With reference to the Indian Economy, consider the following statements:
1. The sum of the current account and capital account reflected in the balance of payments will always be zero.
2. Any surplus or deficit in the current account is matched and canceled out by an equal surplus or deficit in the capital account.

Which of the above statements is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Question

With reference to the Indian Economy, consider the following statements:
1. The sum of the current account and capital account reflected in the balance of payments will always be zero.
2. Any surplus or deficit in the current account is matched and canceled out by an equal surplus or deficit in the capital account.

Which of the above statements is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

ONLiNE UPSC · Accepted Answer

Statement 1 is correct: The current and capital accounts represent two halves of a nation's balance of payments. The current account represents a country's net income over a period of time, while the capital account records the net change of assets and liabilities during a particular year. In economic terms, the current account deals with the receipt and payment in cash as well as non-capital items, while the capital account reflects sources and utilization of capital. The sum of the current account and capital account reflected in the balance of payments will always be zero.

Statement 2 is correct: Any surplus or deficit in the current account is matched and canceled out by an equal surplus or deficit in the capital account. If there is a current account deficit, it implies the country is importing more than it is exporting. To finance this deficit, funds must flow in through the capital account, such as foreign investments or borrowing. Conversely, a surplus in the current account would result in an outflow through the capital account, reflecting investment abroad or repayment of loans. Thus, they counterbalance each other.

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M Question 1	⏱ 0
With reference to the Indian Economy, consider the following statements: 1. The sum of the current account and capital account reflected in the balance of payments will always be zero. 2. Any surplus or deficit in the current account is matched and canceled out by an equal surplus or deficit in the capital account. Which of the above statements is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2