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Foreign Investment are recorded in the _________ of balance of payments.

Foreign Investment are recorded in the _________ of balance of payments.

Looking for the answer to the question below related to Financial Management ?

Foreign Investment are recorded in the _________ of balance of payments.

 Options:

A. Current Account
B. Saving Account
C. Capital Account
D. Fixed Deposit Account

The Correct Answer Is:

  • C. Capital Account

The correct answer is C. Capital Account.

Why C (Capital Account) is the Correct Answer:

Foreign investments, whether in the form of foreign direct investment (FDI), portfolio investment, or other financial instruments, are recorded in the Capital Account of the Balance of Payments (BOP). Here’s a detailed explanation of why C is the correct answer:

1. Capital Account Definition:

The Capital Account is one of the primary components of the Balance of Payments (BOP). It accounts for international financial transactions, including investments, between a country’s residents and the rest of the world. The Capital Account is divided into two main subcategories: the Financial Account and the Capital Transfer Account.

2. Foreign Investment Inflows:

Foreign investments represent capital flows into a country’s economy. These investments can take various forms, such as foreign direct investments (FDI), which involve ownership stakes in domestic companies, and portfolio investments, which include holdings of stocks and bonds issued by domestic entities.

3. Recording Foreign Investments:

When foreign investors make investments in a country, it results in an increase in the country’s assets, as the country is now entitled to receive income or capital gains from these investments. These transactions are recorded in the Capital Account as capital inflows.

4. Capital Outflows:

Conversely, when domestic residents make investments abroad, it represents capital outflows from the country. These outflows are also recorded in the Capital Account as reductions in the country’s assets.

5. Balance in the Capital Account:

The balance in the Capital Account reflects the net difference between capital inflows and outflows related to foreign investments. A surplus in the Capital Account indicates that a country is receiving more capital from foreign investors than it is investing abroad, while a deficit indicates the opposite.

6. Impact on Exchange Rates:

Foreign investments can have a significant impact on exchange rates and a country’s balance of payments. Large inflows of foreign investment can lead to an appreciation of the domestic currency, while outflows can put downward pressure on the currency’s value.

Why the Other Options are Not Correct:

A. Current Account:

The Current Account of the Balance of Payments includes transactions in goods (exports and imports), services (such as tourism and financial services), income (e.g., dividends and interest), and current transfers (e.g., foreign aid and remittances). It does not specifically record foreign investments.

B. Savings Account:

A Savings Account is a type of bank account that individuals use for saving and earning interest on their deposits. It is not related to the recording of foreign investments in the BOP.

D. Fixed Deposit Account:

A Fixed Deposit Account is another type of bank account where individuals deposit a fixed amount of money for a specified period, typically at a higher interest rate than a regular savings account. Like the Savings Account, it is not related to the recording of foreign investments in the BOP.

In summary, foreign investments, whether inbound or outbound, are recorded in the Capital Account of the Balance of Payments. This account tracks the capital flows related to investments between a country and the rest of the world. The other options represent different types of financial accounts and banking instruments but do not specifically pertain to the recording of foreign investments in the BOP.

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