Read the following statements : Assertion (A) and Reason (R). Choose the correct option from those given below :
Assertion (A) : Unilateral Transfers are recorded in the Current Account of the Balance of Payments (BoP) of a nation.
Reason (R) : Capital account records transactions which cause a change in the assets or liabilities of the country.
Read the following statements : Assertion (A) and Reason (R). Choose the correct option from those given below :
Assertion (A) : Unilateral Transfers are recorded in the Current Account of the Balance of Payments (BoP) of a nation.
Reason (R) : Capital account records transactions which cause a change in the assets or liabilities of the country.
Options
Correct option: (B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
Both statements are individually correct BoP facts, but Reason (R) describes the Capital Account, which does not explain why unilateral transfers are recorded in the Current Account.
Marking Scheme
- 11 mark for selecting option (B) — objective type question, no partial credit.
Hint
Check if the reason is even about the same account as the assertion — here R describes the Capital Account while A is about the Current Account.
Quick Oral Answer
Unilateral transfers are correctly placed in the current account because they involve no repayment obligation, but the reason given here defines the capital account, so it does not explain the assertion, even though both statements are true.
Analysis & Explanation
This tests precise understanding of the structure of the Balance of Payments (BoP).
Why Assertion (A) is true
- Unilateral transfers (gifts, remittances, donations, foreign aid received without any quid pro quo) are one-way, non-repayable flows and are correctly recorded in the Current Account of the BoP.
Why Reason (R) is true
- The Capital Account does indeed record transactions that cause a change in a country's foreign assets or liabilities (e.g., loans, investments, purchase/sale of assets) — this is an accurate, independent definition.
Why R is NOT the explanation of A
- R explains what the Capital Account records, but Assertion A is about why unilateral transfers belong in the Current Account, not the Capital Account.
- The real reason unilateral transfers sit in the current account is that they do not create any future repayment obligation or change in assets/liabilities — they are unrequited income-type flows, unlike capital account items.
- Since R talks about a different account altogether, it cannot logically explain A, even though both are true.
Common Mistakes
- 1Assuming that if both A and R are true, R must automatically explain A — always separately verify whether R logically accounts for A.
- 2Confusing unilateral transfers (current account, no repayment obligation) with capital transfers/loans (capital account, create assets/liabilities).
Interesting Facts
Remittances from Indians working abroad are one of the largest unilateral transfer inflows into India's current account, exceeding $100 billion annually in recent years according to RBI/World Bank data.
The Current Account of BoP includes trade in goods (visible), trade in services (invisible), income, and unilateral transfers — while the Capital Account covers loans, investments, and banking capital flows.
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Frequently Asked Questions
Why are unilateral transfers recorded in the current account and not the capital account?
Unilateral transfers (gifts, remittances, donations) are one-way flows with no repayment obligation and do not create any change in a country's foreign assets or liabilities, which is why they are recorded in the current account rather than the capital account.
What is the difference between the current account and capital account of BoP?
The current account records trade in goods and services, income flows, and unilateral transfers, none of which create future repayment obligations. The capital account records transactions like loans, investments and asset purchases/sales that cause a change in the country's foreign assets or liabilities.