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Target Exam

CUET

Subject

Economics

Chapter

Macro Economics: Open Economy Macro Economics

Question:

Which of the following transactions will be recorded in the current account of Balance of Payment?

Options:

Borrowings from abroad.

Investment to abroad.

Increase in Foreign Exchange reserves.

Factor Income receipt from abroad.

Correct Answer:

Factor Income receipt from abroad.

Explanation:

The correct answer is Option (4) → Factor Income receipt from abroad.

The Balance of Payments (BOP) is a systematic record of all economic transactions between the residents of a country and the rest of the world during a specific period. It is divided into two main accounts: the Current Account and the Capital Account (sometimes called the Financial Account). 
The Current Account of the Balance of Payments (BOP) includes the following components:

  1. Trade in goods (exports and imports)

  2. Trade in services

  3. Income flows (such as wages, interest, and dividends — called factor income)

  4. Current transfers (like remittances, gifts, and grants)

Borrowings from abroad: This involves a financial liability (a loan) and is recorded in the Capital Account (specifically, under loans or external commercial borrowings). It represents a change in a country's financial assets or liabilities.

Investment to abroad: This refers to a country's residents making investments in foreign countries (e.g., buying foreign stocks, bonds, or setting up businesses). This transaction represents a change in financial assets and is recorded in the Capital Account (specifically, under foreign direct investment or portfolio investment).
 
Increase in Foreign Exchange reserves: This represents the central bank's acquisition of foreign assets. It is a change in official reserves and is recorded in the Capital Account (or the Official Reserve Account, which is a part of the Capital/Financial Account). An increase in reserves implies an outflow of domestic currency to acquire foreign currency assets, hence it's a debit item in the capital account.
 
Factor Income receipt from abroad: This refers to income earned by a country's residents from providing factor services (like labor, capital, land, entrepreneurship) to the rest of the world. Examples include wages earned by residents working abroad, interest received on foreign loans, dividends from foreign investments, and rent from property owned abroad. This type of income flow is recorded in the Current Account.

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