ECONOMICS

Assignment
By: Akshay Agarwal
(2
nd
Year)
Q1-Distinguish between:
O Balance of Current Account and Balance of Capital Account
O Autonomous Balance and Overall Balance
O Autonomous transaction And Accommodating transaction
O eficit and isequilibrium in Balance of Payment

Ans- Balance oI Current and Capital Account
Balance Of Current Account Balance of Capital Account
Current account shows current year current
year transactions
capital account shows both current
transactions relating to businessman and
initial capital oI businessman
According to FEMA Act 2000, "There is
no restrictions on holding or exchanging oI
Ioreign currency under Current Account .
Any Ioreign currency is under capital
account , then it must be controlled under
the regulations oI RBI."
In partnership , partners can make current
account separately Irom capital account in
which they can show only their salary,
interest on capital and interest on drawing
etc.
But in Capital account, they can show only
their capital invested in the business oI
partnership.

Current account includes in international
trade in goods and services and with
earnings on investments.
The capital account includes oI capital
transIers and the acquisition and disposal
oI non-produced, non-Iinancial assets.
Current account is used Ior receipt and
payment cash and non-capital items
Capital account is used Ior sources and
utilization oI capital.

2) Autonomous Balance and Overall Balance
AuLonomous balance Lconomlcally accounLable enLerprlses keep accounL records and complle
separaLe auLonomous balance sheeLs for baslc operaLlons caplLal lnvesLmenLs and worker supply
Allunlon and republlc lndusLrlal assoclaLlons complle summary reporLs and balance sheeLs for all
Lypes of producLlon and economlc acLlvlLles
verall 8alance 1he dlfference beLween Lhe value of LransacLlons ln whlch money leaves a counLry
and Lhe value of LransacLlons ln whlch money enLers lL A poslLlve balance of paymenLs means more
money enLers a counLry Lhan leaves lL whlle a negaLlve 89 lndlcaLes Lhe opposlLe 1he balance of
paymenLs lncludes Lhe Lrade balance buL also LransacLlons such as forelgn dlrecL lnvesLmenL
Lransfers of currency and paymenLs for goods and servlces lnvesLors who deal ln forelgn
lnvesLmenLs use Lhe 89 Lo help make lnvesLmenL declslons

3) Autonomous transaction And Accommodating transaction
Autonomous transaction Accommodating transaction
Autonomous transactions are those that take
place automatically irrespective oI whether there
is balance oI payment deIicit or surplus.
Accommodating transaction are those which take
place to oIIset a deIicit or surplus in balance oI
payment
Accommodating transactions reIlect increases or
decreases oI the net Ioreign liquidity oI a country.
They are, thereIore, the best measure oI surplus
or deIicit in the balance oI payments.
A deIicit appears in the balance oI payments
when autonomous transactions requiring money
payments exceed autonomous transactions
involving money receipts.
A deIicit appears in the balance oI payments
when autonomous transactions requiring money
payments exceed autonomous transactions
involving money receipts.
Accommodating transactions are the residual
money Ilows (including Ilows oI oIIicial
reserves) that occur to Iill any gaps leIt by
autonomous transactions.
Accommodating transactions, which are not
undertaken Ior their own sake, but rather have
their source in other (autonomous) transactions
elsewhere in the balance oI payments.
Autonomous transactions arise Irom the
Iundamental diIIerences between countries in
prices, incomes, interest rates, tastes, and so
Iorth.

4) eficit and isequilibrium in Balance of Payment
4 DeIicit: Primary deIicit is the deIicit which is derived aIter deducting the interest payments component
Irom the total deIicit oI any budget the total oI primary deIicit and interest payments makes up the total
or Iiscal deIicit.


ulsequlllbrlum
4
A slLuaLlon where lnLernal and/or exLernal forces prevenL markeL equlllbrlum from belng reached or
cause Lhe markeL Lo fall ouL of balance 1hls can be a shorLLerm byproducL of a change ln varlable
facLors or a resulL of longLerm sLrucLural lmbalances

Q2) ''Balance oI Payment always balances`` Elucidate. But how do you explain disequilibrium in
balance oI payment?

Ans- Though the credit and debit are written balanced in the balance oI payment account, it may not
remain balanced always. Very oIten, debit exceeds credit or the credit exceeds debit causing an
imbalance in the balance oI payment account. Such an imbalance is called the disequilibrium.
Disequilibrium may take place either in the Iorm oI deIicit or in the Iorm oI surplus.
Disequilibrium oI DeIicit arises when our receipts Irom the Ioreigners Iall below our payment to
Ioreigners. It arises when the eIIective demand Ior Ioreign exchange oI the country exceeds its supply
at a given rate oI exchange. This is called an 'unIavourable balance'.Disequilibrium oI Surplus arises
when the receipts oI the country exceed its payments. Such a situation arises when the eIIective
demand Ior Ioreign exchange is less than its supply. Such a surplus disequilibrium is termed as
'Iavourable balance'.
Causes of isequilibrium in Balance of Payment
1. Population Growth
Most countries experience an increase in the population and in some likeIndia and China the
population is not only large but increases at a Iaster rate. To meet their needs, imports become
essential and the quantity oI imports may increase as population increases.
2. evelopment Programmes
Developing countries which have embarked upon planned development programmes require to
import capital goods, some raw materials which are not available at home and highly skilled and
specialized manpower. Since development is a continuous process, imports oI these items
continue Ior the long time landing these countries in a balance oI payment deIicit.
. emonstration Effect
hen the people in the less developed countries imitate the consumption pattern oI the people in
the developed countries, their import will increase. Their export may remain constant or decline
causing disequilibrium in the balance oI payments.
. Natural Factor-Natural
Calamities such as the Iailure oI rains or the coming Iloods may easily cause disequilibrium in
the balance oI payments by adversely aIIecting agriculture and industrial production in the
country. The exports may decline while the imports may go up causing a discrepancy in the
country's balance oI payments.
5. Cyclical Fluctuations
Business Iluctuations introduced by the operations oI the trade cycles may also cause
disequilibrium in the country's balance oI payments. For example, iI there occurs a business
recession in Ioreign countries, it may easily cause a Iall in the exports and exchange earning oI the
country concerned, resulting in a disequilibrium in the balance oI payments.
6. Inflation
An increase in income and price level owing to rapid economic developmentin developing
countries, will increase imports and reduce exports causing a deIicit in balance oI payments.
7. Poor Marketing Strategies
The superior marketing oI the developed countries have increased their surplus. The poor
marketing Iacilities oI the developing countries have pushed them into huge deIicits.
8. Flight Of Capital
Due to speculative reasons, countries may lose Ioreign exchange or gold stocks People in
developing countries may also shiIt their capital to developed countries to saIeguard against
political uncertainties. These capital movements adversely aIIect the balance oI payments
position.

9. Globalisation
Due to globalisation there has been more liberal and open atmosphere Ior international movement
oI goods, services and capital. Competition has beer increased due to the globalisation oI
international economic relations. The emerging new global economic order has brought in certain
problems Ior some countries which have resulted in the balance oI payments disequilibrium.
In a Iloating exchange rate, the two components oI the Balance oI Payments should balance each
other out. II the UK has a deIicit on the current account oI 38bn. Then in a Iloating exchange rate,
the Iinancial account should have a surplus oI 38bn. This is because Iinancial outIlows must be
matched by Iinancial inIlows.