Balance of Payments of an economy records__________.

Inflow/outflow of foreign exchange to/from the economy.

The correct answer is Option (4) → Inflow/outflow of foreign exchange to/from the economy.

Inflow/outflow of foreign exchange to/from the economy: This is the most accurate and comprehensive description. The Balance of Payments systematically records all transactions that lead to the inflow (credits) and outflow (debits) of foreign exchange for an economy. These transactions include trade in goods and services, income from investments, remittances, and capital movements like foreign direct investment, portfolio investment, and loans.

Other Options:

• Income and the expenditure of the government: This describes the government budget, not the Balance of Payments. While government transactions with other countries are part of the BoP, the BoP is much broader.

• Inflow and outflow of the funds of the government: Similar to the above, this is too narrow. The BoP includes transactions by individuals, businesses, and the central bank, not just the government.

• Inflow and outflow of visible items into/from the rest of the world: This refers specifically to the trade in goods (merchandise) and is a component of the Current Account within the Balance of Payments (often called the Balance of Trade). However, the BoP is much broader and includes invisible items (services), income flows, transfers, and capital/financial flows.