Question

Assertion (A): Unilateral Transfers are recorded in the Current Account of the Balance of Payments (BoP) of a nation.

Reason (R): Capital account records transactions which cause a change in the assets or liabilities of the country.

Options

• Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

• Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).

• Assertion (A) is true, but Reason (R) is false.

• Assertion (A) is false, but Reason (R) is true.

Answer 1

Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).

Explanation:

• Unilateral (transfer) payments, gifts, remittances, and grants are recorded in the Current Account under the Transfers heading.
• The Capital Account records international transactions in assets (FDI, portfolio flows, external borrowings), i.e. movements that change a country’s assets/liabilities.
• Even though both statements are true, the fact that the capital account records asset transactions does not explain why unilateral transfers belong in the current account, so R is not the correct explanation of A.