Question

State the components of capital account of balance of payments.

Explain various components of the capital account of the balance of payments.

Answer 1

Capital Account of Balance of Payment (BOP) refers to that account of BOP, which records all the transactions that cause a change in the status of assets and liabilities of the government or any of the residents of a country. The following are the components of the capital account of BOP.

1. Foreign Direct Investment (FDI) and Portfolio Investment: Foreign Direct Investment refers to the investment in the assets of a foreign country that allows control over the asset. On the contrary, portfolio investment refers to the investment in the assets of a foreign country without any control over that asset. Both FDI and portfolio are non-debt-creating capital transactions. They cause an inflow of foreign exchange into the country. Thus, they are recorded as positive items in the capital account of the BOP.
2. Loans and Borrowings: A country takes loans and borrowings from the foreign countries and from the international monetary transactions. Loans and borrowings are debt-creating capital transactions. They result in an inflow of foreign exchange into the country. Hence, they are recorded as positive items in the Capital Account of BOP.
3. Banking Capital Transactions: Banking capital transactions refer to the transactions of external financial assets and liabilities of the commercial banks and cooperative banks that operate as authorised dealers in the foreign exchange market.