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Which of the following is/are component (s) of capital account of BoP?
  • a)
    Foreign direct investment
  • b)
    Borrowing from IMF by the government
  • c)
    Foreign exchange reserve
  • d)
    All of the above are components of BoP
Correct answer is option 'D'. Can you explain this answer?
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Which of the following is/are component (s) of capital account of BoP?...
Components of Capital Account of BoP

The capital account of the balance of payments (BoP) consists of two main components: foreign investment and borrowing. Let us discuss these components in detail.

Foreign Direct Investment (FDI)

Foreign direct investment (FDI) is an investment made by a foreign company or individual in the domestic economy of another country. FDI is a crucial component of the capital account of the BoP. It represents investments made by foreign companies in the domestic economy of a country, such as the creation of a new factory or acquisition of an existing one.

Borrowing

Borrowing from international organizations such as the International Monetary Fund (IMF) is another component of the capital account of the BoP. Governments borrow from the IMF to finance their balance of payment deficits. It is a debt that a country owes to international organizations, and it is reported in the capital account of the BoP.

Foreign Exchange Reserves

Foreign exchange reserves are also considered a component of the capital account of the BoP. Foreign exchange reserves are the foreign currencies held by a country's central bank. These reserves are used to stabilize the domestic currency and to pay for imports.

Conclusion

In conclusion, all of the above components, i.e., foreign direct investment, borrowing, and foreign exchange reserves, are considered components of the capital account of the BoP. These components help to ensure that the economy of a country remains stable and sustainable in the long run.
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Which of the following is/are component (s) of capital account of BoP?...
Capital account of BoP records all such transactions which impact either assets or liabilities of the country. All of the given components have either an impact on assets or liabilities of the country.
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The advice of the expert committee to review the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 requires attention, given Indias track record.Excessive and unsustainable borrowing by the government is obviously perverse as it entails a cost on future generations while crowding out private investment.In the past, fiscal irresponsibility has cost jobs, spiked inflation, put the currency in a tailspin and even brought the country to the brink of a default. The possibility of default may have resulted in the liberalisation of the economy in 1991, but the key trigger was irrational public spending on borrowed money in the late-1980s. Less than a decade later, with fiscal discipline faltering and the deficit shooting up to 10% of GDP, the FRBM law was enacted to limit the governments borrowing authority under Article 268 of the Constitution. But the target to limit the fiscal deficit to 3% of GDP (by 2009) was breached after the 2008 global financial crisis as a liberal stimulus reversed the gains in the fiscal space, creating fresh macro-level instability. The FRBM Acts deficit target is now only likely to be met next year.Such damage transmissions from the political economy to the real economy need to be checked forthwith. The committees proposal to maintain the 3% target till 2019-20 before aiming for further reduction is pragmatic, as the extraordinary and unanticipated domestic development of demonetisation happened during its tenure. Such an event, the committee has said, could trigger an escape clause from fixed fiscal targets in its proposed rule-based framework.Q. Based on the authors arguments in the passage above, which of the following would be most correct: The largesse towards voters in the political economy can lead to fiscal imprudence which affects the fiscal deficit and the FRBM targets. Intergenerational parity and private investments in the country are negatively affected by excessive government borrowings.Select the correct answer using the code given below

Which of the following is/are component (s) of capital account of BoP?a)Foreign direct investmentb)Borrowing from IMF by the governmentc)Foreign exchange reserved)All of the above are components of BoPCorrect answer is option 'D'. Can you explain this answer?
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