External Sector Dynamics and International Financial Interactions

Choose the Correct Answer

Correct Answer : Option a

Explanation
Statement 1 is not correct: A BoP deficit indicates that a country's total international payments exceed its receipts. While persistent and large deficits can signal underlying economic issues, short-term deficits are not inherently indicative of poor financial health. They may result from strategic economic decisions, such as increased imports for infrastructure development, which can bolster long-term growth. Therefore, a BoP deficit does not always equate to financial instability.

Statement 2 is correct: The capital account records transactions involving the transfer of ownership of assets between residents and non-residents, including foreign direct investment, portfolio investment, and loans. It reflects the net change in ownership of national assets and is crucial in understanding a country's financial interactions with the rest of the world.

Statement 3 is not correct: FPI and FII represent investments by non-residents in a country's financial assets, such as stocks and bonds. While these inflows contribute to the financial account of the BoP and can influence domestic investment and consumption, they do not directly add to the GDP. GDP measures the total value of goods and services produced within a country; thus, FPI and FII affect the financial markets but are not components of GDP.