Shanu gifted Meenal, who lives in Japan, a luxurious watch and an I-Pad. On which side of the BoP account shall the transaction be recorded?
Answer & explanation
Correct answer: option 3
The correct answer is Option 3: Debit side of current account
The transaction involves a gift from Shanu in India to Meenal in Japan. This is considered a transfer payment. Transfer payments are non-factor income transactions that do not involve the exchange of goods or services.
Since Shanu is sending the gifts out of India, it represents an outflow of foreign exchange. Outflows are recorded on the debit side of the balance of payments (BoP) account.
Moreover, as this transaction involves a gift and not a factor income (like interest or dividends), it falls under the current account of the BoP, which records all transactions related to trade in goods and services, as well as transfer payments.
Therefore, the transaction will be recorded on the debit side of the current account.