Balance of Payment NCERT SOLUTION CLASS 12TH MACRO ECONOMICS | EDUGROWN NOTES

TEXTBOOK QUESTIONS AND ANSWER:

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Q.1 Differentiate between Balance of Trade and Current Account Balance.
[3 Marks] Or
Distinguish between BOT and Balance on current account.[AI 2008, CBSE 2013, Sample Paper 2013]
ANSWER:

Q.2 Should a current account deficit be a cause for alarm? Explain.[1 Mark]
ANSWER:  No, if deficit in current account is offset by the capital account, otherwise such deficit has to be met by following which is a cause for alarm. 

1. Depleting Foreign Exchange reserves
2. Taking foreign Loans.

Value: Analytic.

Q.3If inflation is higher in country A than in country B, and the exchange rate between the two countries is fixed. What is likely to happen to the trade balance between the two countries?[1 Mark]
ANSWER:  The exports from country B to country A will go up in this situation resulting in improvement or surplus trade balance for B. But due to higher price in country A, its imports will increase for country B and it will lead to deficit in trade balance for country A.

Very Short Answer Type Question:

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Q.1 What does balance of payments account of a country record? [CBSE 2007]

ANSWER:Balance of payments is an accounting statement that provides a systematic record of all the economic transactions between the residents of a country and the rest of the world during a given period of time.

Q.2 What is meant by visible items?
ANSWER:  Visible items include material goods [such as sugar, cloth, machines etc.] which can be seen or touched, counted, measured and weighted and which are duly recorded at the custom barriers.

Q.3 What is the meaning of invisible items?
ANSWER: Invisible items, on the other hand, refer to different kinds of services such as transport, banking, insurance etc.

Q.4 Why are imports entered as negative items in the balance of payments account?
ANSWER:  Imports lead to an outflow of foreign exchange in the country. Thus, they are recorded as negative (debit) items.

Q.5 What is meant by balance of trade? [CBSE 2005, Sample Paper 2010]
ANSWER:  The term “balance of trade” denotes the difference between the exports and imports of goods in a country.

Q.6 Name the items included in balance of trade account. [CBSE 2007]
ANSWER:

1. Exports of visible items (goods);
2. Imports of visible items (goods).

Q.7When will balance of trade show a deficit? [CBSE 2006]
ANSWER:  When imports of visible items are more than exports of visible items.

Q.8 How is a deficit or a surplus on the current account restored?
ANSWER: Deficit on the current account is restored through the surplus on capital account and surplus on the current account is restored through the deficit on capital account.

Short Answer Type Questions :

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Q.1 State four items of current account of BOP account.[CBSE 2004, 08, 08C, 09; AI 05]
Or
Name the broad categories of transactions recorded in the Current account of the balance of payment accounts. [CBSE 2015]
ANSWER: Current account records imports and exports of goods and services and unilateral transfers.
Components of Current Account The main components of Current Account are:

1. Export and Import of Goods (Merchandise Transactions or Visible Trade): A major part of transactions in foreign trade is in the form of export and import of goods (visible items). Payment for import of goods is written on the negative side (debit items) and receipt from exports is shown on the positive side (credit items). Balance of these visible exports and imports is known as balance of trade (or trade balance).
2. Export and Import of Services (Invisible Trade): It includes a large variety of non-factor services (known as invisible items) sold and purchased by the residents of a country, to and from the rest of the world. Payments are either received or made to the other countries for use of these services. Services are generally of three kinds: (a) Shipping,
   (b) Banking, and (c) Insurance. Payments for these services are recorded on the negative side and receipts on the positive side.
3. Unilateral or Unrequisted Transfers to and from abroad (One sided Transactions): Unilateral transfers include gifts, donations, personal remittances and other ‘one-way’ transactions. These refer to those receipts and payments, which take place without any service in return. Receipt of unilateral transfers from rest of the world is shown on the credit side and unilateral transfers to rest of the world on the debit side.
4. Income receipts and payments to and from abroad: It includes investment income in the form of interest, rent and profits.

Q.2What do you mean by capital account and what are its components?
Or
State four items (components) of capital account of BOP account.[CBSE 2004, 11, AI 05]
Or
Name the broad categories of transactions recorded in the Capital account of the balance of payment accounts. [CBSE 2015]
ANSWER:  Capital account is that account which records all such transactions between residents of a country and rest of the world which cause a change in the asset or liability status of the residents of a country or its government.
Components of Capital Account
The main components of capital account are:

1. Loans: Borrowing and lending of funds are divided into two transactions:
   (a) Private Transactions
   • These are transactions that are affecting assets or liabilities by individuals, businesses, etc. and other non-government entities. The bulk of foreign investment is private.
   • For example, all transactions relating to borrowings from abroad by private sector and similarly repayment of loans by foreigners are recorded on the positive (credit) side.
   • All transactions of lending to abroad by private sector and similarly repayment of loans to abroad by private sector is recorded as negative or debit item.
   (b) Official Transactions
   • Transactions affecting assets and liabilities by the government and its agencies.
   • For example, all transactions relating to
   borrowings from abroad by government sector and similarly repayment of loans by foreign government are recorded on the positive (credit) side.
   • All transactions of lending to abroad by government sector and similarly repayment of loans to abroad by government sector is recorded as negative or debit item.
2. Foreign Investment (Investments to and from abroad) It includes:
   (a) Investments by rest of the world in shares of Indian companies, real estate in India, etc. Such investments from abroad are recorded on the positive (credit) side as they bring in foreign exchange.
   (b) Investments by Indian residents in shares of foreign companies, real estate abroad, etc. Such investments to abroad are recorded on the negative (debit) side as they lead to outflow of foreign exchange.
3. Change in Foreign Exchange Reserves
   (a) The foreign exchange reserves are. the financial assets of the government held in central bank. A change in reserves serves as the financing item in India’s BOP.
   (b) So, any withdrawal from the reserves is recorded on the positive (credit) side and any addition to these reserves is recorded on the negative (debit) side.
   (c) It must be noted that ‘change in reserves’ is recorded in the BOP account and not ‘reserves’.

Q.3 Distinguish between current account and capital account of BOP account.[AI 2004, 06 C]
ANSWER:

Q.4 Distinguish between balance of trade and balance of payment. [AI 2004, 06C]
ANSWER:

Q.5 Distinguish between autonomous and accommodating transactions of BOP account. ” [AI 2010; CBSE 10, 13C]
ANSWER:

Q.6 Where is ‘borrowings from abroad’ recorded in the Balance of Payments Accounts? Give reasons. [AT 2015]
ANSWER:

1.  Borrowing from abroad is a part of Capital Account.
2. Borrowing from abroad can be private transactions or official transactions.
3. For example,
   (a) All transactions relating to borrowings from abroad by private sector are recorded on the positive (credit) side as it is inflow of foreign currency.
   (b) Similarly, transactions relating to borrowings from abroad by government sector are recorded on the positive (credit) side as it is inflow of foreign currency.

Q.7 Where will sale of machinery to abroad be recorded in the balance of payment accounts? Give reasons. [CBSE 2015]
ANSWER:

1. Sale of machinery to abroad is a part of Current accounts.
2. Current account records imports and exports of goods and services and unilateral transfers.
3. Sale of machinery to abroad leads to inflow of foreign currency and receipt from exports is shown on the positive side (credit items).

Q.8 What is meant by ‘official reserve transactions’? Discuss their importance in Balance of Payments.[CBSE Sample Paper 2016]
ANSWER:

1. Official reserve transactions are those transactions by a central bank that cause changes in its official reserves.
2. It is sale or purchase of its own currency in the exchange market in exchange for foreign currencies.
3. So, any withdrawal from the reserves is recorded on the positive (Credit) side and any addition to these reserves is recorded on the negative (debit) side.
4. They may be Autonomous and Accommodating Transactions.