External Sector | Economy for UPSC 2025 (Pre & Mains) PDF Download

 Page 1


ECONOMY
EXTERNAL 
SECTOR
Page 2


ECONOMY
EXTERNAL 
SECTOR
BALANCE OF PAYMENT
Using IMF as authority
BOP is a statistical statement that summarizes transactions between residents and nonresidents of a 
country during a period. 
It consists of Current Account (including goods and services account, primary income account, 
secondary income account), Capital account, and Financial account.
Current Account + Financial Account + Capital Account + Balancing Item = 0
The different accounts within the balance of payments are distinguished according to the nature of the 
economic resources provided and received.
Balance of Payments (BoP) is a record of nation’s financial transactions (in goods, services, and assets) 
with rest of the world in a single accounting year.
Page 3


ECONOMY
EXTERNAL 
SECTOR
BALANCE OF PAYMENT
Using IMF as authority
BOP is a statistical statement that summarizes transactions between residents and nonresidents of a 
country during a period. 
It consists of Current Account (including goods and services account, primary income account, 
secondary income account), Capital account, and Financial account.
Current Account + Financial Account + Capital Account + Balancing Item = 0
The different accounts within the balance of payments are distinguished according to the nature of the 
economic resources provided and received.
Balance of Payments (BoP) is a record of nation’s financial transactions (in goods, services, and assets) 
with rest of the world in a single accounting year.
CURRENT ACCOUNT
The current account shows flows of goods, services, primary income, and secondary income 
between residents and nonresidents.
It records exports & imports in goods, trade in services and transfer payments. 
It is called the current account as it covers transactions in the "here and now" –
those that don't give rise to future claims.
Includes –
• Balance of Trade
• Balance of Invisible
• Interest Payments on International investments (interst paid or received)
• International Remittances
Page 4


ECONOMY
EXTERNAL 
SECTOR
BALANCE OF PAYMENT
Using IMF as authority
BOP is a statistical statement that summarizes transactions between residents and nonresidents of a 
country during a period. 
It consists of Current Account (including goods and services account, primary income account, 
secondary income account), Capital account, and Financial account.
Current Account + Financial Account + Capital Account + Balancing Item = 0
The different accounts within the balance of payments are distinguished according to the nature of the 
economic resources provided and received.
Balance of Payments (BoP) is a record of nation’s financial transactions (in goods, services, and assets) 
with rest of the world in a single accounting year.
CURRENT ACCOUNT
The current account shows flows of goods, services, primary income, and secondary income 
between residents and nonresidents.
It records exports & imports in goods, trade in services and transfer payments. 
It is called the current account as it covers transactions in the "here and now" –
those that don't give rise to future claims.
Includes –
• Balance of Trade
• Balance of Invisible
• Interest Payments on International investments (interst paid or received)
• International Remittances
CAPITAL ACCOUNT
It records all international purchases and sales of assets such as money, stocks, bonds, etc. 
It includes foreign investments and loans.
The financial account shows net acquisition and disposal of financial assets and liabilities -
• FDI
• Portfolio Investment
• Loans
• External Commercial Borrowings
• Non Resident Deposits
• Those transactions in goods, services and assets that are one-sided, i.e. given without expectation of reciprocity in kind. 
Examples include donations and gifts.
All these transactions are T wo-Way
That is, we can –
- Receive the above payments from other countries as well as 
- Make the above payments in other countries
Page 5


ECONOMY
EXTERNAL 
SECTOR
BALANCE OF PAYMENT
Using IMF as authority
BOP is a statistical statement that summarizes transactions between residents and nonresidents of a 
country during a period. 
It consists of Current Account (including goods and services account, primary income account, 
secondary income account), Capital account, and Financial account.
Current Account + Financial Account + Capital Account + Balancing Item = 0
The different accounts within the balance of payments are distinguished according to the nature of the 
economic resources provided and received.
Balance of Payments (BoP) is a record of nation’s financial transactions (in goods, services, and assets) 
with rest of the world in a single accounting year.
CURRENT ACCOUNT
The current account shows flows of goods, services, primary income, and secondary income 
between residents and nonresidents.
It records exports & imports in goods, trade in services and transfer payments. 
It is called the current account as it covers transactions in the "here and now" –
those that don't give rise to future claims.
Includes –
• Balance of Trade
• Balance of Invisible
• Interest Payments on International investments (interst paid or received)
• International Remittances
CAPITAL ACCOUNT
It records all international purchases and sales of assets such as money, stocks, bonds, etc. 
It includes foreign investments and loans.
The financial account shows net acquisition and disposal of financial assets and liabilities -
• FDI
• Portfolio Investment
• Loans
• External Commercial Borrowings
• Non Resident Deposits
• Those transactions in goods, services and assets that are one-sided, i.e. given without expectation of reciprocity in kind. 
Examples include donations and gifts.
All these transactions are T wo-Way
That is, we can –
- Receive the above payments from other countries as well as 
- Make the above payments in other countries
RESERVES
The net of all the Current and Capital account entries 
leads us to Reserves (Forex Reserve).
It will either increase because of greater inflows 
or
decrease because of greater outflows.
It has crossed $400 billion for the first time (Dec-2017).