Balance of Payments

1 Mark Questions

1. What is the meaning of deficit in Balance of Payments? (Delhi 2014,2010) or

How is Balance of Payment 'deficit' measured? Explain (Foreign 2014)

Ans. When the payments of a country on account of autonomous transactions exceed the receipts of the country on account of autonomous transactions, this difference is termed as BoP deficit.

Deficit in BoP = Receipts on account of autonomous transactions < Payments on account of autonomous transactions Suppose, the receipts of the domestic country is r 200 crore. Where as payments are r 220 crore. Then BoP deficit will be <math>= 220 - 200 \text{ crore} = \text{Rs. } 20 \text{ crore}</math>

2. Distinguish between current account and capital account of the Balance of Payments account on the basis of its components.(Compartment 2014)

Ans. Current account of BoP measures the transaction of export and import natures which do not affects the assets and liabilities positions of a country whereas, capital of BoP includes of Investment and borrowing nature which has direct import on assets and liabilities of a country.

Current account includes export and imports of visible and invisible items and unilateral transactions to and from abroad, while capital account includes:

(a)Investment to and from abroad,

1. Borrowings and landings to and from abroad
2. Official reserves which contains foreign currency, SDRs and gold.

3. Give meaning of Balance of Trade (Delhi 2014)

or What is trade balance? (All India 2010,2008)

Ans. The difference between export and import of goods, i.e. only the visible items of economic transactions is termed as Balance of Trade.

4. Name two invisible items of the Balance of Payments account. (Delhi 2010c)

Ans. Two invisibles of the Balance of Payments account are:

1. Banking services

5. What does a deficit in Balance of Trade indicate? (All India 2009)

Ans. A deficit in Balance of Trade indicates that the value of exports of goods are less than the imports of goods for a country.

3 Mark Questions

1. Distinguish between autonomous and accommodating transactions of Balance of Payments account. (All India 2014,2010; Delhi 2010c)

Ans. Autonomous items, also termed as 'above the line items', are those items, which are related to transactions which are determined by considerations of profit (economic motive) and hence, was no concern with the state of BoP. Autonomous transactions are present in both current and capital account of BoP, While accommodating transactions are present only in capital account of BoP. Accommodating items, also termed as 'below the line items', are those items of BoP that are not determined by considerations of profit but to restore identity of BoP.

The difference between autonomous and accommodating transacting is mat while deficit or surplus in BoP due to autonomous items, the accommodating items, are meant to restore the BoP identity.

7. Distinguish between Balance of Trade and balance on current account. (Delhi 2013)

or Distinguish between Balance of Trade and balance on current account of Balance of Payments. (All India 2013)

Ans. Difference between Balance of Trade and balance on current account

Basis Balance of Trade Balance on current account

Meaning Balance of Trade includes only visible Balance of current account is the

items. It is the difference between difference between sum of credit items

exports and imports of goods of a and sum of debit items on current

country. account. Coverage Balance of Trade does not record any Balance of current account includes

transactions of invisible items and balance of visible items, balance of

transfers invisible items and balance of unilateral

transfer. Concept Balance of Trade is a narrow concept Balance of current account includes the

and it is only a part of the Balance of Balance of Trade hence, it is a broader

Payment account. concept.

8. State the components of capital account of Balance of Payments. (Delhi 2011)

Ans. Components of capital account of Balance of Payments:

1. Investments It includes investments to and from abroad in the form of FDI and FII.

Investment from abroad is a 'credit' item, whereas investment to abroad is a 'debit' item.

1. Borrowing and lending It includes the borrowings by residents from the residents

of abroad (credit item), and sending to the resident of foreign country (debit item).