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All questions of Balance of Payments for CSEET Exam

Which of the following is not types of disequilibrium in the balance of payment?
  • a)
    Structural disequilibrium
  • b)
    Secular disequilibrium
  • c)
    Transactional disequilibrium
  • d)
    Cyclical disequilibrium
Correct answer is option 'C'. Can you explain this answer?

Scholars Academy answered
Key Points
  • Disequilibrium is a lack of balance or harmony in a specific market or economy. This is usually in terms of supply and demand, where one far exceeds the other, resulting in a significant imbalance.
  • Market disequilibrium often results in market instability, inefficient market activity, and substantial fluctuations in market variables, such as prices.
  • Disequilibrium may also refer to a situation in which a country has a strong deficit or surplus in its balance of payments.
  • There are several types of disequilibrium. Three common types are cyclical, secular, and structural.
Important Points
  • Secular  disequilibrium - Secular disequilibrium (also known as long-run or long-term disequilibrium) is a type of disequilibrium that persists over a prolonged period because of changes in the fundamental underlying factors in an economy. These changes can be due to population growth, technological change, or other long-term trends.
  • Structural disequilibrium - The term structural disequilibrium refers to a situation in which changes in the supply and demand for exports and/or imports lead to a disequilibrium in a country's balance of payments. This type of disequilibrium often results from changes in technology, government policy, or the economy.
  • Cyclical disequilibrium - It occurs on account of trade cycles. Depending upon the different phases of trade cycles like prosperity and depression, demand and other forces vary, causing changes in the terms of trade as well as growth of trade and accordingly a surplus or deficit will result in the balance of payments.
Hence, the correct answer is Transactional disequilibrium
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Which of the following approaches of BOP explains the relationship between domestic output and trade balance ?  
  • a)
    the monetary approach 
  • b)
    the Keynesian approach
  • c)
    the elasticity approach 
  • d)
    the absorption approach 
Correct answer is option 'D'. Can you explain this answer?

Scholars Academy answered
The most relevant approach in this case is the absorption approach. Here's why:
  • Absorption approach: This framework focuses on the demand and supply balance within an economy. It posits that the trade balance (difference between exports and imports) is determined by the difference between aggregate demand (domestic expenditure + exports) and aggregate supply (domestic output). If aggregate demand exceeds aggregate supply, the country tends to import more and have a trade deficit. Conversely, if aggregate supply exceeds aggregate demand, the country tends to export more and have a trade surplus.
  • Monetary approach: While the monetary approach also examines the balance of payments, it primarily focuses on the relationship between money supply and the exchange rate. While it indirectly connects to output through its impact on investment and trade, it doesn't directly explain the trade balance based on demand and supply dynamics.
  • Keynesian approach: This approach emphasizes the role of aggregate demand in influencing economic activity. While it acknowledges the potential impact of output on trade through income effects, it doesn't explain the trade balance as a consequence of the direct interplay between demand and supply as the absorption approach does.
  • Elasticity approach: This approach focuses on the responsiveness of trade flows to changes in prices and income. While it can help understand how domestic output prices might affect import and export quantities, it doesn't provide a complete explanation for the trade balance based on the broader demand and supply framework as the absorption approach.
Therefore, based on the options provided, the absorption approach is the most appropriate in explaining the relationship between domestic output and trade balance. It offers a clear analytical framework to understand how domestic demand and supply dynamics translate into trade imbalances.

Which factor is NOT a cause of disequilibrium in the Balance of Payments?
  • a)
    Change in taste and preference
  • b)
    High rate of inflation
  • c)
    Increased foreign direct investment
  • d)
    Political instability
Correct answer is option 'C'. Can you explain this answer?

Talent Skill Learning answered
Increased foreign direct investment typically leads to a positive inflow in the capital account, which helps to balance any current account deficits. In contrast, high inflation, political instability, and changing consumer preferences can disrupt the balance, leading to a disequilibrium.

Which component of the Balance of Payments includes unilateral transfers?
  • a)
    Capital Account
  • b)
    Trade Account
  • c)
    Financial Account
  • d)
    Current Account
Correct answer is option 'D'. Can you explain this answer?

Talent Skill Learning answered
The current account of the Balance of Payments includes unilateral transfers, which are one-sided transactions that do not require reciprocal payments, such as gifts and personal remittances. This distinguishes it from the capital account, which deals with investments and loans.

Which of the following is classified as a visible item in the Balance of Payments?
  • a)
    Banking services provided to NRIs
  • b)
    Import of LCD screens
  • c)
    Personal remittances from abroad
  • d)
    Export of software
Correct answer is option 'B'. Can you explain this answer?

Talent Skill Learning answered
Visible items in the Balance of Payments refer to physical goods that can be seen and measured. The import of LCD screens from Malaysia is a tangible product, making it a visible item, whereas services and remittances are classified as invisible.

When there is a surplus in the capital account, what does it imply?
  • a)
    The country is experiencing inflation.
  • b)
    There is an excess of inflows over outflows in capital transactions.
  • c)
    The government has increased taxes.
  • d)
    The country has a trade deficit.
Correct answer is option 'B'. Can you explain this answer?

Talent Skill Learning answered
A surplus in the capital account indicates that the inflows of foreign capital (such as investments and loans) exceed the outflows. This is often used to finance a deficit in the current account, demonstrating a net positive movement of capital into the country.

What does the Balance of Payments (BOP) primarily record?
  • a)
    All economic transactions of a country with the rest of the world
  • b)
    Only the exports of goods
  • c)
    Only the imports of services
  • d)
    The annual tax revenue of a government
Correct answer is option 'A'. Can you explain this answer?

Talent Skill Learning answered
The Balance of Payments is a comprehensive statement that records all economic transactions of a given country with the rest of the world within a specified accounting year. This includes both inflows and outflows of foreign exchange, thus providing a complete picture of a country's economic interactions globally.

Which of the following transactions would be recorded on the credit side of the BOP?
  • a)
    Indian Government repaying a loan from the IMF
  • b)
    Purchase of toys from China
  • c)
    Export of jute to Sri Lanka
  • d)
    Foreign investment in an Indian company
Correct answer is option 'C'. Can you explain this answer?

Talent Skill Learning answered
The credit side of the Balance of Payments records inflows of foreign exchange. The export of jute to Sri Lanka generates income for the country, thus it is recorded on the credit side. In contrast, imports and repayments result in outflows, recorded on the debit side.

What is the Balance of Trade (BOT) defined as?
  • a)
    Exports of goods minus imports of goods
  • b)
    Total imports minus total exports
  • c)
    The sum of all unilateral transfers
  • d)
    Total services traded between countries
Correct answer is option 'A'. Can you explain this answer?

Talent Skill Learning answered
The Balance of Trade (BOT) specifically measures the difference between the value of a country's exports of goods and its imports of goods. A positive BOT indicates a surplus, while a negative BOT indicates a deficit.

How are foreign exchange reserves treated in the Balance of Payments?
  • a)
    Increases are shown as credit items, while decreases are debit items.
  • b)
    Both increases and decreases are shown on the credit side.
  • c)
    They are only recorded as a liability.
  • d)
    They are not recorded at all.
Correct answer is option 'A'. Can you explain this answer?

Talent Skill Learning answered
In the Balance of Payments, increases in foreign exchange reserves (purchases of foreign currency) are recorded as debit items, while decreases (sales of foreign currency) are shown as credit items. This reflects the central bank's activities concerning foreign exchange management.

What is meant by "errors and omissions" in the Balance of Payments?
  • a)
    Items that are never included in the BOP
  • b)
    Transactions that are always recorded accurately
  • c)
    Errors made in the accounting of goods only
  • d)
    Adjustments made for unrecorded transactions
Correct answer is option 'D'. Can you explain this answer?

Talent Skill Learning answered
"Errors and omissions" refer to adjustments necessary to account for transactions that may not have been recorded accurately or completely. These are included as balancing items in the BOP to ensure that the accounts are balanced, reflecting the complexities of international transactions.

Chapter doubts & questions for Balance of Payments - Economics for CSEET 2025 is part of CSEET exam preparation. The chapters have been prepared according to the CSEET exam syllabus. The Chapter doubts & questions, notes, tests & MCQs are made for CSEET 2025 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests here.

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