Component of Capital Account of Balance of Payment:
The capital account is a component of the balance of payments that tracks the flow of financial transactions between a country and the rest of the world. It consists of various sub-components, including:
1. Borrowing and lending to and from abroad:
- This sub-component includes loans, both short-term and long-term, that a country receives from or extends to foreign entities. It represents the borrowing and lending activities between a country and the rest of the world.
2. Direct investment:
- This sub-component accounts for the investments made by foreign entities in a country's businesses or assets, as well as investments made by domestic entities in foreign businesses or assets. It includes activities such as the establishment of new businesses, mergers and acquisitions, and the purchase of real estate or other assets.
3. Portfolio investment:
- Portfolio investment refers to the purchase of stocks, bonds, and other financial assets by foreign entities in a country's financial markets, as well as investments made by domestic entities in foreign financial markets. It represents the flow of capital between countries through the buying and selling of securities.
4. Other investments:
- This sub-component includes all other types of financial transactions that do not fall under direct investment or portfolio investment. It includes activities such as trade credits, loans between affiliated companies, and currency and deposits.
Conclusion:
The correct answer is option C: Borrowing and lending to and from abroad. The capital account of the balance of payments includes various components, and borrowing and lending to and from abroad is one of them. It represents the flow of capital between a country and the rest of the world through loans and other financial transactions.