Q. With reference to Balance of Payments, which of the following constitutes/constitute the Current Account?

1. Balance of trade
2. Foreign assets
3. Balance of invisibles
4. Special Drawing Rights

Select the correct answer using the code given below. (UPSC Prelims 2014)
Answer: 1 and 3
Notes: The correct answer is [C] 1 and 3. The Balance of Payments (BoP) is a statistical statement that summarizes all economic transactions between residents of a country and the rest of the world. It is divided into the Current Account and the Capital Account.

• Balance of Trade (Statement 1 – Correct): This is the largest component of the Current Account. It records the export and import of physical goods (visible items). A positive balance indicates a trade surplus, while a negative one indicates a trade deficit.
• Balance of Invisibles (Statement 3 – Correct): This is the second major part of the Current Account. It includes:
  • Services: Shipping, banking, insurance, tourism, and software services.
  • Transfers: Remittances, gifts, and grants.
  • Income: Profit, interest, and dividends on investments.
• Foreign Assets (Statement 2 – Incorrect): This constitutes part of the Capital Account. The Capital Account records all international transactions that involve the acquisition or disposal of assets (e.g., Foreign Direct Investment, Portfolio Investment, and external commercial borrowings).
• Special Drawing Rights (SDRs) (Statement 4 – Incorrect): SDRs are international reserve assets created by the IMF. Changes in SDR holdings are recorded in the Capital Account (specifically under the reserve assets section) or the official reserve settlements, not the Current Account.

In simple terms, the Current Account covers "flow" items (what we earn and spend today), while the Capital Account covers "stock" items (changes in ownership of assets and liabilities).