Which of the following is not included in the Capital Account of the Balance of Payments of a country?

The correct answer is  Invisibles.

Key PointsComponents of the Capital Account

• The Capital Account in the Balance of Payments (BoP) records all transactions involving the purchase or sale of assets, including foreign investments, loans, and borrowings by a country.
• Foreign Direct Investment (FDI) refers to investments made by a foreign entity in the business interests of another country, typically by acquiring assets or establishing business operations. FDI is a significant component of the Capital Account. Hence, statement 1 is correct.
• Commercial Borrowing involves loans and credits extended by foreign entities to domestic businesses or the government. This borrowing is recorded under the Capital Account. Hence, statement 3 is correct.
• External Assistance comprises financial aid and grants provided by international organizations or foreign governments. This assistance is also part of the Capital Account. Hence, statement 4 is correct.
• Invisibles refer to transactions in the current account involving services, income, and current transfers. These include payments for services like travel, transportation, and insurance, as well as remittances and investment income. Invisibles are not included in the Capital Account but are part of the Current Account. Hence, statement 2 is incorrect.

Additional Information

• The Balance of Payments (BoP) is a comprehensive record of all economic transactions between residents of a country and the rest of the world during a specific period, typically a year.
• The BoP is divided into two main accounts: the Current Account and the Capital Account.
• The Current Account records transactions involving the export and import of goods and services, income receipts and payments, and current transfers such as remittances.
• The Capital Account records transactions involving the purchase and sale of assets, including FDI, portfolio investment, external borrowing, and financial aid.
• Understanding the structure and components of the BoP is crucial for analyzing a country's economic health, foreign exchange stability, and international financial relations.