strength: 4/5
“Balance of Payments 16.3 BOP of a country is divided into two parts according to the nature of transactions that occur: • L Balance in current account • Balance in capital account . Autarky - A closed economy is referred to as the state of autarky. This concept has now become obsolete. BOP involves vertical double-entry system of accounting; i.e., for every credit there is a debit in the books and vice versa. To explain, all inflows are credited (+ sign) and all outflows are debited (- sign) under BOP. Thus. Credit (Cr.) items include - exports, receivable income, transfer receipts, reduction in foreign assets or increase in foreign liabilities.”
Why relevant

Explains BOP double-entry accounting and lists credits such as 'reduction in foreign assets or increase in foreign liabilities' as items (implying asset/liability changes are tracked separately).

How to extend

A student could use this to deduce that movements in foreign assets are treated as capital/financial entries (affecting assets/liabilities) rather than current account flows of goods/services.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > BALANCE OF PAYMENTS > p. 469
Strength: 4/5
“Balance of Payments Balance in Current Account Balance of Visibles or Balance of Trade (BOT) Balance of Invisibles Remittances Balance in Capital Account Foreign Investments Loans Banking Capital Transactions Net International Investment Position Net Errors and Omissions, Autonomous and Accommodating Items in the BOP Account, Foreign Exchange Reserves, BOP Trend in India in the Pre- and Post-reform Period, BOP Situation in Post-Reform Period, India's External Debt, Twin Deficit Hypothesis, J-Curve”
Why relevant

Under headings, it distinguishes 'Balance in Current Account' (visibles/invisibles) and 'Balance in Capital Account' including 'Net International Investment Position'.

How to extend

A student can link 'Net International Investment Position' with foreign assets/liabilities, suggesting these belong to the capital/financial side, not the current account.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 2014 > p. 488
Strength: 3/5
“• 4. With reference to BOP, which of the following constitute/constitutes 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• (c) 1 and 3 (b) 2 and 3 • 5. Which of the following constitute capital account? • 1. Foreign loan• 2. Foreign direct investment• 3. Private remittances• 4. Portfolio investment”
Why relevant

Includes a multiple-choice item asking whether 'Foreign assets' constitute the current account alongside trade and invisibles, highlighting it as a contested/ testable item.

How to extend

A student could combine this with definitions above to eliminate 'foreign assets' from current account and select trade/invisibles as current-account components.

Statement 3
Are balance of invisibles (services, income, and current transfers) included in the Current Account of the Balance of Payments?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > Balance of Current Account = Balance of Visible + Balance of Invisible > p. 473
Presence: 5/5
“Balance of Current Account = Balance of Visibles + Balance of Invisibles Particular | 2019 - 20 | 2020-21 (Apr-Sep) • Col1: Balance of Trade (A); Present Status of CAD in India: -1,57,506; (in US$ Million): -25,552 • Col1: Balance of Invisibles (B); Present Status of CAD in India: +132,850; (in US$ Million): +60,270 • Col1: Current Account Balance (A + B); Present Status of CAD in India: -24,656; (in US$ Million): +34,718 • Col1: Current Account Deficit (as a % of GDP); Present Status of CAD in India: -1.9%; (in US$ Million): +3.1\% (H1)”
Why this source?
  • Gives the explicit identity: Balance of Current Account = Balance of Visibles + Balance of Invisibles.
  • Provides numeric breakdown showing invisibles form part of the current account balance.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Balance on Current Account > p. 88
Presence: 5/5
“of imports of invisibles of a country in a given period of time. Invisibles include services, transfers and flows of income that take place between different countries. Services trade includes both factor and non-factor income. Factor income includes net international earnings on factors of production (like labour, land and capital). Non-factor income is net sale of service products like shipping, banking, tourism, software services, etc.”
Why this source?
  • Defines 'invisibles' as services, transfers and flows of income between countries.
  • Directly links the listed items (services, transfers, income) to the term 'invisibles' used in BOP context.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.27 Balance of Payment (BoP) > p. 107
Presence: 5/5
“Current Account: Current account deals in those transactions which do not alter Indian residents' assets or liabilities, including contingent liabilities, outside India and foreign resident's assets or liabilities inside India. Current account comprises of visible trade (export and import of goods), invisible trade (export and import of services), unilateral transfers and investment income (income earned from factors of production such as land, foreign shares, loans etc.). Capital Account: This account is a record of the inflows and outflows of capital that directly affect a country's foreign assets and liabilities. Capital account transactions are those transactions which alter Indian residents' assets or liabilities, including contingent liabilities, outside India and foreign resident's assets or liabilities inside India.”
Why this source?
  • States current account comprises visible trade, invisible trade (services), unilateral transfers and investment income.
  • Explicitly places services, transfers and investment income (i.e., invisibles) within the current account.
Statement 4
Are Special Drawing Rights (SDRs) included in the Current Account of the Balance of Payments?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 4/5
"The current account is calculated by finding the balance of trade and adding it to net earnings from abroad and net transfer payments."
Why this source?
  • Defines what the current account records (balance of trade, net earnings from abroad, net transfer payments).
  • By listing current-account components without mentioning reserve assets, it implies reserve items like SDRs are not current-account entries.
Web source
Presence: 4/5
"Special Drawing Rights (SDRs) are a reserve asset created by IMF and allocated from time to time to member countries."
Why this source?
  • Explicitly describes SDRs as a reserve asset created by the IMF and used between monetary authorities.
  • Classifying SDRs as reserves supports that they belong to international reserves/financial accounts rather than the current account.
Web source
Presence: 4/5
"INTERNATIONAL RESERVES (gross). Holdings of monetary gold, Special Drawing Rights (SDRs), the reserve positions of members in the IMF and holdings"
Why this source?
  • Lists SDRs explicitly as part of international reserves.
  • This placement under international reserves corroborates that SDRs are not current-account transactions.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > FOREIGN EXCHANGE RESERVES > p. 483
Strength: 5/5
“Balance of Payments 16.15 • India's forex reserves stand at US$ 583.94 billion as on 5 February 2021 (based on RBI \sigmareport). • India's foreign exchange reserves include: ö • FCAs (Foreign Currency Assets) 1. 2. Monetary gold 3. SDRs (Special Drawing Rights) (SDRs are held in the custody of the government instead of RBI) 4. RTP (Reserve Tranche Position) in the International Monetary Fund (IMF). • At present, FCAs have the maximum share (>90%) in the forex reserves of RBI, followed by gold. Reserve Tranche - It is a portion of the required quota of currency that each member country must provide to the IMF which can be utilised for its own purposes.”
Why relevant

This snippet lists SDRs explicitly as a component of a country's foreign exchange reserves.

How to extend

A student can note that reserves are a stock of assets held by the government/RBI and therefore likely recorded differently from current-account flow items (goods, services, income).

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 18: International Economic Institutions > SPECIAL DRAWING RIGHTS > p. 514
Strength: 4/5
“• IMF lends to member countries in its artificial currency unit known as Special Drawing Rights \bullet (SDRs). • Created in 1969, SDRs are the foreign exchange reserve assets under IMF. • SDR is not intrinsically a currency but is a unit of account maintained by IMF. ٠ • It is neither a proper currency nor a claim on IMF. \bullet • Its value is based on the basket of the following five major currencies: • 1. US Dollar 41.73 per cent • 2. Euro 30.93 per cent • 3. Chinese Renminbi 10”
Why relevant

It defines SDRs as IMF reserve assets and a unit of account, not a currency, emphasizing their role as reserve holdings.

How to extend

From this, a student could infer SDRs function as reserve/financial instruments rather than transactions in trade/invisibles, suggesting they belong outside the current account.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > Balance of Current Account = Balance of Visible + Balance of Invisible > p. 473
Strength: 5/5
“Balance of Current Account = Balance of Visibles + Balance of Invisibles Particular | 2019 - 20 | 2020-21 (Apr-Sep) • Col1: Balance of Trade (A); Present Status of CAD in India: -1,57,506; (in US$ Million): -25,552 • Col1: Balance of Invisibles (B); Present Status of CAD in India: +132,850; (in US$ Million): +60,270 • Col1: Current Account Balance (A + B); Present Status of CAD in India: -24,656; (in US$ Million): +34,718 • Col1: Current Account Deficit (as a % of GDP); Present Status of CAD in India: -1.9%; (in US$ Million): +3.1\% (H1)”
Why relevant

This explains the current account composition as balance of visibles (trade) plus invisibles (services/income).

How to extend

Combine this rule (current account = trade + invisibles) with the fact SDRs are reserve assets to suspect SDRs are not part of current-account flows.

Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Errors and Omissions > p. 90
Strength: 4/5
“Box 6.1: The balance of payments accounts presented above divide the transactions into two accounts, current account and capital account. However, following the new accounting standards introduced by the International Monetary Fund in the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) the Reserve Bank of India also made changes in the structure of balance of payments accounts. According to the new classification, the transactions are divided into three accounts: current account, financial account and capital account. The most important change is that almost all the transactions arising on account of trade in financial assets such as bonds and equity shares are now placed in the financial account.”
Why relevant

Explains BPM6 reclassification: BOP transactions are divided into current, financial, and capital accounts, with financial-account treatment for financial asset transactions.

How to extend

Knowing SDRs are reserve/asset-related, a student could extend this to expect SDR-related changes to appear in the financial (or reserve assets) portion of BOP under BPM6 rather than the current account.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 2014 > p. 488
Strength: 3/5
“• 4. With reference to BOP, which of the following constitute/constitutes 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• (c) 1 and 3 (b) 2 and 3 • 5. Which of the following constitute capital account? • 1. Foreign loan• 2. Foreign direct investment• 3. Private remittances• 4. Portfolio investment”
Why relevant

A practice question explicitly lists Special Drawing Rights as an option when asking which items constitute the current account (implying it is a distinct choice to be evaluated).

How to extend

A student could use this example to judge that SDRs are not typically grouped with balance of trade/invisibles items and thus are likely not part of the current account.

Pattern takeaway: UPSC consistently sets 'Classification Traps' in Economy. They mix items from two opposing lists (Revenue vs Capital Budget, Money vs Capital Market, Current vs Capital BoP). The strategy is to master the *defining principle* of the category rather than just the examples.
How you should have studied
  1. [THE VERDICT]: Sitter. Directly solvable from NCERT Class XII Macroeconomics (Chapter 6: Open Economy) or any standard economy primer.
  2. [THE CONCEPTUAL TRIGGER]: The structure of Balance of Payments (BoP) and the specific sub-categorization of transactions into Current vs. Capital accounts.
  3. [THE HORIZONTAL EXPANSION]: Memorize the BoP Table hierarchy: 1. Current Account: Visibles (Trade Balance) + Invisibles (Services, Income [Profit, Interest, Dividend], Transfers [Remittances, Grants]). 2. Capital Account: Investments (FDI, FPI), Loans (ECB, Sovereign), Banking Capital (NRI Deposits). 3. Forex Reserves: Gold, SDRs, RTP, Foreign Currency Assets.
  4. [THE STRATEGIC METACOGNITION]: Apply the 'Asset Test' instead of memorizing lists. Ask: 'Does this transaction create a future claim (asset or liability)?' If YES (e.g., buying a Foreign Asset, holding SDRs), it is Capital. If NO (e.g., selling a car, sending a gift), it is Current.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Balance of Trade (BOT) = Exports − Imports (goods)
💡 The insight

BOT is defined in the references as the difference between exports and imports of goods, which is the quantity referenced in the statement.

High-yield for BOP questions: recognising BOT formula and its sign (surplus/deficit) is frequently tested. Links to topics on trade balances, exchange rates and external stability. Learn by memorising the formula and practicing interpretation of surplus/deficit scenarios.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Balance on Current Account > p. 87
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 2.1. Balance of Visibles or Balance of Trade (BOT) > p. 471
🔗 Anchor: "Is the balance of trade (exports minus imports of goods) included in the Current..."
📌 Adjacent topic to master
S1
👉 Components of the Current Account
💡 The insight

References list Current Account components (visible goods, services, transfers, income), showing where BOT (visible goods) fits.

Central for UPSC macroeconomics and international economics: helps answer questions on what transactions belong to current vs capital accounts, and on sources of CA surplus/deficit. Master by mapping each transaction type (goods, services, income, transfers) to the Current Account and practicing classification questions.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > 6.1.1 Current Account > p. 86
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.27 Balance of Payment (BoP) > p. 107
🔗 Anchor: "Is the balance of trade (exports minus imports of goods) included in the Current..."
📌 Adjacent topic to master
S1
👉 Current Account vs Capital Account (transactions altering assets/liabilities)
💡 The insight

References contrast Current Account (non-asset-altering transactions) with Capital Account (transactions that change assets/liabilities), clarifying why BOT sits in Current Account.

Important for distinguishing types of BOP entries in UPSC answers and essays. Helps in questions on financing deficits and policy responses. Study by comparing examples of current vs capital transactions and their macro implications.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.27 Balance of Payment (BoP) > p. 107
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > IRVE > p. 487
🔗 Anchor: "Is the balance of trade (exports minus imports of goods) included in the Current..."
📌 Adjacent topic to master
S2
👉 Current vs Capital/Financial Account distinction
💡 The insight

References define the current account as transactions that do not alter residents' foreign assets/liabilities and note that trade in financial assets is placed in the financial/capital account.

High-yield for UPSC: many questions ask which transactions belong to current vs capital/financial accounts. Mastering this distinction helps answer MCQs and explain BoP adjustments; link it to external debt, FDI and reserve movements. Study by memorising defining rule (whether assets/liabilities change) and practising classification examples.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.27 Balance of Payment (BoP) > p. 107
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Errors and Omissions > p. 90
🔗 Anchor: "Are foreign assets included in the Current Account of the Balance of Payments?"
📌 Adjacent topic to master
S2
👉 Components of the Current Account
💡 The insight

Evidence lists current-account components such as balance of trade, invisibles (services, transfers) and investment income.

Frequently tested: knowing components (goods, services, primary income, secondary income) allows quick elimination in MCQs and supports essays on trade deficits/surpluses; revise by listing components and matching real-world items to each.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > Balance on Current Account > p. 87
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > BALANCE OF PAYMENTS > p. 469
🔗 Anchor: "Are foreign assets included in the Current Account of the Balance of Payments?"
📌 Adjacent topic to master
S2
👉 Transactions that alter residents' foreign assets/liabilities
💡 The insight

Sources state capital/financial account records flows that change a country's foreign assets and liabilities, contrasting with the current account.

Conceptually central for BoP analysis and questions on capital flows, portfolio vs FDI, and reserve adjustments. Learning this helps classify items (e.g., foreign asset purchases) correctly and answer applied questions on financing current account deficits.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.27 Balance of Payment (BoP) > p. 107
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > 6.1 THE BALANCE OF PAYMENTS > p. 86
🔗 Anchor: "Are foreign assets included in the Current Account of the Balance of Payments?"
📌 Adjacent topic to master
S3
👉 Components of the Current Account (Visibles + Invisibles)
💡 The insight

The references state that the current account equals the balance of visibles plus the balance of invisibles and give examples/numbers.

High-yield for UPSC: questions often ask what constitutes the current account or to compute CAD. Mastering this helps in classifying flows and solving numerical BOP items. Study by memorising components and practising decomposition of current account balances.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > Balance of Current Account = Balance of Visible + Balance of Invisible > p. 473
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > BALANCE IN CURRENT ACCOUNT > p. 471
🔗 Anchor: "Are balance of invisibles (services, income, and current transfers) included in ..."
🌑 The Hidden Trap

The 'Income' Trap: While 'Foreign Investment' (Principal) is Capital Account, the 'Income' generated from it (Profit, Interest, Dividends) is Current Account. A future question may ask: 'Is interest payment on an external commercial borrowing part of the Capital Account?' (Answer: No, it is Current Account/Invisibles).

⚡ Elimination Cheat Code

The 'Nomenclature Hack': Option 2 is 'Foreign ASSETS'. The definition of Capital Account is 'transactions affecting assets and liabilities'. Therefore, 'Assets' cannot be in the Current Account. Eliminate any option with 2. This removes [B] and [D]. You are left with [A] or [C]. Knowing 'Invisibles' are standard trade services confirms [C].

🔗 Mains Connection

Link BoP to Currency Management (Mains GS-3). A high Current Account Deficit (CAD) weakens the Rupee unless offset by a Capital Account Surplus. This forces the RBI to intervene (sell Forex/SDRs), linking this concept to 'Sterilization' and 'Imported Inflation'.

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SIMILAR QUESTIONS

IAS · 2013 · Q81 Relevance score: 1.40

Which of the following constitute Capital Accounts? 1. Foreign Loans 2. Foreign Direct Investment 3. Private Remittances 4. Portfolio Investment Select the correct answer using the codes given below.

IAS · 2006 · Q66 Relevance score: -0.73

Assertion (A) : ‘Balance of Payments’ represents a better picture of a country’s economic transactions with the reset of the world than the ‘Balance of Trade’. Reason (R) : ‘Balance of Payments’ takes into account the exchange of both visible and invisible items whereas ‘Balance of Trade’ does not.

CDS-II · 2024 · Q17 Relevance score: -0.88

Which of the following is not included in the Capital Account of the Balance of Payments of a country?

IAS · 2000 · Q29 Relevance score: -1.32

Consider the following statements : The Indian rupee is fully convertible I. in respect of Current Account of Balance of Payment. II. in respect of Capital Account of Balance of Payment. III. into gold. Which of these statements is/are correct ?