An Indian businessperson buys shares in a British car company. This transaction will be reflected in:
- (a)Balance of Trade, but not in Balance of Payments.
- (b)Balance of Payments, but not in Balance of Trade.
- (c)both Balance of Payments and Balance of Trade.
- (d)neither Balance of Payments nor Balance of Trade.
Correct — B, Balance of Payments, but not in Balance of Trade. The Balance of Trade is the narrowest item in the whole statement: it is merchandise exports minus merchandise imports, physical goods that clear customs and nothing else. A block of shares is not a good crossing a border; it is a claim on a foreign company. The Balance of Payments, by contrast, is the complete record of every transaction between residents of India and the rest of the world, and it has a financial account precisely for purchases of foreign assets. Her share purchase enters there as outward investment — portfolio investment if the stake is small, foreign direct investment if it reaches ten per cent — and shows as an outflow of capital. So one statement records it and the other never could.
- (a)Balance of Trade, but not in Balance of Payments. — This has the containment backwards. The Balance of Trade sits inside the Balance of Payments as one line of the current account, so nothing can appear in the first without appearing in the second. Share purchases appear in neither of those places — they belong to the financial account.
- (c)both Balance of Payments and Balance of Trade. — For this to hold, buying equity in a British firm would have to count as importing merchandise. No physical good moves and no customs entry is filed; what changes hands is a financial claim.
- (d)neither Balance of Payments nor Balance of Trade. — A resident of India has paid a non-resident and acquired a foreign asset. That is exactly the class of transaction the Balance of Payments exists to capture, and the RBI records it under outward investment in the financial account.
India's Balance of Payments, compiled by the RBI, has two main halves. The current account carries merchandise trade plus invisibles — services, primary income such as interest and dividends, and secondary income such as private transfers. The capital and financial account carries the transactions that change who owns what: foreign direct investment, portfolio investment, external commercial borrowing, banking capital and the change in reserves. The Balance of Trade is only the goods line of the current account, so it is a small slice of the full statement rather than a rival to it.
The trap is the everyday sense of the word trade, which covers any dealing with a foreign country. In national accounting it has been narrowed to visible merchandise, and the exam repeatedly tests whether a candidate has accepted that narrowing. A second point is worth carrying away: the two accounts are linked in time. Buying the shares is a financial-account entry today, but the dividends those shares pay in later years come back as primary income on the current account. Same investment, two different accounts, depending on whether you are looking at the stock bought or the income it throws off.
- The Balance of Trade covers visible merchandise alone; services and income flows are the invisibles of the current account.
- An equity stake of ten per cent or more is classed as foreign direct investment; anything smaller is foreign portfolio investment.
- Buying a foreign asset is recorded as an outflow on India's financial account even though the asset itself is an inflow of wealth to the buyer.
- Dividends later received on those shares return as primary income on the current account, not on the financial account.
- The RBI compiles and publishes India's Balance of Payments quarterly, and every entry is made twice, so the whole statement sums to zero once errors and omissions are added.
Each row is contained in the one below it, which is why an item can be in the Balance of Payments without being in the Balance of Trade, but never the reverse.
- Treating Balance of Trade and Balance of Payments as two names for the same statement.
- Assuming money leaving India cannot be recorded as an entry in a balance.
- Forgetting that the return on a foreign asset is a current-account flow while the asset purchase is not.
Asked as a classification item — a named transaction is described in plain language and you have to place it in the right box of the national accounts.
Capital Account Convertibility of the Indian Rupee implies
- (a) that the Indian Rupee can be exchanged by the authorised dealers for travel
- (b) that the Indian Rupee can be exchanged for any major currency for the purpose of trade in goods and services
- (c) that the Indian Rupee can be exchanged for any major currency for the purpose of trading financial assets
- (d) None of the above
Answer(c) that the Indian Rupee can be exchanged for any major currency for the purpose of trading financial assets
The same line drawn from the other side. That item separates buying financial assets abroad from trading goods and services, and rejects the goods-and-services option as describing current-account convertibility — which is precisely the distinction that keeps a share purchase out of the Balance of Trade here.
Which of the following is not included in the Capital Account of the Balance of Payments of a country?
- (a) Foreign Direct Investment
- (b) Commercial Borrowing
- (c) Invisibles
- (d) External Assistance
Answer(c) Invisibles
The complementary sorting exercise. It lists three capital-account items and one current-account item and asks you to spot the outsider, testing the same boundary that decides where an Indian's purchase of British shares is written down.
- practice — not a real PYQ
A foreign investor buys four per cent of the equity of a listed Indian company. In India's Balance of Payments this is classified as
- (a)foreign direct investment
- (b)foreign portfolio investment
- (c)a merchandise import
- (d)a secondary income transfer
Answer(b) foreign portfolio investment — a stake below ten per cent is portfolio investment; at ten per cent or above the same purchase would be reclassified as direct investment.
- practice — not a real PYQ
Which one of the following is recorded on the current account of India's Balance of Payments?
- (a)Purchase of a foreign government bond by an Indian bank
- (b)Money sent home by an Indian working in the Gulf
- (c)External commercial borrowing raised by an Indian firm
- (d)Repayment of the principal of a foreign loan
Answer(b) Money sent home by an Indian working in the Gulf — private transfers are secondary income on the current account, while the other three change ownership of assets and liabilities and belong to the financial account.