With reference to Balance of Payments, which of the following constitutes/constitute the Current Account? (1) Balance of trade (2) Foreign assets (3) Balance of Invisibles (4) Special Drawing Rights Select the correct answer using the code given below.

The correct answer is C (1 and 3). The current account records transactions in goods, services, income and transfers, so it takes in the balance of trade and the balance of invisibles.

• Statement 1 (balance of trade) is correct. Merchandise exports minus merchandise imports form the trade balance, which is the first component of the current account.
• Statement 2 (foreign assets) is wrong. Foreign assets, such as investments abroad by residents and holdings of foreign securities, are recorded in the capital and financial account.
• Statement 3 (balance of invisibles) is correct. Services, income flows and unilateral transfers such as remittances make up the invisibles, which sit in the current account.
• Statement 4 (SDRs) is wrong. Special Drawing Rights are reserve assets issued by the IMF. Changes in reserves are shown in the capital and financial account, not the current account.

The core concept is the split between current and capital account: the current account captures flows of goods, services, income and transfers, while the capital account captures changes in assets and liabilities. This matters for Mains GS-III on the external sector, where the current account deficit and its financing through capital flows are central to macro-stability questions.

Trap: candidates see the words foreign assets or SDRs in a balance of payments question and assume they belong to the current account. Ask whether the item is a flow of goods, services, income or transfers. If it changes a stock of assets or reserves, it is capital account.