Class 12 Macroeconomics Chapter 12: Balance of Payments | Top 60 Important Q&A & Revision Notes for CBSE & CUET|Economics Class 12 |

 

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Chapter 12: Balance of Payments
(Top 60 Q&A)

• What is Balance of Payments (BOP)?

  Ans: Balance of Payments is a systematic accounting record of all economic transactions between the residents of a country and the rest of the world during a given period of time (usually one year).

• Is Balance of Payments a stock concept or a flow concept?

  Ans: It is a flow concept because it is measured over a period of time.

• What is the basic accounting rule followed in BOP?

  Ans: BOP uses the double-entry bookkeeping system. Every international transaction results in a credit entry and a corresponding debit entry.

• What is recorded on the credit side of the BOP account?

  Ans: All transactions that bring foreign exchange into the country (inflows) are recorded on the credit (positive) side.

• What is recorded on the debit side of the BOP account?

  Ans: All transactions that cause foreign exchange to leave the country (outflows) are recorded on the debit (negative) side.

• What are the two main accounts of the Balance of Payments?

  Ans: The Current Account and the Capital Account.

• Define Current Account in BOP.

  Ans: The account that records exports and imports of goods and services, and unilateral transfers during a given period of time.

• Does the current account affect the asset-liability status of a country?

  Ans: No, transactions in the current account do not cause any change in the assets or liabilities of the residents or the government.

• What are the main components of the Current Account?

  Ans: 1) Export and import of visible goods. 2) Export and import of invisible services. 3) Unilateral (one-sided) transfers.

• What is Balance of Trade (BOT)?

  Ans: Balance of Trade is the difference between the value of exports of goods (visible items) and the value of imports of goods.

• Differentiate between BOT and BOP.

  Ans: BOT includes only visible goods, whereas BOP is a broader concept that includes visible goods, invisible services, unilateral transfers, and capital transfers.

• What are visible items in BOP?

  Ans: Tangible goods that can be seen, touched, and measured as they cross international borders (e.g., machinery, clothes, crude oil).

• What are invisible items in BOP?

  Ans: Intangible services that cannot be seen or touched when they cross borders (e.g., banking, insurance, tourism, software services).

• What are Unilateral Transfers?

  Ans: One-sided transactions where nothing is received in return, such as gifts, donations, personal remittances, and grants.

• Define Capital Account in BOP.

  Ans: The account that records all such transactions between residents of a country and the rest of the world which cause a change in the assets or liabilities of the residents or the government.

• What are the main components of the Capital Account?

  Ans: 1) Borrowings and lendings (External Commercial Borrowings, Assistance). 2) Investments (FDI and Portfolio Investment). 3) Change in Foreign Exchange Reserves.

• What is Foreign Direct Investment (FDI)?

  Ans: Investment made by a foreign entity that involves gaining actual ownership and control over an enterprise in the domestic country (e.g., Walmart buying Flipkart).

• What is Portfolio Investment?

  Ans: Investment made in financial assets like shares and bonds of a foreign company without acquiring direct control over the management (e.g., FIIs buying shares in the Indian stock market).

• Difference between FDI and Portfolio Investment.

  Ans: FDI brings ownership and management control, whereas portfolio investment only brings ownership of financial assets without management control.

• What is External Commercial Borrowing (ECB)?

  Ans: Loans taken by domestic companies or the government from the international market at commercial (market) rates of interest.

• What is External Assistance?

  Ans: Borrowing by a country from foreign governments or international institutions at concessional (lower than market) rates of interest.

• What are Autonomous items in BOP?

  Ans: Economic transactions undertaken voluntarily for the motive of earning profit, independent of the state of the country's BOP.

• Why are autonomous items called 'above the line' items?

  Ans: Because they determine the overall surplus or deficit in the balance of payments. They are the cause of BOP disequilibrium.

• What are Accommodating items in BOP?

  Ans: Transactions undertaken by the Central Bank strictly to cover the deficit or surplus arising from autonomous transactions.

• Why are accommodating items called 'below the line' items?

  Ans: Because they are undertaken after the autonomous transactions to balance the BOP account. They are not done for profit.

• What does a BOP Deficit mean?

  Ans: It occurs when autonomous foreign exchange payments exceed autonomous foreign exchange receipts.

• What does a BOP Surplus mean?

  Ans: It occurs when autonomous foreign exchange receipts exceed autonomous foreign exchange payments.

• What is Equilibrium in BOP?

  Ans: A situation where the total autonomous receipts exactly equal the total autonomous payments.

• How is a BOP deficit primarily financed?

  Ans: It is financed by withdrawing from the country's foreign exchange reserves maintained by the Central Bank.

• What happens to official reserves during a BOP surplus?

  Ans: The excess foreign exchange is added to the official foreign exchange reserves of the Central Bank.

• Mention two economic causes of disequilibrium in BOP.

  Ans: 1) High domestic inflation leading to costlier exports and cheaper imports. 2) Cyclical fluctuations like recession in trading partner countries.

• Mention a political cause of disequilibrium in BOP.

  Ans: Political instability or war, which discourages foreign investment and disrupts trade.

• Mention a social cause of disequilibrium in BOP.

  Ans: Changes in the tastes and preferences of the domestic population towards imported foreign goods.

• Does a deficit in the current account always indicate a crisis?

  Ans: No, if the current account deficit is caused by importing capital goods for future growth, it can be beneficial in the long run.

• What is a Trade Deficit?

  Ans: A situation where the value of imports of visible goods is strictly greater than the value of exports of visible goods.

• Can there be a trade deficit and a current account surplus simultaneously?

  Ans: Yes, if the surplus generated from the export of invisible services and unilateral transfers is larger than the trade deficit.

• Where is the export of machinery recorded in BOP?

  Ans: In the Current Account, on the credit side (because it brings in foreign exchange and is a visible good).

• Where is the import of crude oil recorded?

  Ans: In the Current Account, on the debit side.

• Where are gifts received from relatives abroad recorded?

  Ans: In the Current Account, on the credit side (as a unilateral transfer).

• Where is a loan taken from the World Bank recorded?

  Ans: In the Capital Account, on the credit side (inflow of foreign exchange, increases liability).

• Where is the repayment of a foreign loan recorded?

  Ans: In the Capital Account, on the debit side (outflow of foreign exchange, reduces liability).

• Where are profits earned by an Indian company in the USA recorded?

  Ans: In the Current Account, on the credit side (factor income from abroad).

• Where are salaries paid to foreign experts working in India recorded?

  Ans: In the Current Account, on the debit side (factor income to abroad).

• Where is the purchase of shares of a foreign company by an Indian resident recorded?

  Ans: In the Capital Account, on the debit side (outflow of funds to acquire an asset).

• Where is Foreign Direct Investment by a US firm in India recorded?

  Ans: In the Capital Account, on the credit side (inflow of foreign exchange).

• If an Indian buys real estate in London, where is it recorded?

  Ans: In the Capital Account, on the debit side.

• What is the significance of the "Errors and Omissions" item in BOP?

  Ans: It is a balancing item added to correct statistical discrepancies, ensuring that total credits exactly equal total debits in the accounting sense.

• Why is it said that "BOP always balances" in an accounting sense?

  Ans: Because of the double-entry bookkeeping system and accommodating transactions by the Central Bank, total credits are made equal to total debits.

• Are NRI deposits recorded in the Current or Capital account?

  Ans: In the Capital Account (credit side), because they create a future liability to repay.

• Where is foreign tourism in India recorded?

  Ans: In the Current Account, on the credit side (export of services).

• Where are expenses of Indian students studying abroad recorded?

  Ans: In the Current Account, on the debit side (import of services).

• What happens to the BOP if domestic currency depreciates?

  Ans: Exports become cheaper and imports become costlier, which can improve the BOP deficit over time.

• What is Factor Income in the current account?

  Ans: Income earned from factors of production (land, labor, capital), such as wages, rent, interest, and profits received from or paid to abroad.

• What is Non-Factor Income in the current account?

  Ans: Income earned from rendering invisible services like shipping, banking, insurance, and software services.

• What is an Open Economy?

  Ans: An economy that freely engages in economic activities (trade and investment) with the rest of the world.

• If exports of goods are ₹500 Cr and imports are ₹600 Cr, what is the BOT?

  Ans: BOT = Exports - Imports = 500 - 600 = -₹100 Cr (A trade deficit of ₹100 Cr).

• Can the Capital Account be in deficit?

  Ans: Yes, if capital outflows (like Indians investing abroad) exceed capital inflows (like foreigners investing in India).

• What is the impact of the 'Make in India' initiative on BOP?

  Ans: It encourages domestic production and foreign direct investment, leading to higher exports and reduced imports, thus improving the BOP.

• Where are shipping and insurance services recorded in BOP?

  Ans: In the Current Account, as invisible items.

• What is meant by 'Official Reserve Transactions'?

  Ans: Transactions carried out by the Central Bank involving the sale or purchase of foreign exchange reserves to balance the overall BOP.