Consider the following statements

1. Assertion (A): Balance of Payments represents a better picture of a country’s economic transactions with the rest of the world than the Balance of Trade.
2. Reason (R): Balance of Payments takes into account the exchange of both visible and invisible items whereas Balance of Trade does not.

Select the correct answer using the code given below:

1. Both A and R are individually true and R is the correct explanation of A.
2. Both A and R are individually true but R is not the correct explanation of A.
3. A is true but R is false.
4. A is false but R is true.

Explanation

Option (a) is correct

• The Balance of Trade (BoT) records only the difference between a country’s exports and imports of goods (visible items). In contrast, the Balance of Payments (BoP) is a comprehensive record of all economic transactions between a country and the rest of the world. It includes not only trade in goods but also services, investment income, remittances, transfers, and capital and financial transactions (invisible items). Since BoP captures both visible and invisible transactions, it provides a much more complete picture of a country’s external economic relations than BoT. Therefore, both the Assertion and the Reason are correct, and the Reason correctly explains the Assertion.

Answer: (c) Both A and R are individually true and R is the correct explanation of A.