The balance of payments account: credits and debits, the current account (goods, services, income, transfers) and the capital account (FDI, portfolio investment, loans, NRI deposits), the balance of trade, autonomous and accommodating transactions, and what a BoP deficit or surplus means, with worked examples and the traps CUET sets.
The balance of payments (BoP) records every economic transaction between a country's normal residents and the rest of the world over a period, usually a year. In India the RBI compiles it. Anything that brings foreign exchange in is a credit; anything that sends it out is a debit.
Current account balances
India usually runs a trade deficit, but net earnings from services and remittances cover much of it, so the current account deficit is smaller.
Transactions that change the country's foreign assets and liabilities:
Money coming in (foreign investment here, borrowing from abroad) is a credit; money going out (Indians investing abroad, repaying foreign loans) is a debit.
Watch out
Interest paid on a foreign loan is a current account debit (income); repaying the loan itself is a capital account debit.
Example 1 · Putting the BoP together
Exports of goods 300, imports of goods 450, services exports 200, services imports 100, net income −20, net transfers 30, net FDI 60, net portfolio 40, net borrowing 30 ($ billion).
Balance of trade = 300 − 450 = −150.
Net invisibles = (200 − 100) − 20 + 30 = 110, so the current account = −150 + 110 = −40.
Capital account = 60 + 40 + 30 = 130; overall balance = −40 + 130 = +90, added to reserves.
Current account deficit $40 billion; reserves rise by $90 billion
A BoP deficit means autonomous payments exceed autonomous receipts, so reserves fall or the country borrows officially. A surplus adds to reserves. Counting the accommodating items, total credits always equal total debits: in an accounting sense the BoP always balances.
A deficit cannot go on for ever because reserves are limited. In 1991, India's reserves fell to about two weeks of imports, a crisis that led to emergency borrowing and that year's reforms.
Current account
Capital account
Deficit
The price at which rupees and dollars change hands is in the foreign exchange rate.
53 questions, grouped by type, easy to hard. Pick an answer and check it. The worked solution opens when you ask for it.
The balance of payments is
AnswerB · a record of all transactions between residents and the rest of the world
It covers goods, services, income, transfers and capital flows, usually for a year.
Worth noting
Goods alone are the balance of trade, which is only one part of the BoP.
The two main accounts of the balance of payments are
AnswerD · the current account and the capital account
The current account records goods, services, income and transfers; the capital account records assets and liabilities.
India's balance of payments statistics are compiled and published by
AnswerB · the Reserve Bank of India
The RBI compiles India's BoP and releases it every quarter.
Read the two statements and choose the correct option.
I. A debit entry in the BoP is a receipt of foreign exchange.
II. Imports are recorded as debits.
AnswerB · Only II
A debit is a payment of foreign exchange to the rest of the world. I is false.
Imports must be paid for in foreign exchange, so they are debits. II is true.
In the balance of payments, a receipt of foreign exchange (such as from an export) is recorded as
AnswerA · a credit entry
Anything that brings foreign exchange into the country is a credit; anything that sends it out is a debit.
Match each transaction with how India's BoP records it.
| List I | List II |
|---|---|
| A. India exports rice to Iran | I. Credit in the capital account |
| B. India imports crude oil | II. Credit in the current account |
| C. A US firm builds a factory in India | III. Debit in the current account (services) |
| D. An Indian family pays for a holiday in Thailand | IV. Debit in the current account |
AnswerC · A-II, B-IV, C-I, D-III
Exports bring in foreign exchange (credit); imports and spending abroad send it out (debit).
Foreign investment coming in is a capital account credit.
Read the two statements and choose the correct option.
I. The balance of payments is a flow concept.
II. The balance of payments records only transactions made by the government.
AnswerA · Only I
It records transactions over a period, so it is a flow. I is true.
It records transactions by all residents: households, firms and the government. II is false.
The BoP records transactions between
AnswerA · the normal residents of a country and the rest of the world
Only cross-border transactions with non-residents are recorded.
Assertion (A): In an accounting sense, the balance of payments always balances.
Reason (R): Any gap between the current and capital accounts is matched by a change in official reserves.
AnswerA · Both A and R are true, and R is the correct explanation of A.
A shortfall is paid from reserves and a surplus adds to them, so total credits equal total debits.
R explains A.
Which of these is recorded in the current account?
AnswerB · Export of software services
Trade in services is part of the current account; the others are capital flows.
Invisible items in the current account include
AnswerC · services, income and transfers
Goods are 'visible' because they can be seen crossing the border; services, income and transfers are 'invisible'.
Which of these is a visible item in the BoP?
AnswerA · Import of gold
Gold is a good that physically crosses the border.
Money sent home by Indians working in the Gulf countries is recorded in India's BoP as
AnswerA · a credit under transfers in the current account
Remittances are current transfers into India: a current account credit.
Match each item with its part of the current account.
| List I | List II |
|---|---|
| A. Export of tea | I. Services |
| B. Fees earned by Indian IT firms from US clients | II. Transfers |
| C. Interest received on India's foreign exchange reserves | III. Goods (visible trade) |
| D. A gift of medicines from a foreign government | IV. Income |
AnswerD · A-III, B-I, C-IV, D-II
Tea is a good; IT work is a service; interest is income earned on assets; a gift is a transfer.
A country's international transactions in a year:
| Item | $ billion |
|---|---|
| Exports of goods | 300 |
| Imports of goods | 450 |
| Exports of services | 200 |
| Imports of services | 100 |
| Net income from abroad | −20 |
| Net transfers (remittances, gifts) | 30 |
| Net foreign direct investment | 60 |
| Net portfolio investment | 40 |
| Net external borrowing | 30 |
What is the net balance on invisibles (services, income and transfers)?
AnswerC · $110 billion
Net services = 200 − 100 = 100.
Net invisibles = 100 + (−20) + 30 = $110 billion.
Assertion (A): India often has a trade deficit but a smaller current account deficit.
Reason (R): India earns large net receipts from services such as software and from remittances.
AnswerA · Both A and R are true, and R is the correct explanation of A.
Surpluses on invisibles offset much of the deficit on goods. R explains A.
Read the two statements and choose the correct option.
I. Export of goods is an invisible item.
II. Tourism receipts from foreign visitors are part of services in the current account.
AnswerB · Only II
Goods are visible items. I is false.
Foreign tourists buy Indian travel services, a services export. II is true.
Freight charges paid by India to a foreign shipping company are recorded as
AnswerA · a debit under services in the current account
Shipping is a transport service bought from abroad, so it is a services import: a debit.
Assertion (A): Remittances from Indians abroad are a capital account item.
Reason (R): Remittances are transfers that create no claim to be repaid.
AnswerD · A is false, but R is true.
R is true: a remittance is a one-way transfer.
Because they create no asset or liability, remittances go in the current account, so A is false.
Interest paid by India on loans taken from abroad is recorded as
AnswerD · a debit under income in the current account
Interest is income paid to foreign lenders: a current account debit.
Repaying the loan itself would be a capital account debit.
A country's international transactions in a year:
| Item | $ billion |
|---|---|
| Exports of goods | 300 |
| Imports of goods | 450 |
| Exports of services | 200 |
| Imports of services | 100 |
| Net income from abroad | −20 |
| Net transfers (remittances, gifts) | 30 |
| Net foreign direct investment | 60 |
| Net portfolio investment | 40 |
| Net external borrowing | 30 |
What is the current account balance?
AnswerC · $-40 billion (a deficit)
Balance of trade = 300 − 450 = -150; net invisibles = 110.
Current account balance = -150 + 110 = $-40 billion: a current account deficit.
Worth noting
$90 billion adds the capital account too, which gives the overall balance.
Exports of goods are $500 billion, imports of goods $600 billion, net services $+80 billion, net income $−10 billion and net transfers $+50 billion. The current account shows
AnswerB · a surplus of $20 billion
Balance of trade = 500 − 600 = −100.
Current account = −100 + 80 − 10 + 50 = $+20 billion: a surplus.
Worth noting
A $100 billion deficit is only the trade balance; the invisibles more than cover it.
The capital account of the BoP records
AnswerA · changes in foreign assets and liabilities
Capital account flows create claims: a foreign loan is a liability, buying a foreign company's shares an asset.
Match each flow with its type.
| List I | List II |
|---|---|
| A. A Korean carmaker sets up a plant in Chennai | I. Banking capital (NRI deposits) |
| B. A foreign fund buys shares of Indian companies on the stock exchange | II. External commercial borrowing |
| C. An Indian company borrows dollars from a bank abroad | III. Portfolio investment |
| D. NRIs deposit money in Indian banks | IV. Foreign direct investment |
AnswerB · A-IV, B-III, C-II, D-I
FDI builds or controls a business; portfolio investment buys shares without control.
Commercial borrowing is a loan; NRI deposits are banking capital.
Foreign direct investment differs from portfolio investment in that FDI
AnswerD · gives the investor a lasting interest and a say in managing the business
FDI means building or buying control of a business; portfolio investment is buying shares or bonds for returns.
A country's international transactions in a year:
| Item | $ billion |
|---|---|
| Exports of goods | 300 |
| Imports of goods | 450 |
| Exports of services | 200 |
| Imports of services | 100 |
| Net income from abroad | −20 |
| Net transfers (remittances, gifts) | 30 |
| Net foreign direct investment | 60 |
| Net portfolio investment | 40 |
| Net external borrowing | 30 |
What is the capital account balance?
AnswerD · $130 billion
Capital account = FDI + portfolio + borrowing = 60 + 40 + 30 = $130 billion.
Read the two statements and choose the correct option.
I. Borrowing from abroad is a credit in the capital account.
II. Repaying a foreign loan is a credit in the capital account.
AnswerA · Only I
Borrowing brings foreign exchange in. I is true.
Repayment sends foreign exchange out, so it is a debit. II is false.
Assertion (A): Purchase of a factory in the USA by an Indian company is a debit in India's capital account.
Reason (R): It sends foreign exchange out of India in return for a foreign asset.
AnswerA · Both A and R are true, and R is the correct explanation of A.
Outward investment is a payment abroad, so it is a debit. R explains A.
Which of these is recorded in the capital account?
AnswerD · An NRI's deposit in an Indian bank
A deposit is a claim the depositor holds on the bank: a capital flow.
Exports, gifts and royalties are current account items.
Read the two statements and choose the correct option.
I. Foreign direct investment is recorded in the current account.
II. Portfolio investment gives the investor control over the company.
AnswerD · Neither I nor II
FDI is a capital account item. I is false.
Portfolio investment buys shares for returns without control. II is false.
FDI into India is $50 billion, FDI by India abroad is $20 billion, net portfolio investment is $−10 billion and net external borrowing is $15 billion. The capital account balance is
AnswerB · $35 billion
Net FDI = 50 − 20 = 30.
Capital account = 30 − 10 + 15 = $35 billion.
Assertion (A): A rise in foreign investment in India adds to the supply of foreign exchange.
Reason (R): Foreign investment is recorded in the current account.
AnswerC · A is true, but R is false.
A is true: investors bring in dollars and convert them into rupees.
R is false: foreign investment is a capital account item.
The balance of trade is
AnswerA · exports of goods − imports of goods
The balance of trade covers visible items (goods) only.
A trade deficit occurs when
AnswerC · imports of goods are greater than exports of goods
Balance of trade = exports − imports of goods; a negative value is a trade deficit.
Which of these would improve a country's balance of trade?
AnswerC · A rise in its exports of steel
Higher exports of goods raise exports − imports.
A country's international transactions in a year:
| Item | $ billion |
|---|---|
| Exports of goods | 300 |
| Imports of goods | 450 |
| Exports of services | 200 |
| Imports of services | 100 |
| Net income from abroad | −20 |
| Net transfers (remittances, gifts) | 30 |
| Net foreign direct investment | 60 |
| Net portfolio investment | 40 |
| Net external borrowing | 30 |
What is the balance of trade?
AnswerA · $-150 billion
Balance of trade = exports of goods − imports of goods = 300 − 450 = $-150 billion.
Worth noting
$−50 billion also counts services, which are not part of the balance of trade.
Balance of trade is $−80 billion and net invisibles are $+50 billion. The current account balance is
AnswerB · $−30 billion
Current account balance = BoT + net invisibles = −80 + 50 = $−30 billion.
Assertion (A): A country can have a trade deficit and a current account surplus at the same time.
Reason (R): The current account adds services, income and transfers to the balance of trade.
AnswerA · Both A and R are true, and R is the correct explanation of A.
If net invisibles are bigger than the trade deficit, the current account is in surplus. R explains A.
Read the two statements and choose the correct option.
I. The balance of trade is a wider concept than the current account balance.
II. A trade surplus means exports of goods exceed imports of goods.
AnswerB · Only II
The current account includes the balance of trade and more, so it is the wider one. I is false.
II is the definition of a trade surplus.
Which of these would worsen a country's balance of trade?
AnswerD · A rise in the world price of the crude oil it imports
A costlier import bill raises imports of goods, which lowers exports − imports.
Tourism and remittances are invisibles, outside the balance of trade.
A country's current account balance is $+20 billion and its balance of trade is $−30 billion. Its net invisibles are
AnswerD · $+50 billion
Current account = BoT + net invisibles, so net invisibles = 20 − (−30) = $+50 billion.
Autonomous transactions in the BoP are those that
AnswerB · are made for their own sake, such as for profit, without regard to the BoP
Exports, imports and private investment are decided on their own merits: autonomous.
Accommodating transactions are those that
AnswerC · fill the gap left by autonomous transactions
When autonomous receipts and payments do not match, the central bank uses reserves or official borrowing to fill the gap.
A country's overall BoP balance is a surplus of $25 billion. Its foreign exchange reserves
AnswerC · rise by $25 billion
A surplus means more foreign exchange came in than went out; the extra is added to reserves.
A BoP deficit means that
AnswerC · autonomous payments exceed autonomous receipts
A deficit is in the autonomous items; accommodating items then close it, so the accounts still balance.
Worth noting
Imports exceeding exports of goods is only a trade deficit, one part of the picture.
A country's international transactions in a year:
| Item | $ billion |
|---|---|
| Exports of goods | 300 |
| Imports of goods | 450 |
| Exports of services | 200 |
| Imports of services | 100 |
| Net income from abroad | −20 |
| Net transfers (remittances, gifts) | 30 |
| Net foreign direct investment | 60 |
| Net portfolio investment | 40 |
| Net external borrowing | 30 |
What is the overall balance, and what happens to official reserves?
AnswerB · $90 billion surplus; reserves rise by $90 billion
Overall balance = current account + capital account = -40 + 130 = $90 billion.
The surplus is added to official reserves.
Worth noting
$40 billion is the current account deficit alone; the capital inflow more than covers it.
Match each transaction with its type.
| List I | List II |
|---|---|
| A. Export of cotton for profit | I. Accommodating, use of reserves |
| B. RBI sells dollars from reserves to cover a BoP gap | II. Autonomous, current account |
| C. A foreign firm invests in an Indian start-up | III. Accommodating, official borrowing |
| D. India borrows from the IMF to meet a BoP crisis | IV. Autonomous, capital account |
AnswerD · A-II, B-I, C-IV, D-III
Trade and investment for profit are autonomous; reserve sales and IMF borrowing to fill a gap are accommodating.
India faced a severe BoP crisis, when its foreign exchange reserves fell to about two weeks of imports, in
AnswerB · 1991
The 1991 crisis led to emergency borrowing and the economic reforms of that year.
Read the two statements and choose the correct option.
I. An overall BoP surplus adds to a country's foreign exchange reserves.
II. A current account deficit always means a fall in reserves.
AnswerA · Only I
Net receipts beyond payments are held as reserves. I is true.
A large capital inflow can more than cover a current account deficit, so reserves can rise. II is false.
Which of these is an accommodating item?
AnswerB · Drawing down foreign exchange reserves to meet a BoP gap
Running down reserves is done because of the BoP gap, not for its own sake.
Read the two statements and choose the correct option.
I. An overall BoP deficit is financed by reserves or official borrowing.
II. In the accounts, total credits in the BoP equal total debits.
AnswerC · Both I and II
Accommodating transactions close the gap. I is true.
With accommodating items counted, the BoP balances. II is true.
Assertion (A): A country cannot run a BoP deficit forever.
Reason (R): A BoP deficit is met by running down foreign exchange reserves, which are limited.
AnswerA · Both A and R are true, and R is the correct explanation of A.
Once reserves run low, the country must cut imports, borrow officially or let its currency fall. R explains A.
A country's current account deficit is $50 billion and its capital account surplus (excluding reserves) is $30 billion. Its official reserves
AnswerA · fall by $20 billion
Overall balance = −50 + 30 = −20: a BoP deficit.
The deficit is met by drawing $20 billion from reserves.
NTA's Economics syllabus is three courses: Introductory Microeconomics, Introductory Macroeconomics and Indian Economic Development, each split into units with a list of topics. It prints no chapters and no split of the 50 questions across the courses. So the areas here are NTA's three courses, and the chapters inside them are ours: a unit that covers several ideas, such as consumer behaviour and demand, is split into a chapter for each, so that a chapter can be practised in one sitting. All three courses are here.