BALANCE OF PAYMENT 1

MULTIPLE CHOICE QUESTION [1 MARKS]

1. Foreign exchange transactions dependent on other foreign exchange transactions are called:
(a) Current account transactions (b) Capital account transactions
(c) Autonomous transactions (d) Accommodating transaction
2. Foreign exchange transactions which are independent of other transactions in the Balance of
Payments Account are called:
(a) Current transactions (b) capital transactions
(c) autonomous transactions (d) accommodating transactions
3. Which items in Balance of Payments are also called ‘above the line’ items?
(a) Autonomous items (b) Accommodating items
(c) Visible items (d) Invisible items
4. Balance of payments deficit is calculated by taking into account the ….. only.
(a) accommodating transactions (b) autonomous transactions
(c) unilateral transactions (d) None of the above
5. What is the difference between the value of exports and value of imports of goods called?
(a) Balance of Payment (b) Foreign exchange
(c) Balance of Trade (d) Disequilibrium
6. Which items are excluded in BoT, but included in BoP?
(a) Visible items (b) Invisible items
(c) Private capital (d) Both (b) and (c)
7. Balance of Payment ‘deficit’ is the excess of:
(a) Current Account Payments over Current Account Receipts
(b) Capital Account Payments over Capital Account Receipts
(c) Autonomous Payments over Autonomous Receipts
(d) Accommodating Payments over Accommodating Receipts
8. A company located in India receives a loan from a company located abroad. How is this
transaction recorded in India’s balance of payment account?
(a) Credit side of current account (b) Debit side of current account
(c) Credit side of capital account (d) Debit side of capital account
9. An Indian company located in India invests in a company located abroad. This transaction is
entered in India’s balance of payments account on
(a) Credit side of current account (b) Debit side of current account
(c) Credit side of capital account (d) Debit side of capital account
VERY SHORT QUESTIONS
1. What does balance of payments account of a country record?
OR What is balance of payments?
2. What is meant by visible items?
3. What is the meaning of invisible items?
OR Name two 'invisibles' of the balance of payments accounts.

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 BALANCE OF PAYMENT 2

4. How can increase in foreign direct investment affect the price of foreign exchange?
5. What is meant by balance of trade?
6. Name the items included in balance of trade account.

7. What does a deficit in balance of Trade indicate?

8. Rising reserve of India’s foreign exchange is a sign of our rising exports. Do you agree?
9. Total receipts and total payments of Balance of Payments statements are always equal. Do you agree?
10. Define autonomous items in BoP.
11. Identify the following items as visible or invisible items of BoP.
12. In which account of Bop, tourism services to tourist are included?
13. There has been sustained deficit in Balance of Payments of a country. How it can be reduced.
14. What is excess of exports of goods over the imports of goods called?
15. Name two invisible items of the balance of payments account.
16. What is meant by trade deficit?
TRUE OR FALSE (1 Mark)
1. Export and import of machines are recorded in capital account of BOP account.
2. Current account of Balance of Payments account records only exports and imports of goods and services.
3. Foreign investments are recorded in the capital account of balance of payments.
4. Excess of foreign exchange payments on account of accommodating transactions equals deficit in BOP.
5. Difference between value of exports and imports of goods and services are called Balance of Trade.
6. External assistance is not recorded in Balance of Payments account
SHORT QUESTIONS (3-4MARKS)
1. Name the broad categories of transactions recorded in the Current account of the balance of payment
accounts.
2. State four item of current account of BOP account
3. What do you mean by capital account and what are its components? OR State four items (components) of
capital account of BOP account.
OR Name the broad categories of transactions recorded in the Capital account of the balance of payment
accounts.
4. Distinguish between current account and capital account of BOP account.
5. Where is 'borrowings from abroad' recorded in the Balance of Payments Accounts? Give reasons.
OR What is Balance of Payments Account? Where are borrowings from abroad recorded in it and why?
6. Where will sale of machinery to abroad be recorded in the balance of payment accounts? Give reasons.
7. In the context of balance of payments account, state whether the following statements are true or false.
Give reasons for your answer.
(i) Profits received from investments abroad is recorded in capital account.
(ii) Import of machines is recorded in current account.
8. What is meant by 'official reserve transactions'? Discuss their importance in Balance of Payments.
9. Are the following entered (i) on the credit side or the debit side and (ii) in the current account or capital
account in the Balance of Payment account? You must give reason for your answer.

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 BALANCE OF PAYMENT 3

(a) Investments from abroad.

(b) Transfer of funds to relatives abroad
10. Indian investors lend abroad. Answer the, following questions:
(a) In which sub-account and on which side of the Balance of Payments Account such lending is
recorded? Give reason.
(b) Explain the impact of this lending on market exchange rate.
11. What will be the effect of the following on the balance of payments?
(i) 'Make in India' programme
(ii) Import of pulses
12. Which transactions determine the balance of trade? When is balance of trade in surplus?
13. Differentiate between Balance of Trade and Current Account Balance.
OR Distinguish between BOT and Balance on current account.
14. Distinguish between balance of trade and balance of payment.
15. Distinguish between autonomous and accommodating transactions of BOP account.
16. What is 'current account deficit' in the balance of payments?
17. Explain the meaning of deficit in BOP. How is it measured?
18. The balance of trade shows a deficit of ` 5,000 crore and the value of imports are ` 9,000 crore. What is
the value of exports?
19. The balance of trade shows a deficit of ` 300 crore. The value of exports is ` 500 crore. What is the value
of imports?
20. List the items included as invisibles in the balance of payments accounts.
21. State the effect of the following on the balance of payments situation.
(i) Increase in import duty on gold. (ii) Rise in the prices of foreign currency.
22. Give the reasons explain where charity to foreign countries recorded in the Balance of Payments Account.
23. Explain the concept of surplus in the Balance of Payments account.
24. Giving reason, state whether the following statements are true or false.
1. Excess of foreign exchange receipt over foreign exchange payments on account of accommodating
transactions equals deficit in the Balance of Payments.
2. Export and import of machines are recorded in capital account of Balance of Payments account.
25. Giving reasons, state whether the following statements are true or false.
1. Current account of Balance of Payment account records only export and import of goods and
services.
2. Foreign investments are recorded in the capital account of Balance of Payment.
26. Should a current account deficit be a cause for alarm? Explain.
27. If 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?
28. Can there be a deficit in Balance of Trade without a deficit in Balance of Payments?
29. Identify the following items as credit or debit transactions on Balance of Payment account: Exports,
Imports, borrowing from rest of the world, lending to the rest of the world, import of software services.
30. Explain the meaning of Balance of Payments Deficit. OR
How is Balance of Payment ‘Deficit’ measured? Explain.

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31. List the transactions of Current Account of the Balance of Payment Account. OR
State the components of Current Account of Balance of Payment. OR
What are the components of the Current Account of the Balance of Payment Account?
32. Name the broad categories of transactions recorded in the ‘Current Account’ of the Balance of Payment
Accounts.
33. Name the broad categories of transactions recorded in the ‘Capital Account’ of the Balance of Payments
Accounts.
34. Define Balance of Payments. Discuss briefly the components of current account.
35. In the context of Balance of Payments Account, state whether the following statements are true
Or false. Give reasons for your answer.
(a) Profits received from investments abroad is recorded in Capital Account.
(b) Import of machines is recorded in current Account.
36. Giving reasons state whether the following statements are true or false:
(a) Excess of foreign exchange receipt over foreign exchange payments on account of accommodating
transactions equals deficit in Balance of Payment.
(b) Export and Import of machines are recorded in Capital Account of the Balance of Payments
Account.
37. Giving reasons state whether the following statements are true or false:
(a) Current Account of Balance of Payment Account records only exports and imports of goods and
Services.
(b) Foreign investments are recorded in Capital Accounts of Balance of Payments.
38. Indian investors lend abroad. Answer the following questions.
(i) In which sub-account and on which side of Balance of Payments Account such lending is
Recorded? Give reasons
(ii) Explain the impact of these lendings on Market Exchange Rate.
39. Indian investors borrow from abroad. Answer the following:
(i) In which sub-account and on which side of the Balance of Payments Account will this Borrowing
be recorded? Give reasons.
(ii) Explain what is the impact of this borrowing on exchange rate.
Long Answer type Questions

1. (i) In which sub-account and on which side of Balance of Payments Account will foreign Investments in
India be recorded? Give reasons.
(ii) What will be the effect of foreign investments in India on exchange rate? Explain.
MULTIPLE ANSWERS
Ans.1 (d) Accommodating transaction
Ans.2 (c) autonomous transactions
Ans.3 Autonomous items
Ans.4 Autonomous transaction
Ans.5 Balance of Trade
Ans.6 Both (b) and (c)
Ans.7 Autonomous Payments over Autonomous Receipts

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Ans.8 Credit side of capital account

Ans.9 Debit side of capital account
VERY SHORT ANSWERS
Ans.1 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.
Ans.2 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.
Ans.3 Invisible items, on the other hand, refer to different kinds of services such as transport, banking, insurance;
etc.
Ans.4 Increase in foreign direct investment can affect the price of foreign exchange because increase in foreign
direct investment raises the supply of foreign exchange that lowers the price of foreign exchange.
Ans.5 The term "balance of trade" denotes the difference between the exports and imports of goods in a country.
Ans.6 (i) Exports of visible items (goods); (ii) Imports of visible items (goods).
Ans.7 It indicates that imports of visible items are more than exports of visible items which leads to outflow of
money from domestic country more than inflow of money.
Ans.8 Not necessarily, as increase in foreign exchange could be on account of remittances or investments from
abroad.
Ans.9 No, total receipts and total payments of BoP statements may not always be equal.
Ans.10 It refers to international economic transactions that takes place due to some economic motive such as
profit maximization. These are not concerned with the state of BoP.
Ans.11 1. Visible item, as it can be seen and touched.
2. Invisible item, as it is a service, hence cannot be touched or seen.
Ans.12 Tourism services are included in current account of BoP because it is considered as an export of
services to the rest of the world.
Ans.13 Sustained deficit in BoP is not good for country’s health. In such a situation, government should follow
the policy of import substitution and export promotion.
Ans.14 Surplus Balance of Trade.
Ans.15 Banking, Insurance, etc.
Ans.16 It is excess of imports of goods over exports of goods.

TRUE /FALSE
Ans.1 False: Export and import of machines are considered as export and import of goods, that comes under
current account of BOP account.
Ans.2 False: Current account of Balance of Payments account records exports and imports of goods and services
and unilateral transfers also.
Ans.3 True: Because it causes a change in the asset or liability status of the residents of a country or its
government.
Ans.4 False: Excess of foreign exchange payments on account of autonomous transactions equals deficit in
BOP.
Ans.5 False. Because the term "balance of trade" denotes the difference between the exports
and imports of goods in a country. Balance of trade refers to the visible items only.
Ans.6 False. External assistance is the part of Unilateral transfer account of balance of payment.

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SHORT ANSWERS
Ans.1 The balance of payments of a country is a systematic record of all economic transactions between its
residents and residents of the foreign countries during a given period of time. The two parts of the balance
of payments account are:
(i) Current account: Current account records imports and exports of goods and services and unilateral
transfers.
(ii) Capital account: 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.
Ans.2 Current account records imports and exports of goods and services and unilateral transfers.
Components of Current Account The main components of Current Account are:
(i) 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).
(ii) 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.
(iii) Unilateral or Unrequested 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.
(iv) Income receipts and payments to and from abroad: It includes investment income in the form
of interest, rent and profits.
Ans.3 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:
(i) 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.

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➢ 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.
(ii) 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.
(iii) 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'.
Ans.4
Current Account Basis Capital Account
Capital account is that account which records all
The current account records im- such transactions between residents of a country
ports and exports of goods and Meaning and rest of the world which cause a change in the
services and unilateral transfers. asset or liability status of the residents of a
country or its government.
1. Borrowings and lendings to and
1. Balance of trade (visible trade).
from abroad.
2. Balance of services (invisible
2. Investments to and from abroad,
trade). Component
(a) Foreign Direct Investment(FDI)
3. Unilateral transfers or un-
(b) Portfolio Investment
requited transfers.
3. Change in Foreign Exchange Reserves
A deficit in current accounts
indicates that the inflow of foreign A deficit in capital accounts indicates that the
currencies from exports of inflow of foreign currencies by purchase of assets
goods and services is less than the Deficit by foreign country in home country is less than
outflow of foreign currencies on the outflow of foreign currencies on account of
account of import of goods and purchase of assets abroad by home country.
services.
It is a flow concept as it includes It is a stock concept as it includes all items
Concept
all items of flow nature. expressing changes in-stock.
Goods like steel, machinery etc.
Purchase of a house abroad by an individual,
and services like shipping, Example
purchase of shares in foreign company.
banking, insurance etc.

Ans.5 (i) Borrowing from abroad is a part of Capital Account.

(ii) Borrowing from abroad can be private transactions or official transactions.
(iii) 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.

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(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.
Ans.6 (i) Sale of machinery to abroad is a part of Current accounts.
(ii) Current account records imports and exports of goods and services and unilateral transfers. (iii) Sale
of machinery to abroad leads to inflow of foreign currency and receipt from exports is shown on the
positive side (credit items).
Ans.7 (i) False: Because current account includes income receipts and payments to and from abroad it should
be included in current account not in capital account which includes asset and liability of the country.
(ii) False: Import of machinery from abroad is a part of current accounts because current account
records imports and exports of goods and services and unilateral transfers and Machinery is a good
for the economy.
Ans.8 (i) Official reserve transactions are those transactions by a central bank that cause changes in its official
reserves.
(ii) It is sale or purchase of its own currency in the exchange market in exchange for foreign currencies.
(iii) 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.
(iv) They may be Autonomous and Accommodating Transactions.
Ans.9 (a) Investments from abroad Account: Capital account; Reason: It cause a change in the asset or
liability status of the residents of a country or its government. Side: Credit side; Reason: It increases
inflow of foreign exchange in home country.
(b) Transfer of funds to relatives abroad Account: Current account; Reason: Because current account
records imports and exports of goods and services and unilateral transfers.
Side: Debit side; Reason: It increases outflow of foreign exchange from home country.
Ans.10 (a) Account: Capital account Side: Debit side Reason: It increase outflow of foreign exchange from home
country.
(b) Market exchange rate will increase after such lending because of outflow of foreign exchange.
Ans.11 (i) 'Make in India' programme improves balance of payment condition because it increases inflow of
foreign exchange in home country.
(ii) 'Import of pulses' worsen or deteriorate balance of payment condition because it increases outflow of
foreign exchange from home country.
Ans.12 (i) 'Visible items' determines the balance of trade.
(ii) 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.
(iii) The term "balance of trade" denotes the difference between the exports and imports of goods in a
country.
Balance of Trade = Export of visible goods -Import of-visible goods.
(iv) When export of visible goods is more than export of visible goods, then BOT will be in surplus.
(v) In other words, when inflow of money from export of visible goods is more than outflow of money
from import of visible goods, then BOT will be in surplus.

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Ans.13
Balance of Trade
Those transactions that arise out of the
exports and imports of goods. It does
not consider the exchange of services
rendered such as shipping, insurance
and banking etc.
Balance of trade includes only visible
Components
items.
Basis Accommodating Items
The current account records imports and
Meaning exports of goods and services and unilateral
transfers.
Current Account records both visible and
invisible items & unilateral items.

It is a narrow concept as it is only a part

Scope It is a wider concept and it includes BOT.
of current account.

Ans.14
Balance of Trade Basis Accommodating Items
Those transactions that arise out of the Meaning The balance of payments of a country is a
exports and imports of goods. It does not systematic record of all economic transac-
consider the exchange of services tions between the residents of foreign coun-
rendered such as shipping, insurance and tries during a given period of time.
banking etc.
It is a narrow concept as it is a Scope It is a wider concept.
component of balance of payments.
It includes only visible items. Nature of It includes both visible and invisible items.
items
It is a partial record. Hence, it is not a Nature of It is the complete record of economic
true indicator of economic relations with Re-cord of transactions with the rest of the world.
other countries. Doesn't record capital Hence, it provides a true picture of the
transactions of capital nature. transactions economy with the rest of the world.
Records capital nature transactions.
Deficit in balance of trade can be met by Settlement Deficit in balance of payments cannot be
balance of payments. met by the components of balance of trade.
Ans.15
Autonomous Items Basis Accommodating
Autonomons items refer to those Accommodating items refer to the
international economic transactions, transactions that are undertaken to cover
Meaning
which take place due to some economic deficit or surplus in autonomous
motive such as profit maximisation. transactions.
Autonomous transactions are Effect on Accommodating transactions are
independent of the state of BOP BOP Ac- undertaken to maintain the balance in BOP
account. count account.
Autonomous transactions take place on Current/ Accommodating transactions take place
both current and capital accounts. Capital only on capital account.
Account
These items are also known as 'above Alternate These items are also known as "below the
the line items'. Name line items'.

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Ans.16 (i) Current account records imports and exports of goods and services and unilateral transfers.
(ii) When the total inflows on account of current account transactions are less than total outflows on
account of such transactions, there is a deficit in the balance of current account.
(iii) Suppose, the autonomous inflow of foreign exchange during the year is $500 in current account,
while the total outflow is $600. It means that there is a deficit of $100.
Ans.17 (i) The balance of payments of a country is a systematic record of all economic transactions
between the residents of foreign countries during a given period of time.
(ii) The transaction in the balance of payment account can be categorized as autonomous transactions
and accommodating transactions.
(iii) Autonomous transactions are transactions done for some economic consideration such as profit.
(iv) When the total inflows on account of autonomous transactions are less than total outflows on
account of such transactions, there is a deficit in the balance of payments account.
(v) Suppose, the autonomous inflow of foreign exchange during the year is $500, while the total
outflow is $600. It means that there is a deficit of $100.
Ans.18 Balance of Trade = - ` 5,000 crore
Value of Imports = ` 9,000 crore Balance of trade (Deficit) = Value of Exports - Imports
Value of Exports = Balance of trade (Deficit) + Imports
= - ` 5,000 crore + ` 9,000 crore
= 4,000 crore
Ans.19 Balance of Trade = -` 300 crore Value of exports = ` 500 crore Balance of trade (Deficit) = Value of
Exports - Imports
Imports = Exports Balance of trade ((deficit) = ` 500 crore - (- ` 300 crore) = ` 800 crore
Ans.20 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.
Ans.21 (i) Increase in import duty on gold makes import of gold expensive as a result import will decrease and
situation of balance of payment improve.
(ii) With the rise in price of foreign currency the demand of foreign currency decreases.
This rise in price of foreign currency implies depreciation in domestic currency. It encourages exports
from home country and discourages imports from rest of the world as a result credit side of BOP improves
an so situation of balance of payment.
Ans.22 Charity to foreign countries is the part of Unilateral transfers (Gifts) made. As it is inflow of money from
home country to the foreign country it must be recorded in the debit side of BOP.
Ans.23 (i) The balance of payments of a country is a systematic record of all economic transactions between its
residents and the residents of foreign countries during a given, period of time.
(ii) The transaction in the balance of payment account can be categorized as autonomous transactions and
accommodating transactions.
(iii) Autonomous transactions are transactions done for some economic consideration such as profit.
(iv) When the total inflows on account of autonomous transactions are more than total outflows on
account of such transactions, there is a surplus in the balance of payments account.

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(v) Suppose, the autonomous inflow of foreign exchange during the year is $600, while the total
outflow is $500. It means that there is a surplus of $100.
Ans.24 1. True, as accommodating transactions remove both surplus and deficit of Balance of payment
Account. As outflow causes deficit, which has to fulfilled with inflows.
2. False, as export and import of machines are recorded in current account of Balance of Payment
account.
Ans.25 (a) False, as current account of Balance of Payments account also records unilateral transfer.
(b) True, as all kind of foreign investments (Foreign Direct Investments and portfolio investments)
are included in the capital account of Balance of Payments.
Ans.26 A current account deficit means that the value of imports for goods and services are greater than the
value of imports for goods and services are greater than the value of exports. It leads to several ill-
effects which are:
1. Economic growth is not favourable.
2. Inflation and borrowing become major problems.
3. It also increase dependence on foreign country for borrowing, creating debt trap.
Thus, we can say that current account deficit is a cause for alarm because of the above stated ill-effected
on the country.
Ans.27 The exchange rate is one of the most important determinant of a country’s trade. It plays a vital role in
the country’s level of trade. As per the above condition, it is favourable for country A to import goods
and on the other hand, for country B export is favourable.
As a result, exports of country B to country A will increase, hence imports of country A will increase.
Ans.28 Yes, there can be a deficit in Balance of Trade without a deficit in Balance of Payments. BoT is only a
component of current account of BoP. Which includes only exports and imports of goods. However,
BoP includes both current as well as capital account, hence there is a much wider scope.
Ans.29 Credit side of Bop
1. Imports (current account).
2. Borrowing from rest of the world ( capital account).
Debit side of BoP
1. Import ( current account).
2. Lending to the rest of the world (capital account).
3. Import of software services (current account).
Ans.30 BOP deficit occurs when autonomous foreign exchange receipt fall short of autonomous payment.
Autonomous transactions are the transactions not influenced by other transactions in BOP.
Ans.31 The transaction of current account of BOP are:
(a) Export and import of goods
(b) Export and import of services
(c) Unilateral transfers.
Ans.32 Transactions Recorded in Current Account:
Two principal components of current account of balance of payment are:
(a) Merchandise and, (b) invisible

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Invisible Include:
(a) Non-factor services (b) Income, and (c) Current transfers.
Ans.33 Transactions recorded in capital account are: Balance of payments on Capital Account is a statement
of all capital inflows and outflows, during the period of an accounting year. It includes:
(a) borrowing (commercial borrowing and external assistance),
(b) Investments (foreign Direct Investment and portfolio investments)
(c) NRI deposits,
(d) Banking capital
(e) Short-term debt
(f) Rupee debt service, and
(h) Other capital
Ans.34 Balance of Payment is defined as the statement of accounts of a country’s inflows and outflows of
foreign exchange in a fiscal year.
Components of Current Account:
(a) Visible: Refers to the merchandise/goods exported from or imported by a country are placed on the
credit side whereas, imports are placed on the debit side as they result into outflow of foreign
exchanges from the country.
(b) Invisible: Refers to the different types of services and transfers that take place between nation. They
give rise to monetary receipts and payments for the nation.
Ans.35 (a) False, it is recorded in current account as it neither affects foreign exchanges assets nor foreign
exchanges liabilities.
(b) True, all imports and exports of goods are recorded in trade account which is a part of current
account, because it is simply import/export of a good.
Ans.36 (a) False. As Accommodating Transactions remove both surplus and deficit of Balance of Payment
Account.
(b) False. As export and import of machines are recorded in Current Account of Balance of Payment
Account.
Ans.37 (a) False. As Current account of Balance of Payments Account also records unilateral transfers.
(b) True. As all kind of foreign investments (Foreign Direct Investments and Portfolio Investments) are
included in the Capital Account of Balance of Payments.
Ans.38 (a) Indian lending abroad is recorded in Capital Account of BOP Account because it leads to creation of
foreign exchange assets. It is recorded on the debit side because it leads to outflow of foreign
exchange.
(b) Lending abroad increase demand for foreign exchange. Supply of foreign exchange remains
unchanged exchange rate may rise.
Detailed Answer:
(i) In Capital Account, and on debit side of BOP, the lending of Indian investors lending abroad cause
an outflow of foreign exchange from the country. Thus, it is recorded as negative item in the Capital
Account of BOP.
(ii) Lending to abroad by Indian investors will decrease the supply of foreign currency. This would shift
in supply curve, the new equilibrium is established at point E, where the exchange rate rises from OR
to OR1

GK INSTITUTE OF COMMERCE, RAJBAHA ROAD, PATIALA

 BALANCE OF PAYMENT 13

Ans.39 (i) Borrowings from abroad are recorded in the Capital Account of the BOP because these give rise to
foreign exchange liabilities. These are recorded on the credit side because these bring foreign
exchange into the country.
(ii) Borrowing from abroad raise foreign supply of foreign exchange. Demand for foreign exchange
Remaining unchanged, exchange rate is likely to fall.
LONG ANSWERS
Ans.1. (a) Foreign investments will be recorded in the Capital Account of the BOP Account because these.
Give rise to foreign exchange liabilities. Foreign investment will be recorded on the credit side
because these bring in foreign exchange of the Economy.
(b) Foreign investment add to supply of foreign exchange. Demand remaining unchanged, it brings
downward influence on exchange rate.

Detailed Answer:
(i) Foreign investments in India will be recorded in the Capital Account of Balance of Payment Account
as it leads to decrease in the asset of the resident of the country to the rest of the world. It is recorded
on the credit side of Balance of Payment Account as it leads to inflow of foreign Exchange.
(ii) Foreign investment in India will lead to increase in the supply of foreign exchange. It the supply of
foreign exchange increase in the foreign exchange market, it will lead to a rightward Shift in the
supply curve from SS to S1S1 and exchange rate will fall from R to R1.

GK INSTITUTE OF COMMERCE, RAJBAHA ROAD, PATIALA