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Consider the following statements regarding Balance of Payments (BoP):
1. The BoP of a country comprises transactions between residents and non- residents during a period.
2. A country having a balance of payments equilibrium will experience an increase in foreign exchange reserves.
Which of the statements given above is/are correct?
1. The BoP of a country comprises transactions between residents and non- residents during a period.
2. A country having a balance of payments equilibrium will experience an increase in foreign exchange reserves.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
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Most Upvoted Answer
Consider the following statements regardingBalance of Payments (BoP):1...
Explanation:
Statement 1:
- The Balance of Payments (BoP) of a country comprises all economic transactions between residents and non-residents during a specific period.
- These transactions include imports and exports of goods and services, financial capital, and transfer payments.
- Therefore, Statement 1 is correct.
Statement 2:
- A country having a balance of payments equilibrium means that its total receipts from exports, capital inflows, and other sources equal its total payments for imports, capital outflows, and other expenditures.
- In this case, there is no need for the country to increase its foreign exchange reserves as it is already in balance.
- Therefore, Statement 2 is incorrect.
Conclusion:
- The correct answer is option 'A' because Statement 1 is correct while Statement 2 is incorrect.
- Having a balance of payments equilibrium does not necessarily result in an increase in foreign exchange reserves.
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Community Answer
Consider the following statements regardingBalance of Payments (BoP):1...
- The balance of payments (BoP) records the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period typically a year. There are two main accounts in the BoP — the current account and the capital account. Hence, statement 1 is correct.
- The essence of international payments is that , a country that has a deficit in its current account must finance it by selling assets or by borrowing abroad. Thus, any current account deficit must be financed by a capital account surplus, that is, a net capital inflow.
- A country is said to be in a balance of payments equilibrium when the current account deficit is financed entirely by international lending without any reserve movements. Hence, if a country is having BoP equilibrium it's official foreign exchange reserves remain unchanged. Hence, statement 2 is not correct.
- Alternatively, the country could use its reserves of foreign exchange in order to balance any deficit in its balance of payments. The reserve bank sells foreign exchange when there is a deficit. This is called an official reserve sale. The decrease (increase) in official reserves is called the overall balance of payments deficit (surplus).
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Consider the following statements regardingBalance of Payments (BoP):1. The BoP of a country comprisestransactions between residents and non-residents during a period.2. A country having a balance of paymentsequilibrium will experience an increasein foreign exchange reserves.Which of the statements given above is/arecorrect?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?
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