Question : The balance of payments is divided into which three main components?
Option 1: Current Account, Capital Account, and Financial Account
Option 2: Exports, Imports, and Trade Balance
Option 3: Income, Savings, and Investments
Option 4: Domestic, Foreign, and External Accounts
Correct Answer: Current Account, Capital Account, and Financial Account
Solution :
The correct answer is (a) Current Account, Capital Account, and Financial Account.
The balance of payments is divided into three main components:
Current Account: The current account records the transactions related to the trade in goods, services, income flows, and unilateral transfers. It includes exports and imports of goods and services, income received from abroad (such as dividends and interest), and unilateral transfers (such as remittances and foreign aid). The current account provides information about a country's net earnings from international trade and its net transfer payments.
Capital Account: The capital account records transactions that involve changes in a country's foreign assets and liabilities. It includes capital transfers, such as the transfer of ownership of non-financial assets, and the acquisition and disposal of non-produced, non-financial assets. The capital account captures capital flows between residents and non-residents that are not classified as financial investments.
Financial Account: The financial account records transactions related to financial assets and liabilities between residents and non-residents. It includes direct investment, portfolio investment, financial derivatives, other investment (such as loans and trade credits), and reserve assets. The financial account provides information on the investment and borrowing activities between the domestic economy and the rest of the world.
