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

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

The correct answer is 1,2 and 4.

Key Points

  • The capital account shows the net change in the physical or financial asset ownership for a country.
    • It includes Foreign Direct Investment, Portfolio Investment, foreign loans, changes in the reserve account, etc.
    • Hence statements 1,2 and 4 are correct.
  • Private remittances come under the Current account and not the Capital account.
    • Hence statement 3 is not correct.
  • Hence option 2 is correct.

​​Additional Information 

  • Components of Balance of Payment (BoP):
  • For preparing BoP accounts, economic transactions between a country and the rest of the world are grouped under - Current account, Capital account, and Errors and Omissions.
    • ​It also shows changes in Foreign Exchange Reserves.
  • Current Account: It shows export and import of visibles (also called merchandise or goods - represent trade balance) and invisibles (also called non-merchandise).
  • Invisibles include services, transfers, and income.
  • Capital Account: It shows a capital expenditure and income for a country.
    • It gives a summary of the net flow of both private and public investment into an economy.
    • External Commercial Borrowing (ECB), Foreign Direct Investment, Foreign Portfolio Investment, etc form a part of the capital account.
  • Errors and Omissions: Sometimes the balance of payment does not balance. This imbalance is shown in the BoP as errors and omissions. It reflects the country’s inability to record all international transactions accurately.
  • Changes in Foreign Exchange Reserves: Movements in the reserves comprise changes in the foreign currency assets held by the Reserve Bank of India (RBI) and also in Special Drawing Rights (SDR) balances.
  • Overall the BoP account can be a surplus or a deficit.
    • If there is a deficit then it can be bridged by taking money from the Foreign Exchange (Forex) Account.
      • If the reserves in the forex account are falling short then this scenario is referred to as BoP crisis.

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