Looking for the answer to the question below related to Financial Management ?
Sale or purchase of gold in BOP is covered under _____________________
|A. Capital Account
B. Current Account
C. Official Reserve Account
D. Balancing Items
The Correct Answer Is:
- C. Official Reserve Account
The correct answer is C. Official Reserve Account. The sale or purchase of gold in a country’s Balance of Payments (BoP) is typically covered under the Official Reserve Account. The BoP is a comprehensive record of all economic transactions between residents of a country and the rest of the world. It comprises several sub-accounts, with the Official Reserve Account being one of them.
This account specifically tracks changes in a country’s official foreign exchange reserves, which include gold. Let’s explore in detail why this answer is correct and why the other options, A, B, and D, are not:
C. Official Reserve Account –
This option is correct because the Official Reserve Account in the Balance of Payments focuses on tracking changes in a country’s official foreign exchange reserves, including gold. Gold holdings in a country’s official reserves are categorized under this account. Transactions related to the sale or purchase of gold, which can influence a country’s reserve holdings, are recorded here.
Now, let’s examine why the other options are not correct:
A. Capital Account –
This option is incorrect because the Capital Account in the Balance of Payments covers capital transactions, such as foreign direct investments, portfolio investments, and financial assets. The sale or purchase of gold is not typically categorized as a capital transaction; it involves changes in a country’s reserve assets, which are covered under the Official Reserve Account.
B. Current Account –
This option is incorrect because the Current Account in the Balance of Payments records transactions related to the exchange of goods and services, income, and current transfers between a country and the rest of the world. Gold sales and purchases do not fall within the scope of the Current Account, as they pertain to changes in a country’s reserves.
D. Balancing Items –
This option is incorrect because “Balancing items” in the Balance of Payments are used to ensure that the sum of the Current Account, Capital Account, and Financial Account equals zero, as required by the accounting identity of the BoP. Balancing items do not represent a specific category of transactions and are not the appropriate place to account for the sale or purchase of gold.
Gold plays a unique role in a country’s official foreign exchange reserves. Historically, gold has been held by central banks and monetary authorities as a means of maintaining confidence in a country’s currency and reserves. Transactions involving gold, including the sale or purchase of gold, can impact a country’s reserve levels and are an essential part of the monetary policy toolkit.
Gold can be sold or purchased for various reasons, such as managing exchange rate stability, diversifying reserve assets, or responding to changes in the international economic environment. The decision to buy or sell gold is typically made by a country’s central bank or monetary authority, and the associated transactions are recorded in the Official Reserve Account.
The Official Reserve Account also includes other reserve assets, such as foreign currencies and Special Drawing Rights (SDRs), which are financial assets that can be used to support a country’s currency and international financial stability.
In conclusion, the correct answer is C. Official Reserve Account because the sale or purchase of gold in a country’s Balance of Payments is covered under this account.
This account tracks changes in a country’s official foreign exchange reserves, including gold holdings. The other options, A, B, and D, do not accurately represent the specific category in which gold transactions are recorded and are related to different aspects of a country’s economic transactions.