Reason Based Question’s
(Q1) Monetary transactions arise only due to international sale and purchase of financial assets.
Ans: False. Monetary transactions arise due to export and import of goods, export and import of services, international sale and purchase of financial assets as well as international sale and purchase of real assets.
(Q2) ‘A continuous deficit in B.O.P. results into ‘capital-flight’.
Ans: True, we will have to export gold abroad to pay-off our creditors.
(Q3) Greater flow of foreign exchange from ROW always reflect higher level of development of domestic economy.
Ans: False , because greater flow of foreign exchange can happen on account of borrowing from ROW
(Q4) External Commercial Borrowings (ECB) from foreign banks is a part of Balance of Payment on Current Account
Ans: False , ECB from foreign banks relates to Borrowing therefore, it is a part of B.O.P. on Capital Account.
(Q5) Rise in BPO service is a good source of supply of foreign currency
Ans: True , because BPO service earns foreign exchange by providing services to foreigners at cheaper rates. It raise supply of foreign exchange in the country.
(Q6) Giving reasons, state whether the following statements are true or false.
(a) Current account of balance of payments account records only export and import of goods and services.
(b) Foreign investments are recorded in the capital account of balance of payments account.
(c) External assistance is not recorded in balance of payments account.
Ans: F , T , F
(Q7) Giving reasons explain whether the given statements are true or false.
(a) Improvement in exchange rate of the country’s currency always beneficial for Balance of Payment (BoP).
(b) Rise in foreign exchange rate cause a rise in its supply.
(c) We should work to get our trade deficit eliminated even if it means reducing the essential imports to zero
Ans: F , T ,F
(Q8) (a) If exports > imports, the level of aggregate demand tends to fall.
(b) Portfolio investment relates to ownership of enterprises by the non-residents in the domestic economy.
(c) Accommodating items do not cause any movement of goods and services across the borders.
(d) In balance of payments, repayment of loans by Indian government to Japanese
Government will be reflected as credit item.
(e) Autonomous items are also known as ‘below the line’ items.
(Q1) Are concepts of ‘demand for domestic goods’ and domestic demand for goods’ the same?
Ans: Both the concepts are not the same. The reason is that demand for domestic goods is a wider concept as it includes both the demand for goods at home and abroad. As compared to it ‘domestic demand for goods’ includes demand by only the domestic country, not by foreign countries.
(Q2) How is cancellation of coal blocks allocation by Supreme Court of India likely to affect our current account deficit (CAD)?
Ans: The Supreme Court’s decision to cancel coal blocks is likely to cause a fall in supply of coal , particularly for production of electricity. A cut in domestic supply of coal is bound to cause a rise in imports. This will increase our import payment of foreign exchange which will further increase our CAD, other things remaining unchanged.
(Q3) Should current account deficit by a cause for alarm ? Explain.
Ans: A deficit in current account of BOP indicates that exports of goods and services, income from abroad and transfer receipts are less than imports of goods and services, income paid to abroad and transfer payments.
Therefore, it is a cause for alarm in the country as it will lead to
(i) decrease in foreign exchange reserves and
(ii) borrowing abroad causing interest burden.
But if there is surplus of capital account of BOP & it exceeds deficit in current account, then it is not a cause for alarm as deficit in current account is offset by surplus of capital account.
(Q4) Can you think of a situation when CAD (Current Account Deficit) in India has improved even when exchange rate has remained almost constant?
Ans: It is in the latter half of the year 2014 that CAD in India has improved even when exchange rate (US $ in relation to Indian rupee) has remained almost constant. It has happened in the wake of a drastic fall in the price of crude oil in the international market , the price slipping from US $ 110 to US $ 45 per barrel.
(Q5) High rate of inflation in the domestic economy causes ‘deficit balance of trade’.
Ans: True. Because high rate of inflation makes domestic goods costlier in relation to good from rest of the world. This leads to increase in imports and decrease in exports. Implying a deficit balance of trade.
(Q6) Autonomous items of trade are undertaken by the government with a view to restore equilibrium in balance of payments.
Ans: False. Autonomous items are not meant to restore equilibrium in balance of payments. These are determined entirely by considerations of profit.
(Q7) Improvement in exchange rate of the country’s currency does not necessarily mean improvement in BOP status of the country.
Ans: True. Improvement in country’s exchange rate may in fact cause deficit BOP equilibrium, because exports may decrease and imports may increase.
(Q8) Unfavourable balance on current account leads to high receipt of foreign exchange in the capital account. Do you agree?
Ans: Unfavourable balance on current account leaves us with no option other than
(i) borrowing from rest of the world, or
(ii) selling our assets to rest of the world.
Either way, it leads to the receipt of foreign exchange in the capital account.
(Q9) CAD (current account deficit) can be managed through import substitution. Do you agree?
Ans: It is true . Import substitution implies that domestic goods are substituted for the imported goods. Example : We can cut imports by shifting from allopathic drugs to ayurvedic drugs. This will help us save foreign exchange. Accordingly, CAD can be managed.
(Q10) How are remittances by NRIs helpful in tackling BOP deficit?
Ans: Remittances by NRIs are reflected as receipts of foreign exchange in the capital account. If these receipts shoot up, then the BOP deficit (excess of payment of foreign exchange over and above the receipts of foreign exchange) is reduced. Thus, remittances by NRIs are helpful in tackling BOP deficit.
(Q11) “Slump in oil prices.” How will this affect India’s CAD?
Ans: India is a big importer of oil. A fall in oil prices means that India will be able to save foreign exchange even when the quantum of import is not reduced. Accordingly, CAD will be managed. This will help in improving India’s current account deficit.
(Q12) Indian Rupee has been depreciating in the recent times. What effect will it have on the CAD ?
Ans: As a result of depreciation of the rupee, foreign goods become expensive while domestic goods become cheaper. This should lead to a rise in exports and fall in imports.
(Q13) How do we finance the deficit on current account BOP in case official reserves with the RBI are not moved?
Ans: We are left with two alternatives only :
(i) We borrow from rest of the world.
(ii) We sell our assets (financial assets like stocks and bounds, & physical assets like plant and machinery) to rest of the world.
(Q14 ) ‘A Deficit in Balance of Payments indicates economics deterioration’. Discuss.
Ans: No, because a deficit in B.O.P. may be due to excessive imports of goods and services which are useful for the growth of the economy. As in case of India, we largely imported heavy machinery and raw-material from abroad, required for a strong foundation of the country after the achievement of independence. Even now we are spending heavily on imports of technology transfer. However if deficit in B.O.P. is due to imports of non development expenditure, it can be harmful and inflationary for the economy.
(Q15) If India’s export of goods is Rs. 200 crore and import of goods is Rs. 150 crore, then what is difference between these two terms called and how it is related with Balance of Payments ?
Ans: Balance of Trade (BOT) is a part of Balance of Payment (BOP). Balance of Payments is a wider concept.
(Q16) India’s Balance of Trade (BOT) is unbalanced, i.e. in disequilibrium, mainly deficit. Then suggest the measures to reduce disequilibrium, i.e. deficit.
Ans: If BOT is in disequilibrium, then we will suggest the following measures to rectify the disequilibrium -
(a) Export promotion
(b) Import restriction
(c) Import substitution.
(Q 17 ) In case of inflation, should we make more export or more import. Which one is better ?
Ans: In case of inflation, more import is better than export of goods. During inflation goods are not available in a country to fulfill the wants of people. Thus, it is better to purchase them from abroad. However, less export is better as goods which are in surplus can be exported.
(Q18) Do you think that a surplus in capital account BOP reflects prosperity of the nation ?
(Q19) There is improvement in the “balance of trade” over the years. Explain its effect on GDP
(Q20) ‘ It is generally observed that at the initial levels of country development, it experiences a deficit in Balance of Payment (BoP). Explain why ?
(Q21) What are the categories of classifying transaction ?
(Q22) Explain three main components of Balance of Payment accounts ?
(Q23) What is meant by unrequitted receipts ?
(Q24) How is unfavourable Balance of trade Offset ?
(Q25) BOT may be favourable or unfavourable or in equilibrium but BOP always balances in accounting sense ? Explain
(Q26) Balance Of payment always balances .Does it mean a situation of zero net obligation for a country?
(Q27) “Deficit in current account of BOP necessarily always indicate a weak economy “ . Statement is true or false . Give reason for your answer ?