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Question
Name the broad categories of transactions recorded in the 'capital account' of the Balance of Payments Account
Solution
Components of the capital account of the balance of payments:
1) The foreign investment which includes foreign direct investment (FDI) and foreign institutional investment (FII) or portfolio investment by the residents of a nation abroad or by the rest of the world in the domestic country. Investments made in the assets of a foreign country is a foreign direct investment. Here, the assets of the foreign country are owned and controlled by the government or any resident within the domestic territory. On the other hand, foreign institutional investment means investment made in the assets of a foreign country. Here, the assets of the foreign country are not owned and controlled by the government or any resident within the domestic territory. These investments lead to an inward flow of foreign exchange and hence are treated as positive items in the capital account of the balance of payments.
2) Borrowings which include commercial borrowing by the government or private sector from the rest of the world and external assistance to a nation or by a nation. Borrowings with external assistance are provided with low-interest rate than the existing market. On the other hand, commercial borrowings are provided with the open market interest rate. These borrowings lead to an inward flow of foreign exchange and hence are treated as positive items in the capital account of the balance of payments
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