Background
Overview
The external sector of an economy encompasses all transactions between residents of a country and the rest of the world. It is crucial for understanding a nation's economic health, influencing exchange rates, foreign exchange reserves, and overall macroeconomic stability. The Balance of Payments (BoP) is a systematic record of all economic transactions between a country's residents and non-residents during a specific period, providing a comprehensive view of these international dealings.
GS Paper 3: Indian Economy (Government Budgeting, Industrial Policy, Energy Security, Infrastructure)
Key facts
Balance of Payments (BoP)
A systematic record of all economic transactions between residents and non-residents over a period.
Current Account
Records transactions related to goods, services, income (primary income), and current transfers (secondary income).
Capital Account
Records international transactions involving financial assets and liabilities, reflecting changes in ownership of assets.
Foreign Direct Investment (FDI)
Long-term investment where an investor establishes a lasting interest in an enterprise in a foreign economy.
Foreign Portfolio Investment (FPI)
Short-term, volatile investment in financial assets like stocks and bonds, without gaining control.