Choose the correct statement regarding components of Balance of Payment.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Transfer payments are free receipts received by residents without having to provide anything in return.
The balance of payments records all of a country’s dealings with the rest of the world in two main accounts:
Current account: trade in goods, trade in services (factor income, such as interest and profits earned abroad, and non-factor items, such as shipping and tourism) and transfer payments.
Capital account: dealings in assets — land, buildings, shares, bonds, loans — between residents and foreigners.
In either account, a transaction that brings foreign exchange into the country is a credit item, and one that sends foreign exchange out is a debit item. Transfer payments — money sent home by workers abroad, gifts, grants — are receipts that residents get ‘free’, without having to provide any goods or services in return.
Why the other options are incorrect
Option (1) Trade in services includes factor income and equity capital transactions. — Incorrect. Factor income does belong to trade in services, but equity capital is an asset, so dealings in it belong to the capital account.
Option (2) Purchase of assets in foreign countries is a credit item on the capital account. — Incorrect. Buying an asset abroad sends foreign exchange out of the country, so it is a debit item on the capital account, not a credit.
Option (4) Sale of Indian company’s share to a foreigner is a debit item of current account. — Incorrect. A share is an asset, and selling it to a foreigner brings foreign exchange in, so it is a credit item on the capital account — wrong in both the account and the side.
NCERT (2025-26): “6.1.1 Current Account Current Account is the record of trade in goods and services and transfer payments. … 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.… …Capital Account records all international transactions of assets. An asset is any one of the forms in which wealth can be held, for example: money, stocks, bonds, Government debt, etc. Purchase of assets is a debit item on the capital account. If an Indian buys a UK Car Company, it enters capital account transactions as a debit item (as foreign exchange is flowing out of India). On the other hand, sale of assets like sale of share of an Indian company to a Chinese customer is a credit item on the capital account.…” |