Module: General Practice
Q36: Consider the following international transactions regarding a hypothetical Indian manufacturing firm, "Bharat Motors Ltd." Choose the correct option.
1. Importing heavy machinery from Germany.
2. Availing a long-term loan from a German bank to fund the machinery.
3. Paying an annual consultancy fee to a German engineer.
Which options correctly map these transactions to their BoP heads?
2. Availing a long-term loan from a German bank to fund the machinery.
3. Paying an annual consultancy fee to a German engineer.
Which options correctly map these transactions to their BoP heads?
✅ Correct Answer: B
Transaction 1 (Import of Machinery): Even though machinery is a "Capital Good" in accounting terms, its import is a Trade in Goods (Merchandise). It is a Current Account debit.
Transaction 2 (Loan): Borrowing money creates a Liability to a non-resident.
This satisfies the Asset-Liability test.
It is a Capital Account credit (inflow). Transaction 3 (Consultancy Fee): This is a payment for a Service (Business/Professional Services). It is an "Invisible" item in the Current Account.
Key Takeaway: Do not confuse "Capital Goods" (machinery) with "Capital Account." The good is Current; the funding (if borrowed) is Capital.
Transaction 2 (Loan): Borrowing money creates a Liability to a non-resident.
This satisfies the Asset-Liability test.
It is a Capital Account credit (inflow). Transaction 3 (Consultancy Fee): This is a payment for a Service (Business/Professional Services). It is an "Invisible" item in the Current Account.
Key Takeaway: Do not confuse "Capital Goods" (machinery) with "Capital Account." The good is Current; the funding (if borrowed) is Capital.