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Published on: 19/08/2019
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1.
Name the board categories of transactions recorded in the 'current account' of the balance of payments account
2.
State components of the current account of Balance of Payments account.
3.
What is meant by visible and invisible items in the balance of payment account? Give two examples of invisible items.
4.
Distinguish between current account and capital account of Balance of Payments account. Mention any two transactions of capital account.
5.
Difference between devaluation and depreciation.
6.
Explain the automatic mechanism by which BoP equilibrium was achieved under the gold standard.
7.
What are official reserve transactions? Explain their importance in the Balance of Payments.
8.
Differentiate between balance of trade and current account balance.
9.
Give the meaning of 'foreign exchange and foreign exchange rate'. Giving reason explain the relation between foreign exchange rate and demand for foreign exchange.
10.
Explain the causes of disequilibrium in the balance of payments.
11.
State any four items each of current account and capital account of the Balance of Payments account.
12.
________________ rate of exchange is that rate, which is determined by the demand for and supply of different currencies in the foreign exchange market.
13.
According to gold standard system of exchange rate, each country was to define value of its currency in terms of ______________
14.
Fixed exchange rate has ______________ important variants.
15.
____________ rate of exchange refers to rate of exchange as determined by the government.
16.
The ___________ measures number of units of one currency which is exchanged in the foreign market for one unit of another.
17.
Current account records visible items, invisible items and unilateral transfers.
18.
Balance of payments may be positive or negative.
19.
Balance of trade is always positive.
20.
Balance of trade is a part of Balance of Payments.
21.
Balance of payments includes only visible items
22.
Other things remaining the same, when in a country the market price of foreign currency falls, national income is likely:
To rise
To fall
To rise or to fall
To remain affected
23.
The deficit in the trade balance is Rs. 300 crores. The value of exports is Rs.500 crores. What is the value of import be?
Rs. 200 crores
Rs. 1500 crores
Rs. 800 crores
Rs.60 crores
24.
When there is unfavorable balance of trade?
X>M
X=M
X<M
None of these
25.
Hybrid in management of fixed and flexible exchange rate is known as__________
Managed floating
Crawling peg
Wider Bands
None of these
26.
Market, where the national currencies are traded for one another, is known as ___________
Domestic exchange market
Foreign exchange market
Bazaar
Shop
1.
The board categories of transactions recorded in the 'capital account' of the Balance of Payments accounts are:
(i) External assistance
(ii) Commercial borrowings
(iii) NR deposits
(iv) Foreign investment
Foreign Direct Investment
Portfolio Investment
(v) Other flows
2.
The main components of the current account of the Balance of Payments accounts include:
(i) Import and export of goods
(ii) Import and export of services
(iii) Unilateral transfers.The deficit in current account indicates that the current imports of goods and services and unilateral transfers to rest of the world are greater than the exports of goods and services and unilateral transfers from rest of the world.
3.
All types of physical goods exported and imported are called visible items in the Balance of Payment account. On the other hand, all those services whose export and import are not visible are known as invisible items in the balance of payment account.
Two examples of invisible items are:
(i) shipping
(ii) Insurance and banking.
4.
The Balance of Payments on capital account includes capital transactions relating to borrowing and lending of capital, sale, and purchase of assets, interest payment, etc.The Balance of Payments on current account is the sum of the balance of merchandise trade, services t and net transfers received from rest of the world.The two transactions of capital account are:
(i) Direct investment
(ii) Private transactions
5.
| Devaluation | Depreciation |
|---|---|
| Devaluation is said to occur when the exchange rate is increased by a social action under a pegged exchange rate system. | Depreciation of a currency in the value of the domestic currency in terms of the foreign currency. |
| Devaluation takes place when a country has adopted a fixed rate system. | Depreciation occurs when a country has adopted a floating exchange system. |
6.
Under the gold standard, all the currencies were convertible into gold. Thus, the fixed exchange rate system was in operation. All the countries on the gold standard had a stable exchange rate. Each participant country committed itself to convert freely its currency into gold at a fixed price. This, therefore, made each currency convertible into all others at a fixed price. Under the gold standard, BoP disequilibrium was corrected through a counter-flow of gold. For instance, suppose that Indian imports from japan are greater than its export to japan. Since gold is the only means of international payments, it will flow from India to japan. Consequently, while India experiences a decrease in money supply, japan experiences an increase. This implies that the price level will tend to fall in India and rise in japan. Further, the Indian products become more competitive compared to Japanese products in the export market. This change will improve Indian BoP and deteriorate Japanese BoP, eventually, eliminate the initial BoP disequilibrium.
7.
The official reserve transactions are the transactions relating to the sale and purchase of the foreign currency in the foreign exchange market. A country, running down its reserves of the foreign exchange, could engage in the official reserve transactions by selling the foreign currency in the foreign exchange market. Importance Official Reserve Transactions in the Balance of Payments A country can run a Balance of Payments surplus or deficit by increasing or decreasing its official reserves. Under the fixed exchange rate system, countries maintain official reserves that allow them to have Balance of Payments disequilibrium, without adjusting the exchange rate. For instance, if a country runs a deficit on the overall balance, the central bank of the country can supply foreign exchanges out of its reserve holdings. However, if the deficit persists, the central bank will eventually run out of its reserves, and the country may be forced to devalue its currency. Under the flexible exchange rate system, on the other hand, central banks do not intervene in the foreign exchange markets. Central banks, therefore, do not need to maintain official reserves. Thus, the official reserve transactions are more relevant under a regime of the pegged exchange rates than when exchange rates are floating.
8.
| Balance of Trade | Current Account Balance |
|---|---|
| Balance of trade refers to the relationship between the value of imports and exports of the goods of a country. | The Current account balance is obtained by adding trade in services and net transfers to the trade balance. |
| It includes only visible items | It includes visible items, invisible items and transfers. |
| The balance of trade is a narrow concept. | The current account balance is a broad concept. |
9.
Foreign exchange refers to any foreign currency. Thus, US dollars, British pounds are foreign exchange for India. Foreign exchange rate is the price of one currency in terms of another currency. It is the rate at which exports and imports of a country are valued during a period of time.
There is an inverse relation between foreign exchange rate and demand for foreign exchange. Higher the foreign exchange rate, lower the demand for foreign exchange and lower the foreign exchange rate, higher the demand for foreign exchange. Suppose the price of US dollar in India falls from ~ 50 to ~ 40. It means that earlier Indian .. people had to part with ~ 50 to buy one dollar worth of goods from USA. Now they have to part with ~ 40 to buy one dollar worth of goods from USA. It implies that American goods have become cheaper for Indian buyers.
At a lower price of US dollar, India is ready to buy more goods from USA. This raises the demand for US dollars. So, lower the price of US dollars, higher is the demand for US dollars and vice versa. Graphically, the demand curve of foreign exchange is downward sloping signifying the inverse relation between foreign exchange rate and demand for foreign exchange.

In the figure, at price OP, the demand for foreign exchange is OF. At a lower price OP0, the demand is OF1, i.e., higher. At a higher price OP1, demand is OF0, i.e., lower than OF.
10.
Following are the causes of disequilibrium in Balance of Payments:
1. Natural Causes
Natural calamities like famine, flood, etc. may cause disequilibrium in the Balance of Payments of an economy as these calamities result in a reduction in production and exports and increase in imports.
2. Economic Causes
(i) Economic Development: In order to accelerate the pace of development, underdeveloped countries have to depend on foreign assistance.These countries import advanced machinery, capital goods, and raw material, etc, which results in the excess of imports over exports.Hence, there arises the problem of disequilibrium in Balance of Payments.
(ii) Cyclical Fluctuations: Cyclical fluctuations like inflation and depression also cause the problem of disequilibrium of Balance of Payments. If there is a depression in the world market than exports of a country are affected adversely. Similarly, if prices start rising within the economy, the rate of increase in imports exceeds that of exports, which results in disequilibrium.
(iii) Capital Outflow: If a country invests its capital in other countries in order to earn more dividend then it may result in unfavorable Balance of Payments of the country investing the capital and favorable Balance of Payments of the country where the capital is invested.Hence, the problem of disequilibrium arises.
3. Political Factors
Government expenditure in foreign countries, political instability, cause disequilibrium political relations with other countries partition or unification of cause disequilibrium in Balanceof Paymentsof a country.
11.
Items of Current Account:
(i) Export and Import of Goods: Current account shows exports and imports of visible items i.e., goods like machinery, wheat, steel, etc.
(ii) Export and Import of Services: Current account shows exports and imports of invisible items i.e., services like banking, tourism, insurance, etc.
(iii) Unilateral Transfers: These are those receipts which residents of a country receive or payments that the residents of a country make without getting anything in return. Receipts from abroad are entered as positive items and payments abroad are entered as negative items.
(iv) Private Transfers: These are gifts that domestic residents receive from or make to foreign residents.
Items of Capital Account:
(i) Private Transactions: These are transactions that affect the assets or liabilities of individuals, business, etc. and other non-government entities.
(ii) Official Transactions: These are the transactions that affect the assets and liabilities by the government and its agencies.
(iii) Direct Investment: Direct investment means the act of purchasing an asset and at the same time acquiring control of it.
(iv) Portfolio Investment: It is the acquisition of an asset that does not give the purchase control over I the asset.
12.
( )
flexible
13.
( )
gold
14.
( )
two
15.
( )
fixed
16.
( )
rate of exchange
17.
(a)
18.
(b)
19.
(b)
20.
(a)
21.
(b)
22.
(b)
To fall
23.
(c)
Rs. 800 crores
24.
(c)
X<M
25.
(a)
Managed floating
26.
(b)
Foreign exchange market
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