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Balance of Payments MCQ | Class 12 Economics | Chapter 6 | 2024

Last updated on July 14th, 2024 at 05:26 pm

Balance of Payments MCQ

Below are some of the very important NCERT MCQ Questions of Balance of Payments Class 12 Economics Chapter 6 with Answers. These Balance of Payments MCQ have been prepared by expert teachers and subject experts based on the latest syllabus and pattern of term 1 and term 2. We have given these Balance of Payments MCQ Class 12 Economics Questions with Answers to help students understand the concept.

MCQ Questions for Class 12 Economics Chapter 6 are very important for the latest CBSE term 1 and term 2 pattern. These MCQs are very important for students who want to score high in CBSE Board.

We have put together these NCERT Questions of Balance of Payments MCQ for Class 12 Economics Chapter 6 with Answers for the practice on a regular basis to score high in exams. Refer to these MCQs Questions with Answers here along with a detailed explanation.

1. An Indian real estate company receives rent from Google in New York. This transaction would be recorded ______ on the side of _________ account.

• credit, current
• debit, capital
• credit, capital
• debit, current 

2. A company located in India receives a loan from a company located abroad. How is this transaction recorded in India ‘s Balance of Payments Account?

• Credit side of current account
• Debit side of current account
• Credit side of capital account 
• Debit side of capital account

3. An Indian company located in India invests in a company located abroad. This transaction is entered in India’s Balance of Payments Account on:

• Debit side Of current account
• Credit side of capital account

4. Foreign Exchange Transactions which are independent of other transactions in the Balance of Payments Account are called:

• Current transactions
• Capital transactions
• Autonomous transactions
• Accommodating transactions

5. Foreign Exchange transactions dependent on other Foreign Exchange Transactions are called:

• Current account transactions
• Capital account transactions

6. Which of the following statements is not true?

• Borrowings from the Asian Development Bank by the government is an accommodating transaction
• Loans even to Sri Lanka by the government is an accommodating transaction
• Buying machinery from Japan is an accommodating transaction
• Borrowing from the public is an accommodating transaction

7. Identify the correct sequence of alternatives

• (i) – (a)
• (ii) – (b)
• (iii) – (c)
• (iv) – (d)

8. Identify the correct matched pair.

9. Identify the correctly matched pair from the following table.  

MCQ Answers

1. (1) 

It is an inflow of money and it is recurring in nature.

It is an inflow of money in Indian economy.

It is an outflow of money from Indian economy. 

Autonomous transactions are independent of the state of BOP Account For example, if a foreign company is making investments in India with the aim of earning profit, then such a transaction is independent of the country’s BOP situation.

Accommodating transactions are those that are undertaken as a consequence of the autonomous transactions.  

Buying machinery from Japan is an autonomous transaction.

Autonomous items refers to those Balance of Payment (BOP) transactions which are undertaken for profit.

7. (2)  

Invisible items refer to those items which cannot be seen, felt, touched or measured. For example, services of shipping, banking, insurance, etc.

8. (1) 

Import of goods and services are recorded in the current account. Import is recorded on the debit side as it leads to an outflow of foreign exchange in the country.

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Assertion-Reason Based MCQ 

• Both assertion and reason are true and reason is the correct explanation of assertion.
• Both assertion and reason are true but reason is not the correct explanation of assertion.  
• Assertion is true but reason is false.
• Assertion is false but reason is true. 

1. Assertion Import of machinery is reflected in the current account of balance of payments,

Reason Export and import of goods and invisibles are recorded in the current account of balance of payments.

2. Assertion The level of aggregate demand tends to rise.

Reason Exports are more than imports. 

3. Assertion Autonomous items cause movements of goods and services across  the borders.

Reason Accommodating items to clear the deficit or surplus in the Balance of Payment.

4. Assertion Current account is a part of Balance of trade.

Reason Current account records exports and imports of goods and services and transfer payments.

Assertion-Reasoning Based MCQ Answers 

2. (1) 

Aggregate demand is based on four components. These are: consumption, investment, government spending and net exports. Exports lead to a rise in AD.

3. (2) 

4. (4) 

Balance of trade is a part of the current account. Balance on Current Account=Trade balance + invisibles balance

Case-Study Based MCQ  

1. Read the following passage and answer accordingly.

NEW DELHI: India’s balance of payments this year is going to be ‘very very strong’ on the back of significant improvement in exports and a fall in imports, Commerce and Industry; Minister Piyush Goyal said on Monday.

He said that ‘good’ green shoots are visible in the economy and exports have shown a ‘good’ turnaround.

“We are in July at about 91 per cent export level of July 2019 figures. Imports are still at about 70-71 percent of July 2019. So, broadly our balance of payments this year is going to be very very strong, which is why we feel confident that Indian industry will see opportunities for themselves, and will see opportunities of growth,” he said at a FICCI webinar.

India’s exports fell for the fourth straight month in June as shipments of key segments like petroleum and textiles declined but the country’s trade turned surplus for the first time in 18 years as imports dropped by a steeper 47.59 per cent. The country posted a trade surplus of USD 0.79 billion in June.

(i) Why is India having a very strong Balance of Payment?

(a) Increase in Exports (b) Decrease in Imports (c) Both (a) and (b) (d) Neither (a) nor (b)

(ii) Read the following statements – 

Assertion: The country’s trade turned surplus for the first time. Reason: India’s exports fell for the fourth straight month in June.

Select the correct alternative from the following:

(a) Both Assertion and Reason are True, and Reason is the correct explanation of the Assertion (b) Both Assertion and Reason are True, but Reason is not the correct explanation of the Assertion (c) Assertion is true, but Reason is false.  (d) Assertion is false, but Reason is true.

(iii) Consider the following statements:     

(I) It will get a lot of investments. (II) The government can achieve its development goals. (III) Increase the GDP of the economy. (IV) It is more profitable for the domestic manufacturers.

Which of the following is the true benefit of having a strong Balance of Payment:

(a) i and iii only (b) iii and iv only  (c) i, iii and iv only  (d) i, ii, iii and iv

(iv) _______ is the situation when the imports of goods are more than the export of goods. 

(a) Trade Surplus (b) Trade Deficit (c) Either (a) or (b) (d) Neither (a) nor (b) 

2. Read the following passage and answer accordingly. 

A lower trade deficit along with strong FDI and portfolio flows in FN 19 January March quarter may help the external sector balance sheet and prop up both current account as well as the overall balance of payments numbers.  

This could reflect a lower current account deficit in the balance of payments for the quarter ended March. Trade balance, an important component of the current account, is estimated at a deficit of $35.6 billion for Q4 compared to $40.6 billion in the same period a year ago, thanks to lower crude prices and slowdown in gold and other imports. 

Other factors influencing the current account are software services income and remittances by overseas Indians. Market estimates for F/Y 19 March quarter current account deficit is at $8.1 billion versus $13.2 billion for March’18 quarter.

In the capital account, thanks to some bidding for defaulting companies by Arcelor Mittal which are expected to have bought in some funds.  

FDI inflows in March are projected to be almost double the amount in the previous comparable period of March 2018. Also, external commercial borrowing flows in the latest quarter are almost double the amount of the previous comparable quarter ending March 2018. 

In addition, forex resources raised through the swap agreements with the commercial banks are expected to add another $5 billion through the foreign investment route. 

The overall balance of payments surplus is estimated higher at $17 billion for the latest March quarter compared to $13 billion surplus in the March 2018 quarter.

(i) Which of the following is not the benefit of a lower trade deficit?

(a) Help the external sector balance sheet    (b) Prop-up the Current Account (c) Increase the Balance of Payment numbers (d) Increase the Capital Account deficit

(ii) FDI inflows in March is a type of

(a) Accommodating transactions (b) Accumulating transactions (c) Autonomous transactions (d) None of the above

(iii) The Forex resources has surged in India. What effect does it have on the country? 

(a) Balance of Payment surplus (b) Balance of trade surplus (c) Balance of Payment deficit  (d) Balance of trade deficit

(iv) FDI inflows is recorded in which of the following accounts of Balance of Payment: 

(a) Current Account (b) Capital Account (c) Foreign Reserve Account (d) Depends on the type of FDI

3. Read the passage below and answer accordingly.

The trade deficit between India and China in April-June this fiscal year fell to USD 5.48 billion as compared to USD 13.1 billion in the same period last year. Parliament was informed on Wednesday.  

In a written reply, Commerce and Industry Minister Piyush Goyal said the bilateral trade between the countries dipped to USD 16.55 billion during the first three months of 2020-21 as against USD 21.42 billion in the same period last year.

“Government has consistently taken steps to balance our trade with China by increasing our exports to China and reducing our dependence on imports from China,” he said.

In a separate reply, the minister said at present, atx»ut tariff lines (or products) are under the restricted/prohibited category for imports under the Foreign trade imports of these products are restricted from all countries, including China. 

Replying to a separate question, he said merchandise exports from special economic zones (SF7s) dipped to ₹ 8 1,481 crore during April-August, 2020 as against ₹1,30,129 crore in the same period of 2019-20.

“However, services exports have shown a growth of 9 per cent during April to August 2020 in comparison to corresponding period of previous year,” he added.

(i) Considering the steps taken by the government to reduce the trade deficit with China, choose the correct alternative:

(I) To reduce the dependence on imports from China. (II) To increase our exports to China (III) To make Rupees stronger than Yuan (IV) To prohibit the use of Chinese goods

(a) (i) and (ii) (b) (ii) and (iii) (c) (i), (ii) and (iii)  (d) (iii) and (iv)

(ii) Which of the following has seen growth?

(a) Trade deficit with China (b) Imports of merchandise (c) Export of merchandise (d) Export of service

(iii) The bilateral trade between India and China dipped to

(a) 5.48 Billion USD (b) 13.1 Billion USD (c) 16.55 Billion USD (d) 21.42 Billion USD 

(iv) 550 tariff lines (or products) are under the restricted/prohibited category under the Foreign Trade Policy. 

(a) imports (b) exports (c) either (a) or (b) (d) neither (a) nor (b) 

Case-Study Based MCQ Answers  

(i) (c) 

A Balance Of Payments surplus means the country exports more than it imports 

Imports dropped by a steeper 47.59%

Foreign direct investments are autonomous transactions of long term capital movements, motivated by economic interests, with the profit in the first place.

(iii) (a) 

The Balance of Payments of a country is the difference between all money flowing into the country in a particular period of time and the outflow of money to the rest of the world.

(iv) (2) 

Explanation: Foreign Investment causes an inflow of foreign exchange into the country. Thus, it is recorded as positive items in the Capital Account of BOP.

(i) (a) 

Minister Piyush Goyal said, “Government has consistently taken steps to balance our trade with China by increasing our exports to China and reducing our dependence on imports from China.”

(ii) (d) 

Explanation: Services exports have shown a growth of 9 per cent during April to August 2020.

Click Below To Learn Economics All Chapter Notes

• Unit 1: National Income and Related Aggregates
• Unit 2: Money and Banking
• Unit 3: Determination of Income and Employment  
• Unit 4: Government Budget and the Economy 
• Unit 5: Balance of Payments
• Unit 6: Development Experience (1947-90) and Economic Reforms since 1991
• Unit 7: Current Challenges Facing Indian Economy
• Unit 8: Development Experience of India

Final Words

From the above article, you have practiced Balance of Payment MCQ of class 12 Economics Chapter 6. We hope that the above-mentioned MCQs for term 1 of chapter 6  Balance of Payment  will surely help you in your exam. 

If you have any doubts or queries regarding Balance of Payment MCQ (Multiple Choice Questions) with Answers, feel free to reach us and we will get back to you as early as possible.

• CBSE Class 12

CBSE Class 12 Economics Important Case Study Based Questions for 2023 Board Exams

Cbse class 12 economics important case study based questions: class 12th economics exam is just a few hours away. get important case study questions to practice before cbse class 12 economics board examinations scheduled to be conducted on march 17, 2023. .

Important Case Study Based Questions for CBSE Class 12 Economics Board Exam 2023

Read the following case study paragraph carefully and answer the questions on the basis of the same..

Q1 The central bank of India i.e. Reserve Bank of India, is the apex institution that control the entire financial market. It's one of the major functions is to maintain the reserve of foreign

exchange. Also, it intervenes in the foreign exchange market to stabilise the excessive fluctuations in the foreign exchange rate.

In other words, it is the central bank's job to control a country's economy through monetary policy; if the economy is moving slowly or going backward, there are steps that central bank can take to boost the economy. These steps, whether they are asset purchases or printing more money, all Involve injecting more cash into the economy. The simple supply and demand economic projection occur and currency will devalue.

When the opposite occurs, and the economy is growing, the central bank will use various methods to keep that growth steady and in-line with other economic factors such as wages and prices.

Whatever the central bank does or in fact don't do, will affect the currency of that country.

Sometimes, it is within the central bank's interest to purposefully effect the value of a currency.

For example, if the economy is heavily reliant on exports and their currency value becomes too high, importers of that country's commodities will seek cheaper supply; hence directly effecting the economy.

1 Which of the following tools are used by the central bank to control the flow of money in domestic economy?

(a) Fiscal tools (b) Quantitative monetary tools

(c) Qualitative monetary tools (d) Both (b) and (c)

• a) Tighten the money supply in the economy
• b) Ease the money supply in the economy
• c) Allow commercial banks to work under less strict environment
• d) Both (b) and (c)

3 Which of the following steps should be taken by the central bank if there is an excessive rise in the foreign exchange rate?

(a) Supply foreign exchange from its stock

(b) Demand more of other foreign exchange

(c) Not intervene in the market as the exchange rate is determined by the market forces

(d) Help central government to stabilize the foreign exchange rate.

Answer: 

1(d) Both (b) and (c)

2(a) Tighten the money supply in the economy

3(a) Supply foreign exchange from its stock

Q2 Changes in aggregate demand bring about changes in the level of output, employment, income, and price. These changes are generally cyclical in nature. These changes, more generally, follow a cycle of four different stages namely boom, recession, depression and recovery. The cyclical nature of economic activity is known as trade cycle or business cycle. Boom is a stage of economic activity characterized by rising prices, rising employment, rising purchasing power.

• During the time of ‘excess demand’, Govt. should .................. the public expenditure.
• a) Reduce b) increase c) unchanged d) none of these.
• Investment depends on: a) Supply b) income c) saving d) Both (a) and (c)

Answer: Income.

Q3 In the modern world, govt. aims at maximizing the welfare of the people and the country. It

requires various infrastructure and economic welfare activities. These activities require huge govt. spending through appropriate planning and policy. Budget provides a solution to all these concerns. Budget is prepared by the government at all levels.

Estimated expenditure and receipts are planned as per the objectives of the government. In India, budget is prepared by the parliament on such a day as the president may direct. The parliament approves the budget before it can be implemented. The receipts and expenditures as shown in the budget are only the estimated values for the upcoming fiscal year, and not the actual figure.

• a) Reallocation of resources.
• b) Re distribution of income
• c) Reducing expenditure
• d) Economic stability.

Answer: c) Reducing expenditure

Answer: False

Q4 India’s balance of payments position improved dramatically in 2013-14 particularly in the last three quarters. this moved in large part to measure taken by the government and the Reserve Bank of India (RBI) and eat some part to the overall macro-economic slowdown that fed into the external sector. current account deficit (CAD) declined sharply from a record high of U.S. dollar 88.2 billion (4.7% of GDP) in 2012 -1/3 to U.S. dollars 32.4 billion (1.7% of GDP) in 2013 -14. After staying at perilously unsustainable levels off well over 4.0 percentage of GDP in 2011 -12 and 2012 -13, the improvement in BOP position is a welcome relief, and there is need to sustain the position going forward. This is because even as CAD came down, net capital flows moderated sharply from U.S. dollars 92.0 billion in 2012 -13 do U.S. dollar 47.9 billion in 2013-14, that two after a special swap window of

The RBI under the nonresident Indian (NRI) scheme / overseas borrowings of banks alone yielded U.S. dollar 3 4.0 billion. This led to some increase in the level of external debt, but it has remained at the manageable levels. the large depreciation of the rupee during the course of the year, note with standing sizable accretion to reserve in 2013 – 14, could partly be attributed to frictional forces and partly to the role of expectations in the forex market. the rupiah has stabilized the recently, reflecting an overall sense of confidence in the forex market as in the other financial markets of a change for better economic

prospects there is a need to nurture and build upon this optimism through creation of an enabling environment for investment inflows so as to sustain the external position in an as yet uncertain global milieu. --------- The Hindu, archives

• a) credit, capital account
• b) debit, capital account
• c) credit, current account
• d) debit, current account
• a) current account
• b) revenue account
• c) capital account
• d) official reserves
• a) outward flow of foreign exchange
• b) inward flow of foreign exchange
• c) decrease in the level of external debt
• d) decrease in future claims

Answers: 1.b 2. c 3. b 4. d

Q5 The green revolution for the third agricultural revolution is the set of research technology

e-transfer initiatives earring between GNE E and the late 1960 that increased agricultural

production worldwide beginning most markedly in the late 1960 the initiative resulted in

the adoption of new technologies including high yield varieties of CSR rules of cells

especially does wheat and rice it was associated with chemical fertilizers agrochemicals

and controlled water supply and newer methods of cultivation including machine isolation

National bank for agriculture and rural development is and apex development finance

institution fully owned by government of India the bank has been entrusted with Martyrs

concerning policy planning and operations in the field of credit for agriculture and other

economic activities in rural areas in India.

1 Who among the following is known as the father of green revolution

(a) Dr. M S Swaminathan

(b) Dadabhai Naoroji

(c) Vikram Sarabhai

(d) all of these

2 Green revolution is also known as ..................

(a) Golden revolution

(b) milk revolution

(c) Wheat revolution

(d) None of this

3 Which of the following institutions were setup as the apex body in rural areas to support the small farmers in the adoption of modern farming methods?

4 Green revolution was the ............... set of agricultural reforms brought in India

Answer: 1 (a) 2 (c) 3 (d) 4(c)

• Narasimha Rao. This policy opened the door of the India Economy for the global exposure for the first time. In this New Economic Policy P. V. Narasimha Rao governmentreduced the import duties, opened reserved sector for the private players, devalued the Indian currency to increase the export. This is also known as the LPG Model of growth. New Economic Policy refers to economic liberalization or relaxation in the import tariffs, deregulation of markets or opening the markets for private and foreign players, and reduction of taxes to expand the economic wings of the country. Former Prime Minister Manmohan Singh is considered to be the father of New Economic Policy (NEP) of India. Manmohan Singh introduced the NEP on July 24,1991. Main Objectives of New Economic Policy – 1991, July 24 The main objectives behind the launching of the New Economic policy (NEP) in 1991 by the union Finance Minister Dr. Manmohan Singh are stated as follows:

The main objective was to plunge Indian Economy in to the arena of ‘Globalization and to give it a new thrust on market orientation. The NEP intended to bring down the rate of inflation.

1 New Economic Policy of India was launched in the year 1991 under the

• P. V. Narasimha Rao
• Atal Bihari Bajpayi
• Sharad Pawar
• None of these

2 .................................. is also known as the LPG Model of growth. ((choose

the correct alternative)) (New Economic Policy / New Education Policy)

Answer: New Economic Policy

3 State whether the given statement is true or false:

Former Prime Minister Manmohan Singh is considered to be the father of New Economic Policy (NEP) of India. ((choose the correct alternative))

True / False

Answer: True

Q7 Both forms of capital formation are the outcomes of conscious investment decisions. The decision regarding investment in physical capital is taken on the basis of one’s knowledge in this regard. The ownership of physical capital is the outcome of the conscious decision of the owner the physical capital formation is mainly an economic and technical process.

Human capital formation takes place in one’s life when she/he is unable to decide whether it would maximize her/his earnings. Children are given different types of school education and health care facilities by their parents and society. Moreover, the human capital formation at this stage is dependent upon the already formed human capital at the school level. Human capital formation is partly a social process and partly a conscious decision of the possessor of the human capital.

• a) Human capital is intangible whereas physical capital is tangible.
• b) Human capital can cope up with the changing technology whereas physical cannot.
• c) Human capital generates both personal and societal benefits whereas physical capital generates only personal benefit.
• d) Human capital gets obsolete with time whereas physical capital does not.
• In the context of the paragraph, it can be argued that human capital depreciates faster than the physical capital. The given statement is:
• c) Partially true
• d) can’t comment due to lack of proper estimation mechanism
• Machines and industrial tools are examples of _
• a) Physical capital
• b) Human capital
• c) Both physical and human capital
• d) Natural capital
• Investment in education by parents is the same as_______
• a) Investment in intermediate goods by companies
• b) Investment in CSR activity by companies
• c) Investment in capital goods by companies
• d) None of the above

Answer: – c) Investment in capital goods by companies

Q8 The central government will spend Rs. 9800 crores on livestock development over the next five years in a bid to leverage almost Rs. 55000 crore of outside investment into the Animal Husbandry Sector. It would do this by merging a slew of schemes of the Department of Animal Husbandry and Dairying into three main programmes, focused on indigenous cows and dairy development, livestock health and infrastructure development, an official statement said. The Cabinet Committee on Economic Affairs approved the implementation of the special livestock sector package by revising and realigning the various components of the existing schemes in order to boost growth and make animal husbandry more remunerative for the 10 crore farmers engaged in it.

1) Livestock production provides ------------- for the family without disrupting other food producing activities

(a)Increased stability in income 

(b) food security

(c)transport and fuel 

Answer: (d) all of these

2) The central bank undertakes to invest on livestock development in ----------- (horticulture/ animal husbandry) sector

Answer: animal husbandry

3) State one limitation of livestock sector in India

Answer: The livestock productivity is quite low as compared to other countries

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Balance of Payment and Foreign Exchange Class 12 Notes PDF (Handwritten & Short Notes)

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Balance of Payments and Foreign Exchange Rate Class 12 Important Questions and Answers Macroeconomics Chapter 6

We have given these Economics Class 12 Important Questions Macroeconomics Chapter 6 Balance of Payments and Foreign Exchange Rate to solve different types of questions in the exam. Go through these Balance of Payments and Foreign Exchange Rate Class 12 Important Questions and Answers Solutions & Previous Year Questions to score good marks in the board examination.

Important Questions of Balance of Payments and Foreign Exchange Rate Class 12 Macroeconomics Chapter 6

Question 1. What is meant by depreciation of domestic currency? (All India 2017) Answer: Depreciation of domestic currency means that the value of domestic currency decreases in relation to the value of foreign currency under flexible exchange rate system.

Question 2. Give the meaning of managed floating exchange rate. (All India 2014; Delhi 2012) Answer: Under this system, the exchange rate is determined by the market forces of demand and supply. However, excessive fluctuation is checked by the Central Bank.

Question 3. Define foreign exchange rate. (All India 2014; Delhi 2011) Answer: Foreign exchange rate refers to the rate at which one currency can be exchanged for the other currency in foreign exchange market, e.g. If ₹ 58 is paid, to buy one US dollar, then ₹/$ exchange rate will be 58, i.e. ₹ 58 per dollar.

Question 4. What is floating exchange rate? (All India 2014) Answer: The rate of exchange which is determined by the market forces of demand and supply of foreign currencies in the foreign exchange market, is termed as floating or flexible exchange rate system.

Question 5. What is a fixed exchange rate? (All India 2013, 2012) Or Give the meaning of fixed foreign exchange rate. (All India 2012) Answer: Fixed exchange rate is the system under which the central authority or government maintains their exchange rate fixed either against gold or some other foreign currency, (say USD)

Question 6. How can increase in foreign direct investment affect the price of foreign exchange? (Delhi 2013) Answer: Increase in foreign direct investment will reduce the price of foreign exchange.

Question 7. How can Reserve Bank of India help in bringing down the foreign exchange rate which is very high? (All India 2013) Answer: The Reserve Bank of India can help in bringing down the high foreign exchange rate by selling foreign exchange from its reserve.

Question 8. What is foreign exchange? (All India 2011) Answer: Foreign exchange refers to all currencies other than domestic currency of a given country, e.g. currency of US and UK are the foreign exchanges for India.

Question 9. State two sources of supply of foreign exchange. (Delhi 2010) Answer: Two sources of supply of foreign exchange are

• Export of goods and services from domestic country to foreign country.
• Foreign direct investment.

Question 10. State two sources of demand for foreign exchange. (All India 2010) Answer: Two sources of demand for foreign exchange are

• Payment of loans and interests to international organisations.
• Gifts and grants to the rest of the world.

Question 11. Describe any three sources of demand for foreign exchange. (All India (C) 2016,2015; Delhi 2015) Answer: The three sources of demand for foreign exchange are described below

• Purchase of foreign goods by domestic residents: To purchase of foreign goods domestic residents need foreign exchange. So, this results in demand for foreign exchange.
• Re-payments of international loans: International loans have to be paid back in foreign exchange, so, this also results in demand for foreign exchange.
• Tourism to abroad: When Indian tourists visit abroad, they need foreign exchange to meet their expenses related to boarding and lodging. So, they demand foreign exchange.

Question 14. What are fixed and flexible exchange rates? (All India 2015) Or Distinguish between fixed and flexible foreign exchange rate. (All India 2010) Answer: Fixed exchange rate refers to the rate of exchange which is fixed by the central authority of the country. It is not affected by change in demand or supply of foreign exchange. It discourages venture capital.

Flexible exchange rate refers to the rate of exchange which is determined by the demand and supply of foreign exchange in the foreign exchange market, with no intervention from any central authority. It incourages venture capital.

Question 15. Explain the meaning of managed floating exchange rate. (All India 2015) Answer: Managed floating exchange rate refers to the rate, which is determined by the demand and supply of foreign exchange in the foreign exchange market with excessive fluctuations if any, being checked by some central authority. It is a hybrid system of exchange rate determination which combines the features of both fixed exchange rate and flexible exchange rate. It encourages venture capital.

Question 16. Describe any three sources of supply of foreign exchange. Delhi (C) 2015 Answer: Three sources of supply of foreign exchange are

• Exports of goods and services When goods and services are exported to other countries then the foreign exchange earned is a source of supply of foreign exchange.
• Gifts and remittances from abroad Gifts and remittances from abroad are also a source of supply of foreign exchange.
• Foreign Direct Investments (FDI) Foreigners invest in India. This is also an important source of foreign exchange.

Question 17. Give the meanings of devaluation and depreciation of domestic currency. (All India (C) 2015) Or Distinguish between devaluation and depreciation of domestic currency. (Delhi 2010) Or Distinguish between Depreciation of a Currency and Devaluation of a Currency. (All India 2019) Answer: Differences between Devaluation and Depreciation of domestic currency are

Question 18. Explain the effect of rise in price of foreign currency on exports. (Delhi (C) 2015) Or Foreign exchange rate in India is on the rise recently. What impact is it likely to have on exports and how? (All India 2014) Or Explain the effect of depreciation of domestic currency on exports. (All India 2013) Or Explain the effect of a rise in the price of foreign currency on exports. (Delhi (C) 2012; All India (C) 2012) Answer: With the rise in foreign exchange rate in India, the demand for foreign currency increases. This rise in exchange rate implies depreciation in domestic currency. It encourages exports from a country, because due to depreciation of the domestic currency, domestic goods become cheaper in the international market.

Question 19. When foreign exchange rate in a country is on the rise, what impact is it likely to have on imports and how? (All India 2014) Or Foreign exchange rates have risen considerably in a country. What is its likely impact on imports of that country and why? (All India (C) 2013) Answer: With the rise in foreign exchange rate in India, the demand for foreign currency increases. This rise in exchange rate implies depreciation in domestic currency. It encourages exports from a country and discourages imports from rest of the world as the residents of the country have to pay more to buy foreign goods.

Question 20. What is ‘appreciation’ of domestic currency? What is its likely effects on export and how? (Foreign 2014) Or Explain the effect of appreciation of domestic currency on exports. (All India 2014) Answer: Appreciation of domestic currency implies that there is a fall in the foreign exchange rate. A fall in the exchange rate means that the foreigners will have to pay more for the goods and services purchased by them. This will reduce their demand and accordingly exports will fall.

Question 26. Give the meaning of foreign exchange rate. How it is determined under flexible exchange rate system? All India 2011 Answer: Foreign exchange rate: Foreign exchange rate refers to the rate at which one currency can be exchanged for the other currency in foreign exchange market, e.g. If ₹ 58 is paid, to buy one US dollar, then ₹/$ exchange rate will be 58, i.e. ₹ 58 per dollar.

Question 27. Giving two examples, explain the relation between the rise in price of a foreign currency and its demand. (Delhi 2011,2010) Answer: The following two examples explain the relation between the rise in price of a foreign currency and its demand

• When the price of a foreign currency rises, the imports become costlier so, the value of imports will fall with time, hence the demand for foreign exchange will fall.
• When the price of foreign currency rises, residents of a country find it costlier to travel abroad. So, the number of foreign travellers decrease, and consequently the demand for foreign currency also decreases.

Question 28. By giving two examples, explain why there is a rise in demand for a foreign currency when its price falls? (All India 2010) Answer: The following two examples explain why there is a rise in demand for a foreign currency when its price falls

• When there is a fall in the price of foreign currency, the import gets cheaper. It encourages the importers to import more and consequently, the demand for that foreign currency increases.
• When the price of a foreign currency falls, the price of foreign assets also falls. It encourages domestic people and companies to buy foreign assets and consequently, the demand for that foreign currency increases.

Question 29. Give the meanings of fixed, flexible and managed floating exchange rates. (All India 2010: Delhi 2010) Answer: Fixed rate of exchange: Fixed exchange rate is the system under which the central authority or government maintains their exchange rate fixed either against gold or some other foreign currency, (say USD)

flexible exchange rate: The rate of exchange which is determined by the market forces of demand and supply of foreign currencies in the foreign exchange market, is termed as floating or flexible exchange rate system.

Managed floating exchange rate: Under this system, the exchange rate is determined by the market forces of demand and supply. However, excessive fluctuation is checked by the Central Bank.

Question 30. What is meant by appreciation and depreciation of domestic currency? Explain. (All India 2010) Answer: When the value of domestic currency increases in relation to a foreign currency due to demand and supply forces in a free market, it is termed as appreciation of the domestic currency.

Depreciation of the domestic currency occurs when the value of domestic country’s currency decreases in relation to a foreign currency. For example, Increase in exchange rate is currency depreciation and decrease in exchange rate is currency appreciation.

• When ₹/$ exchange rate falls from 55 to 50, it is termed as appreciation of domestic currency. (i.e. Indian rupee)
• When ₹/$ exchange rate rises from 50 to 55, it is termed as depreciation of domestic currency.

Question 31. Explain the meaning and two merits of fixed foreign exchange rate. (Delhi 2010) Answer: Fixed exchange rate is the system under which the central authority or government maintains their exchange rate fixed either against gold or some other foreign currency, (say USD)

Two merits of fixed foreign exchange rate are

• Less speculation in the currency market.
• Encourages international trade and investment flows.

Question 32. Explain the effect of appreciation of domestic currency in imports. (All India 2014: Delhi 2013) Answer: Appreciation of domestic currency implies fall in foreign exchange rate in India and therefore, the demand for foreign currency decreases. It encourages imports from rest of the world as the residents of country have to pay less to buy foreign goods, e.g. When ₹/ $ exchange rate falls from 55 to 50, it leads to currency appreciation and this will help in buying more and more units of foreign goods. As a result, demand for foreign goods will rise, i.e. imports will rise.

Question 33. (a) Distinguish between appreciation of home currency and depreciation of home currency. (b) What is meant by “current account surplus”? (c) State any one source of supply of foreign currency for a country are (All India 2019) Answer: (a) Difference between appreciation and depreciation of domestic currency: (i) Depreciation of domestic currency refers to decrease in the value of domestic currency as compared with foreign currency due to change in market forces of demand and supply, while appreciation of domestic currency refers to increase in the value of domestic currency as compared with foreign currency due to change in market forces of demand and supply.

(ii) Due to depreciation, exports increase and imports fall while due to appreciation, exports fall and imports increase.

(iii) Depreciation is shown by increase in exchange rate, while appreciation is shown by decrease in exchange rate.

(b) Current account surplus refers to the state where credit side balance is greater than debit side balance on current account, i.e. inflows are more than outflows. (c) Export of goods and services.

Question 34. Discuss briefly the meanings of (a) Fixed Exchange Rate (b) Flexible Exchange Rate (c) Managed Floating Exchange Rate (April re-exam 2018) Answer: (a) Fixed Exchange Rate: Fixed exchange rate is the system under which the central authority or government maintains their exchange rate fixed either against gold or some other foreign currency, (say USD)

(b) Flexible exchange rate: The rate of exchange which is determined by the market forces of demand and supply of foreign currencies in the foreign exchange market, is termed as floating or flexible exchange rate system.

(c) Managed Floating Exchange Rate: Under this system, the exchange rate is determined by the market forces of demand and supply. However, excessive fluctuation is checked by the Central Bank.

Question 35. Why does the demand for foreign currency fall and supply rises when its price rises? Explain. (Delhi 2017) Answer: Foreign exchange rate shares an inverse relationship with the demand for the currency. With a fall in the price of foreign exchange, value of domestic currency increases (i.e. appreciation of domestic currency) and that means foreign goods become cheaper and their domestic demand (i.e. imports) increases.

Question 36. Give the meaning of foreign exchange and foreign exchange rate. Give the reason, explain the relation between foreign exchange rate and demand for foreign exchange. (All India 2012) Answer: Foreign exchange: Foreign exchange refers to all currencies other than domestic currency of a given country, e.g. currency of US and UK are the foreign exchanges for India.

Foreign exchange rate: Foreign exchange rate refers to the rate at which one currency can be exchanged for the other currency in foreign exchange market, e.g. If ₹ 58 is paid, to buy one US dollar, then ₹/$ exchange rate will be 58, i.e. ₹ 58 per dollar.

Question 37. Give the meaning of Balance of Payments. (Delhi 2017) Answer: Balance of Payments (BoP) of a country is a systematic record of all the economic transactions between the residents and non-residents of a country during an accounting year.

Question 38. What is the meaning of deficit in Balance of Payments? (Delhi 2014,2010) Or How is Balance of Payment ‘deficit’ measured? Explain. (Foreign 2014) Answer: When the payments of a country on account of autonomous transactions exceed the receipts of the country on account of autonomous transactions, this difference is termed as BoP deficit. Suppose, the receipts of the domestic country is ₹ 200 crore, whereas payments are ₹ 220 crore. Then, BoP deficit will be = 220 – 200 crore = ₹ 20 crore.

Question 39. Give meaning of Balance of Trade. (Delhi 2014) Or What is trade balance? (All India 2010) Answer: The difference between export and import of goods i.e. only the visible items of economic transactions is termed as Balance of Trade.

Question 40. What is ‘current account deficit’ in the Balance of Payments? (Delhi 2014) Answer: When receipts of current account of BoP falls short of expenditure of current account, then it is referred to as ‘current account deficit’.

Question 41. Name two invisible items of the Balance of Payments account. (Delhi (C) 2010) Answer: Two invisible items of the Balance of Payments account are

• Banking services
• Insurance services

Question 42. Give the meanings of ‘autonomous’ transactions and ‘accommodating’ transactions in the Balance of Payments account. (Foreign 2015) Or Distinguish between autonomous and accommodating transactions of Balance of Payments account. (All India 2014,2010; Delhi (C) 2010) Or Distinguish between Autonomous and Accommodating transactions of Balance of Payments account. Answer: Differences between Autonomous and Accommodating transactions are

Question 43. Give the meanings of Balance of Trade and Balance on Current Account of Balance of Payments Account. (Foreign 2015) Or Distinguish between Balance of Trade and Balance on Current Account. (Delhi (C) 2013,2012) Or Distinguish between Balance of Trade and Balance on Current Account of Balance of Payments. (All India (C) 2014,2013) Answer: Differences between Balance of Trade and Balance on Current Account are:

Question 44. Name the broad categories of transactions recorded in the capital account of the Balance of Payments Account. (Delhi 2015) Or State the components of capital account of Balance of Payments. (Delhi 2011) Answer: Components of Capital Account of Balance of Payments are

• Investments It includes investments to and from abroad in the form of Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII). Investment from abroad is a ‘credit’ item, whereas investment to abroad is a ‘debit’ item.
• Borrowing and lending It includes the borrowings by residents from the residents of abroad (credit item). And lending to the residents of foreign country (debit item) by residents of domestic country.
• Foreign exchange It includes the reserve of foreign currency gold and Special Drawing Rights (SDRs) with the domestic country.

Question 45. Name the broad categories of transactions recorded in the Current Account of the Balance of Paynjents Account. (Delhi 2015) Or List the transactions of Current Account of the Balance of Payments. (All India 2011) Or State the components of current account of Balance of Payments. (Delhi 2011) Answer: The transactions included in the Current Account of the Balance of Payments are

• Export and import of visible items
• Export and import of services (invisible items)
• Unilateral transfers

Question 46. Where will sale of machinery to abroad be recorded in the Balance of Payments Account? Give reasons. (Delhi 2015) Answer: Sale of machinery will be recorded in Current Account of Balance of Payments account, as it is export of goods to abroad.

Question 47. Where is ‘Borrowings from Abroad’ recorded in the Balance of Payments Account? Give the reasons. (All India 2015) Answer: ‘Borrowings from Abroad’ will be recorded in the Capital Account of Balance of Payments account, as it is concerned with the assets and liability position of the country. And borrowings from abroad will increase liabilities hence it will be recorded in the credit side of Capital Account.

Question 48. Giving reason, explain where charity to foreign countries is recorded in the Balance of Payments account. (Foreign 2015) Answer: Charity given to foreign countries is a form of unilateral transfer. So, it will be recorded in the debit side of the Current Account of the Balance of Payments account.

Question 49. Distinguish between current account and capital account of the Balance of Payments account on the basis of its components. Delhi [Cl 2014 Answer: Current account includes:

• Export and imports of visible and invisible items.
• Unilateral transactions to and from abroad.

Capital account includes:

• Investment to and from abroad.
• Borrowings and lendings to and from abroad.
• Official reserves which contains foreign, currency, SDRs and gold.

Question 50. Explain the meaning of Balance of Payments deficit. (Delhi 2014) Or Explain the meaning of deficit in Balance of Payments. (Delhi 2010) Or Explain the concept of ‘Deficit’ in the Balance of Payments. (All India (c) 2013) Answer: When the receipts of the country on account of autonomous transactions are less than the payments of the country on account of autonomous transactions, then this difference is termed as deficit in Balance of Payments. So, BoP Deficit = R < P, Where R = Receipts of the country and P = Payments of the country, e.g. If the receipts of the country is 1200 crore and the payments are ₹ 250 crore, then BoP deficit will be ₹ 50 (250-200) crore.

Question 51. List the items included as invisibles in the Balance of Payments account. (All India (C) 2012) Answer: The following items are included as invisibles in the Balance of Payments account

• Income from abroad and income to abroad.
• Export and import of services.
• Current transfers from abroad and current transfers to abroad.

Question 52. What does a Balance of Payments account show? Name the two parts of the Balance of Payments account. (Delhi 2011) Answer: The Balance of Payment (BoP) of a country is a systematic record of all economic transactions between its residents and residents of foreign countries during an accounting year. It summarises the exports and imports and other international transactions of a country with other countries.

Two parts of Balance of Payments account are as follows

• Current account
• Capital account

Question 53. Which transactions determine the Balance of Trade? When is Balance of Trade in surplus? (All India 2011) Answer: The transactions involving export and import of goods, i.e. only the visible items of economic transactions, determines the Balance of Trade. Balance of Trade is in surplus, when the value of export of goods are more than the value of import of goods.

Question 54. Explain the concept of surplus in the Balance of Payments account. (All India 2010) Answer: When the receipts of the country on account of autonomous transactions exceed the payments of a country on account of autonomous transactions, this difference is termed as BoP surplus.

BoP Surplus = R > P, Where R = Receipts of the country, P = Payment of the country, e.g. If the receipts of the country is ₹ 200 crore and the payments are ₹ 190 crore, then BoP surplus will be (200 – 190) = ₹ 10 crore.

Question 55. In the context of Balance of Payments Account, state whether the following statements are true or false. Give reasons for your answer. (i) Profits received from investments abroad is recorded in capital account. (ii) Import of machines is recorded in current account. (All India (C) 2015) Answer: (i) False, profit received from investments abroad affect neither the assets not the liabilities of a country or its residents. Therefore it is recorded in Current Account (ii) True, machine is a visible item. Therefore, it’s import is recorded in the Current Account.

Question 56. Distinguish between autonomous transactions and the accommodating transactions in the balance of payments. What is the significance of this distinction? (Delhi (c) 2015) Answer: Differences between Autonomous and accommodating Transactions:

The distinction between these two transactions is important to understand the causes of disequilibrium and to restore the identity of Balance of Payments account.

Question 57. Are the following entered (i) on the credit side or the debit side and (ii) in the current account or capital account in the Balance of Payments account? You must give reasons for your answer. (i) Investments from abroad. (ii) Transfer of funds to relatives abroad. (All India (C) 2013) Answer: (i) Investments from abroad are entered in the credit side of capital account because they increase the assets of the country by increasing the flow of foreign exchange in the country. (ii) Transfer of funds to relatives abroad are entered on the debit side of current account as they result in outflow of domestic currency with no returns.

Question 58. What is Balance of Payments Account? Where are borrowings from abroad recorded in it and why? (Delhi 2011) Answer: The Balance of Payments (BoP) account of a country is a systematic record of all economic transactions between its residents and residents of foreign countries during an accounting year. Balance of Payments account is classified into Current Account and Capital Account. Borrowing from abroad are recorded in the Capital Account (credit side) of Balance of Payments as it is a foreign liability on the country and it is to be repaid with interest.

Question 59. What is Balance of Payments? Give meanings of Trade balance and Current Account balance. Delhi 2011; All India 2011 Answer: Balance of payments: Balance of Payments (BoP) of a country is a systematic record of all the economic transactions between the residents and non-residents of a country during an accounting year.

Trade balance The difference between export and import of goods, i.e. only the visible items of economic transactions is termed as Balance of Trade. Balance of Trade = Export of Goods – Import of Goods Current account balance Current account is that account of BoP, which records exports and imports of visible and invisible items and unilateral transfers.

Question 60. Give reasons and state whether the following statements are true or false. (i) Current Account of Balance of Payment account records only export and import of goods and services. (ii) Foreign investments are recorded in the Capital Account of Balance of Payments. (All India 2011) Answer: (i) False, as Current Account of Balance of Payments Account also records unilateral transfers. (ii) True, as all kind of foreign investments (foreign direct investments and portfolio investments) are included in the Capital Account of Balance of Payments as they affect the assets positions of the country.

Question 61. Give reasons and state whether the following statements are true or false. (i) Excess of foreign exchange receipts over foreign exchange payments on account of accommodating transactions equals deficit in the Balance of Payments. (ii) Export and import of machines are recorded in Capital Account of Balance of Payments account. (Delhi (C) 2011) Answer: (i) False, as accommodating transactions removes both surplus and deficit from Balance of Payments account. (ii) False, export and import of machine, will be recorded in Current Account as it is a producer good.

Question 62. State whether the following statements are true or false. Give reasons for your answer. (i) Difference between value of exports and imports of goods and services are called Balance of Trade. (ii) External assistance is not recorded in Balance of Payments account. (Delhi (C) 2011) Answer: (i) False, because Balance of Trade only records the export and import of visible items, i.e. goods. (ii) False, because external assistance is recorded in the Current Account of Balance of Payments as unilateral receipts.

Question 63. (a) Define‘Trade Surplus’ and ‘Trade Deficit’. (b) Discuss briefly the concept of managed floating system of foreign exchange rate determination. (All India 2019) Answer: (a) Trade surplus: When the receipts of the country on account of autonomous transactions exceed the payments of a country on account of autonomous transactions, this difference is termed as BoP surplus. BoP Surplus = R > P, Where R = Receipts of the country, P = Payment of the country, e.g. If the receipts of the country is ₹ 200 crore and the payments are ₹ 190 crore, then BoP surplus will be (200 – 190) = ₹ 10 crore.

Trade deficit: Charity given to foreign countries is a form of unilateral transfer. So, it will be recorded in the debit side of the Current Account of the Balance of Payments account.

(b) Managed floating system of foreign exchange rate determination: Managed floating exchange rate refers to the rate, which is determined by the demand and supply of foreign exchange in the foreign exchange market with excessive fluctuations if any, being checked by some central authority. It is a hybrid system of exchange rate determination which combines the features of both fixed exchange rate and flexible exchange rate. It encourages venture capital.

Question 64. (a) Distinguish between ‘Trade Deficit’ and ‘Current Account Deficit’. (b) Discuss briefly the concept of flexible exchange rate system of foreign exchange rate determination. (All India 2019) Answer: (a) Trade deficit is the situation where exports of goods are less than import of goods. While deficit in current account is the situation where inflow from visible (BOT) and invisible items are less than outflow from visible and invisible items, i.e. trade deficit is only one component of current account account deficit other factors including balance on invisible trade, balance on capital transfer. So, a deficit in balance of trade may not lead to deficit in current account.

(b) Flexible exchange rate system: The rate of exchange which is determined by the market forces of demand and supply of foreign currencies in the foreign exchange market, is termed as floating or flexible exchange rate system.

Question 65. (a) State any two factors responsible for inflow of foreign currency. (b) State on which side of capital account/ current account will the following transactions be recorded and why (i) Interest on loan received from Nepal (ii) Import of mobile phones from China (All India 2019) Answer: (a) Two factors responsible for inflow of foreign currency: Two sources of supply of foreign exchange are (i) Export of goods and services from domestic country to foreign country. (ii) Foreign direct investment.

(b) (i) It will be recorded in the credit side of current account of BoP, as it doesn’t affects the assets or liabilities of the country. (ii) It will be recorded in debit side of current account of BoP, as it leads to outflow of foreign currency but doesn’t affects assets or liabilities of the country.

Question 66. (a) Define ‘Trade Surplus’. How is it different from ‘Current accounts surplus’? (b) “Indian Rupees (₹) plunged to all time low of ₹ 74.48 against the US Dollar (S)”. In the light of the above repon, discuss the impact of the situation on Indian Imports. (Delhi 2019) Answer: (a) Trade surplus is a situation where exports of goods are more than import of goods. While surplus )n current account is the situation where inflow from visible and invisible interns is more than outflow from visible and invisible items, i.e. trade surplus is only one components of current account, while current account includes other factors including balance of visible trade, balance of unilateral transfers and balance of capital transfer.

(b) As the price of Indian rupees reached to its highest, this shows that the value of Indian rupee is falling as compared with USD. Also, due to depreciation of rupee, Indians will find imported goods costlier. So, our imports will decrease and at the same time, exports from India will become cheaper for foreigners, leading to increase in exports.

Question 67. (a) Explain the impact of rise in exchange rate on National Income. (b) Explain the concept of ‘deficit’ in . Balance of Payments. (March 2018) Answer: (a) Impact of rise in exchange rate on National Income Domestic currency depreciates when there is a rise in foreign exchange rate. The foreign countries can now purchase more quantity of goods and services from the same amount of foreign currency from the domestic country. As a result, exports will rise and imports will fall. A rise in the export raises the level of aggregate demand which further raises the level of output and income. Hence, as the domestic currency depreciates an economy experiences trade surplus. This in turn boosts the National Income.

(b) Deficit in Balance of Payment (BoP) It refers to a situation when receipts of the country arising out of autonomous transactions are less than the corresponding payments to the rest of the world during the period of an accounting year. It highlights our net liabilities towards rest of the world.

Question 68. Distinguish between (i) Current account and Capital Account, and (ii) Autonomous Transactions and accommodating transactions of Balance of Payments account. (All India 2017) Answer: (i) Differences between Current and Capital Account of Balance of Payments (BoP) are

(ii) Differences between autonomous and accommodating transactions:

Question 69. (i) In which sub-account and on which side of Balance of Payments Account will foreign investments in India be recorded? Give reasons. (ii) What will be the effect of foreign investments in India on exchange rate? Explain. (Delhi 2016) Answer: (i) Foreign investments in India will be recorded in the credit side of the capital account of the Balance of Payments Accounts. Capital account records the capital transactions such as loans and investments between India and the rest of the world, which causes a change in the assets and liabilities status of the residents of the country or the government. One of the component of capital account is ‘foreign investment’, which records Foreign Direct Investment (FDI), Foreign Institutional Investment (FII) or portfolio investment by the residents of India in abroad or by the rest of the world in the domestic territory. So, foreign investments in India will be a part of this component and therefore will be recorded in the capital account.

In the capital account, all transactions causing flow of foreign exchange in the country are recorded on the credit side. Since investments from abroad will cause a flow of foreign exchange in the country, therefore it will be recorded in the credit side.

As the supply of foreign exchange increase, the exchange rate falls from OR to OR 1 . This is a situation of appreciation of the domestic currency.

Question 70. Indian investors lend abroad. Answer the following questions. (i) In which sub-account and on which side of the Balance of Payments Accounts such lending is recorded? Give reasons. (ii) Explain the impact of this lending on market exchange rate. (All India 2016) Answer: (i) Indian investors lend abroad. This will be recorded in the debit side of the capital accounts of the Balance of Payments Accounts. Capital account records the capital transactions such as loans and investments between India and the rest of the world, which causes a change in the assets and liabilities status of the residents of the country or the government.

One of the component of capital account is ‘Foreign Investment’, which records Foreign Direct Investment (FDI), Foreign Institutional Investment (FII) or portfolio investment by the residents of India in abroad or by the rest of the world in the domestic territory. So, lending by Indian investors will be a part of this component and therefore will be recorded in the capital account.

In the capital account, all transactions causing flow of foreign exchange out of the country are recorded in debit side. Since, lendings to abroad will cause a flow of foreign exchange out of the country, therefore it will be recorded in the debit side.

The investors who want to lend abroad will demand foreign exchange. As the demand for foreign exchange rises, with supply remaining the same, the market exchange rate will also rise, as is explained in the diagram given above. As the demand for foreign exchanges rises, the exchange rate rises from OR to OR 1 . This is a situation of depreciation of domestic currency.

Question 71. Explain the distinction between autonomous and accommodating transactions in Balance of Payments. Also explain the concept of Balance of Payments deficit in this context. (Delhi 2012) Answer: Autonomous items, also termed as ‘above the line items’, are those items, which are related to transactions which are determined by considerations of profit (economic motive). Autonomous transactions are that transaction between the residents of two countries which take place due to the considerations of profit. Autonomous items are not conditioned by the BoP status of the country, i.e. these are independent. Autonomous transactions are not done to establish identity of BoP, i.e. Current Account and Capital Account.

Accommodating items, also termed as ‘below the line items’, are those items of BoP that are not determined by considerations of profit but to restore identity of BoP. These are undertaken to maintain balance in the BoP accounts. These transactions correct the disequilibrium in autonomous items of BoP account. Accommodating transactions are also known as ‘below the line items’ and include foreign exchange reserve and borrowings to meet BoP deficit.

BoP deficit: When the payments of a country on account of autonomous transactions exceed the receipts of the country on account of autonomous transactions, this difference is termed as BoP deficit. Suppose, the receipts of the domestic country is ₹ 200 crore, whereas payments are ₹ 220 crore. Then, BoP deficit will be = 220 – 200 crore = ₹ 20 crore.

Multiple Choice Questions

Question 1. Other things remaining unchanged, when in a country the price of foreign currency rises, National Income is ………. (Delhi 2015) (a) likely to rise (b) likely to fall (c) likely to rise and fall both (d) not affected Answer: (a) likely to rise

Question 2. Other things remaining the same, when in a country the market price of foreign currency falls, National Income is likely ……… . (All India 2015) (a) to rise (b) to fall (c) to rise or to fall (d) to remain unaffected Answer: (b) to fall

Question 3. Other things remaining the same, when foreign currency becomes cheaper, the effect on National Income is likely to be (Choose the correct alternative) (Foreign 2015) (a) positive (b) negative (c) Both (a) and (b) (d) no effect Answer: (b) negative

Question 4. Foreign exchange transactions dependent on other foreign exchange transactions. (Delhi 2016) (a) Current account transactions (b) Capital account transactions (c) Autonomous transactions (d) Accommodating transactions Answer: (d) Accommodating transactions

Question 5. Foreign exchange transactions which are independent of other transactions in the Balance of Payments Account are called (Choose the correct alternative) (All India 2016) (a) current transactions (b) capital transactions (c) autonomous transactions (d) accommodating transactions Answer: (c) autonomous transactions

Question 6. …………. is the price of one currency in terms of another currency. (a) Fixed exchange rate (b) Real exchange rate (c) Real effective exchange rate (d) Foreign exchange rate Answer: (d) Foreign exchange rate

Question 7. Which of the following is not a source of supply of foreign exchange? (a) Tourism and reinittance from abroad (b) Speculative purchases of foreign exchange (c) Grant and donation from rest of the world (d) Grant and donation to rest of the world Answer: (d) Grant and donation to rest of the world

Question 8. ……………. is a custodian of foreign exchange reserve in India. (a) SBI (b) RBI (c) Foreign bank (d) Ministry of finance Answer: (b) RBI

Question 9. We demand foreign exchange for (a) import of foreign goods and services (b) investing in abroad (c) payments of international loans (d) All of the above Answer: (d) All of the above

Question 10. Decrease in the value of a domestic currency in terms of a foreign currency. It is known as (a) depreciation of a domestic currency (b) devaluation of a domestic currency (c) revaluation of a domestic currency (d) appreciation of a domestic currency Answer: (a) depreciation of a domestic currency

Question 11. Let foreign exchange rate between Indian Rupee and US dollar is ₹ 40/1$ and it changes to ₹ 50/1$. Which of the following is the reason of depreciation of Indian currency? (a) Increase in demand of US dollar and decrease in supply of US dollar (b) Increase in both demand and supply of US dollar (c) Increase in supply of US dollar and decrease in demand of US dollar (d) Decrease in both demand and supply of US dollar Answer: (a) Increase in demand of US dollar and decrease in supply of US dollar

Question 12. A BoP account of a country is always in balance because it is based on the principle of (a) accounts (b) mathematics (c) statistics (d) economics Answer: (a) accounts

Question 13. Which item(s) is/are excluded in BoT, but included in BoP? (a) Invisible items (b) Visible items (c) Income receipts and payments (d) Both (a) and (c) Answer: (d) Both (a) and (c)

Question 14. Unilateral transfers are transfers between residents and non-residents which include (a) interest and profits (b) dividend and royalty (c) gifts and donations (d) All of the above Answer: (c) gifts and donations

Question 15. Decrease in value of a foreign currency in terms of domestic currency. It is of domestic currency. (a) revaluation (b) devaluation (c) depreciation (d) appreciation Answer: (d) appreciation

Question 16. Under depreciation of a foreign currency in terms of domestic currency, who will be benefited? (a) Importers (b) Exporters (c) Both (a) and (b) (d) Neither (a) nor (b) Answer: (a) Importers

Question 17. In a foreign exchange market, equilibrium exchange rate is determined by in India. (a) RBI (b) government (c) demand and supply (d) IMF Answer: (c) demand and supply

Question 18. Favourable disequilibrium in BoP. (i.e. BoP Surplus) occurs when there is (a) BoT surplus (b) total exports are more than total imports (c) total exports are less than total imports (d) total exports are equal to total imports Answer: (b) total exports are more than total imports

Question 19. Which one is not an effect of BoP deficit? (a) Increase in financial burden (b) Increase in economic credibility (c) Reduce in foreign exchange reserve (d) Increase in foreign dependence Answer: (b) Increase in economic credibility

• CBSE- Balance of Payments
• Important Questions

Balance of Payments-Important Questions

Important questions, chapter 22: balance of payments.

• Define balance of payments?
• What is meant by balance of trade?
• When will balance of trade show a deficit?
• The balance of trade shows a deficit of Rs. 300 crores. The value of exports is Rs. 500 crores. What is the value of imports?
• What is current account deficit in the balance of payments?
• State the components of capital account of balance of payments?
• Distinguish between balance of trade and balance of payments?
• Which transactions determine the balance of trade? When is balance of trade in surplus?
• Explain the meaning of deficit in a balance of payments account?
• Distinguish between current account and capital account of balance of payment account. Is import of machinery recorded in current account or capital account?
• Discuss the components of current account?
• Explain the distinction between autonomous and accommodating transactions in balance of payments. Also explain the concept of balance of payments deficit in this context.
• What are the causes for deficit in balance of payment?
• What are accommodating items?
• STUDY MATERIAL FOR CBSE CLASS 12 ECONOMICS
• Chapter 1 - Aggregate Demand and Related Concepts
• Chapter 2 - Balance of Payments
• Chapter 3 - Banking: Commercial Banks and The Central Banks
• Chapter 4 - Basic Concepts of Macroeconomics
• Chapter 5 - Circular Flow of Income
• Chapter 6 - Development: India and its neighbours
• Chapter 7 - Employment: Growth, Informalisation
• Chapter 8 - Environment and Sustainable Development
• Chapter 9 - Excess Demand And Deficient Demand
• Chapter 10 - Foreign Exchange Rate
• Chapter 11 - Government Budget and the Economy
• Chapter 12 - Human Capital Formation in India
• Chapter 13 - Income Determination and Multiplier
• Chapter 14 - Indian Economy (1950–1990)
• Chapter 15 - Indian economy on the eve of independence
• Chapter 16 - Infrastructure
• Chapter 17 - Liberalisation, Privatisation, Globalisation
• Chapter 18 - Measurement of National Income
• Chapter 19 - Money
• Chapter 20 - National Income and Related Aggregates
• Chapter 21 - Poverty
• Chapter 22 - Rural Development

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Balance of Payments & Foreign Exchange Class 12 Economics Extra Questions

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Balance of Payments & Foreign Exchange Class 12 Economics Extra Questions. myCBSEguide has just released Chapter Wise Question Answers for class 12 Economics. There chapter wise Practice Questions with complete solutions are available for download in  myCBSEguide   website and mobile app. These test papers with solution are prepared by our team of expert teachers who are teaching grade in CBSE schools for years. There are around 4-5 set of solved Economics Test Papers from each and every chapter. The students will not miss any concept in these Chapter wise question that are specially designed to tackle Board Exam. We have taken care of every single concept given in CBSE Class 12 Economics syllabus  and questions are framed as per the latest marking scheme and blue print issued by CBSE for class 12.

CBSE Class 12 Economics Extra Questions

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Important Questions for Class 12 Economics

Balance of Payments

The demand curve for foreign exchange is ( 1)

• Downward sloping
• Upward sloping

Point out a demerit of fixed exchange rate ( 1)

• BOP surplus countries face inflation
• Has no effect on the stock of gold in BOP surplus countries
• BOP deficit countries run down the stock of gold
• BOP surplus countries run down the stock of gold
• Has no effect on the stock of gold

If CDA (Capital Development Authority, Islamabad) gets a loan from World Bank for roads, it will be recorded in the balance of payments in section: ( 1)

• Capital account
• Invisible balance
• Visible balance
• Official financing

What is balance of payment accounts? ( 1)

What is a fixed exchange rate? ( 1)

Give the meaning of managed floating exchange rate. ( 1)

What is fixed exchange rate? ( 1)

Give the meanings of devaluation and depreciation of domestic currency. ( 3)

Describe any three sources of supply of foreign exchange. ( 3)

Explain the impact of Devaluation of domestic currency on the export and imports of an economy. ( 4)

Give the meaning of favourable balance of payments. ( 4)

The Central Bank takes steps to control rise in the price of foreign exchange. Explain the economic values it involves as far as the common man is concerned. ( 4)

Discuss the components of capital account. ( 6)

Distinguish between autonomous and accommodating transactions of balance of payments account. ( 6)

• Downward sloping Explanation:  At lower exchange rate more foreign currency is demanded and at higher exchange rate less foreign currency is demanded.
• BOP surplus countries face inflation Explanation:  As countries can’t implement autonomous monetary policies under a metallic standard, they many import their trade partner’s inflation and unemployment rates. For example, if the inflation rate is increasing in a country, at the given exchange rate, its consumers may increase their demand for foreign goods, thus increasing the prices in other countries.
• BOP deficit countries run down the stock of gold Explanation:  Fixed exchange rate had however a great flaw in that the countries with a large and persistent balance of payments deficits were losing gold and other foreign assets. This could not go on forever as evidently stock of gold and foreign currencies would have run out. Countries with deficit bop found their international reserves dwindling which forced them to devalue their currency. The devaluation has an inflationary potential. Due to depletion of reserves of gold and foreign cur­rencies, the countries with deficit balance of payments are forced to devalue their currency to over­come the deficit
• Capital account Explanation:  Capital account
• It is a systematic record of all economic transactions between the residents of a country and the rest of the world in a given period (one year) of time. It has two components which are, current account and capital account.
• Fixed exchange rate is the system under which the monetary authority of a country fixes the value of its currency against other foreign currencies.
• Managed floating system is a system in which the central bank allows the exchange rate to be determined by market forces but intervenes at times to influence the rate. When central bank finds the rate is too high, it starts selling foreign exchange from its reserve to bring down it. When it finds the rate is too low. It starts buying to raise the rate.
• It is a system in which the central authority or government maintains their exchange rate, fixed either against gold or some other currency.
• Exports of goods and services: When goods and services are exported to other countries then the foreign exchange earned through exports is a source of supply of foreign exchange.
• Gifts and remittances from abroad: Gifts and remittances from abroad are also a source of supply of foreign exchange.
• Foreign Direct Investments (FDI): The amount which foreigners invest in India increases the supply of foreign exchange.
• Devaluation means a fall in the value of the domestic currency. A devaluation of the exchange rate will make exports more competitive and appear cheaper to foreigners. This will increase demand for exports. Devaluation also means that imports, such as petrol, food and raw materials will become more expensive. This will reduce demand for imports.
• When there is an excess of receipts over payments made by a country, it is called favourable balance of payment. This situation is favourable because there is more money coming into the country than what is going out of the country. Favourable balance is when R>P. or R – P > O.
• Exports will reduce. This will ensure an adequate supply of goods in the domestic markets.
• It will increase imports in the country and help to check the inflation of necessary items.
• Foreign Direct Investment (FDI) refers to ownership of enterprises by the non residents in the domestic economy like walmart stores in India.
• Portfolio investment refers to FII (Foreign Institutional investment) which is invested by the non residents in shares and bonds of the domestic companies.
• External commercial borrowings: It refers to borrowing by a country (including govt, and private sector) from the international money market. This involves market rate of interest compared to that prevailing in the open market.
• External assistance – External assistance are borrowings which are available at concessional rate of interest.
• NRI deposits is another important component of the capital account, particularly in emerging economies like India where interest rates are high.
• Banking Capital is another important compontent of the capital account. It refers to the foriegn asset holding of commercial banks.
• Capital account BoP also includes the flow of capital on account of short term debt.

Chapter Wise Practice Test for Class 12 Economics

• National Income and Related Aggregates
• Money and Banking
• Determination of Income and Employment
• Government Budget and the Economy
• Balance of Payments & Foreign Exchange
• Indian Economy on the Eve of Independence
• Indian Economy 1950-90
• Economic Reforms Since 1991
• Human Capital Formation in India
• Rural Development
• Employment Growth Informational and other Issues
• Infrastructure
• Environment Sustainable Development
• Development Experiences India & Neighbours

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• Employment Growth Informational and other Issues Class 12 Economics Extra Questions
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• Poverty Class 12 Economics Important Questions
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• Class 12 Economics Indian Economy 1950-90 Extra Questions

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MCQ on Balance of Payment Class 12 Economics

MCQ on Balance of Payment Class 12 Economics are covered in this Article. Balance of Payment MCQs Test contains 70 questions. Answers to MCQ on Balance of Payment Class 12 Economics are available after clicking on the answer.

1. Balance of payment is an accounting statement that records the economic transactions between a) Residents of a country and non-resident individuals b) Residents of a country and rest of the world c) Non-residents and rest of the world d) None of the above

Answer: b) Resident and rest of the world

2. Economic transactions include, which of the following a) Visible items b) Invisible items c) Unilateral transfers d) All of the above

Answer: d) All of the above

3. Resident includes a) Individual b) Firms c) Government agencies d) All of the above

4. Balance of payment accounting uses which standard of accounting? a) Double entry system b) Single entry system c) Accrual basis system d) Cash basis system

Answer: a) Double entry system

5. Balance of payment is which of the following concepts ? a) Flow b) Stock c) Both (a) and (b) d) None of the above

Answer: a) Flow

6. Balance of trade is a) Difference between export and import of goods. b) Sum total of export and import of goods c) Difference between export and import of services d) Sum total of export and import of services

Answer: a) Difference between export and import of goods

7. What are the components of balance of payment account? a) Current account b) Capital account c) Both (a) and (b) d) None of the above

Answer: c) Both (a) and (b)

Balance of Payment Class 12 MCQ Economics

9. Inflow of foreign exchange is recorded on which side of BOP account? a) Credit b) Debit c) Both (a) and (b) d) None of the above

Answer: a) Credit

10. Which of the following is not a component of BOP? a) Current account b) Capital account c) Real account d) None of the above

Answer: c) Real account

11. Import and export of goods is called a) Invisible trade b) Visible trade c) Nominal trade d) None of the above

Answer: b) Visible trade

12. Import and export of services is called a) Invisible trade b) Visible trade c) Nominal trade d) None of the above

Answer: a) Invisible trade

13. Gifts and grands received from abroad are recorded on which side of BOP account?\ a) Credit side of current account b) Debit side of current account c) Credit side of capital account d) Debit side of capital account

Answer: a) Credit side of current account

Answer: b) Debit side of current account

15. Borrowings from the rest of the world are recorded on which side of BOP account ? a) Credit side of current account b) Debit side of current account c) Credit side of capital account d) Debit side of capital account

Answer: c} Credit side of capital account

16. Investments by the Indian residents in shares of foreign companies is recorded on which side of BOP account? a) Credit side of current account b) Debit side of current account c) Credit side of capital account d) Debit side of capital account

Answer: d) Debit side of capital account

17. Which of the following is not a component of capital account of BOP ? a) Borrowings b) Investments c) Foreign travel tour purchased by an individual resident d) Change in foreign reserves

Answer: c) Foreign travel tour purchased by an individual resident

18. Which of the following is a type of investment ? a) Foreign direct investment b) Portfolio investment c) Foreign institutional investment d) All of the above

19. Surplus in current account arises when a) Credit side is more than debit side b) Debit side is more than credit side c) Debit side equals the credit side d) None of the above

Answer: a) Credit side is more than debit side

20. Deficit in capital account arises when a) Credit side is more than debit side b) Debit side is more than credit side c) Debit side is equals to credit side d) None of the above

Answer: b) Debit side is more than credit side

21. Which account has a direct impact on the income, output and employment ? a) Current account b) Capital account c) Real account d) Nominal account

Answer: a) Current account

22. Which account does not have a direct impact on income, output and employment? a) Current account b) Capital account c) Nominal account d) Real account

Answer: b) Capital account

Answer: a) Stock

24. Current account is which concept? a) Stock b) Flow c) Real d) None of the above

Answer: b) Flow

Balance of Payment Class 12 MCQ

25. Debit side of capital account constitutes a) Capital receipts b) Capital payments c) Capital balance d) None of the above

Answer: b) Capital payments

26. Credit side of capital account constitutes a) Capital receipts b) Capital payments c) Capital balance d) None of the above

Answer: a) Capital receipts

27. Credit side of current account constitutes a) Current receipts b) Current payments c) Current balance d) None of the above

Answer: a) Current receipts

28. Debit side of current account constitutes a) Current receipts b) Current payments c) Current balance d) None of the above

Answer: b) Current payments

29. Which transactions are recorded In the balance of account with a profit maximization , motive  ? a) Autonomous b) Accommodating c) Compensatory d) None of the above

Answer: a) Autonomous

30. Which transactions are done to cover the surplus or deficit in BOP account ? a) Autonomous b) Accommodating c) Compensatory d) None of the above

Answer: b) Accommodating

31. Which transactions are independent of state of BOP ? a) Autonomous b) Accommodating c) Compensatory d) None of the above

32. Which transactions are dependent of state of BOP ? a) Autonomous b) Accommodating c) Compensatory d) None of the above

33. Which of the following transactions take place on both current and capital account ? a) Autonomous b) Accommodating c) Compensatory d) None of the above

34. Which of the following transactions take place only on capital account ? a) Autonomous b) Accommodating c) Compensatory d) None of the above

Answer: b. Accommodating

35. Which transactions are the transactions by the central bank to maintain the disequilibrium in BOP account? a) Autonomous b) Accommodating c) Official reserves d) All of the above

Answer: c) Official reserves

36. Which transactions are recorded In the balance of account with a profit maximization , motive a) Autonomous b) Above the Line c) Compensatory d) Both A and B

Answer: d) Both a and b

37. __________ is an accounting statement which records all economic transactions between non-resident and domestic territory. a) Balance of payment b) Balance of Trade c) Final accounts d) None of these

Answer: a) Balance of payment

38. Visible items includes ____. a) Goods and services b) Only goods c) Only Service d) All of these

Answer: b) Only goods

39. One-way transactions are a part of _____ account. a) Balance of payment b) Balance of trade c) Both a and b d) None of these

40. BOP is a ________ concept as it is measured over a period. a) Vector b) Stock c) Flow d) All of these

Answer: c) Flow

41. Systematic record of all Economic transactions between ________ and rest of the world is called Balance of payment. ( Fill in the blank with correct alternative) a) Foreign exchange b) Residents of developing countries c) Residents of a country d) None of the above

Answer: (c) Residents of a country

42. Balance of payment is an accounting statement of ________ year. ( Fill in the blank with correct alternative) a) Accounting year b) New year c) Business year d) All of the above

Answer: (a) Accounting year

43. Read the following statement given below and choose the correct alternative Statement 1- The balance of payment account records visible , invisible and Capital transactions Statement 2- The balance of payment account is based on multiple entry system of accounting a) Both are correct b) Both are incorrect c) Statement 1 correct and statement 2 is incorrect d) Statement 1 is incorrect and statement 2 is correct

Answer: (c) Statement 1 correct and statement 2 is incorrect

44. Read the following statement given below and choose the correct alternative. Statement 1- Visible transactions refers to import and export of physical goods. Statement 2- Invisible transactions refers to import and export of non factor services a) Both are correct b) Both are incorrect c) Statement 1 correct and statement 2 is incorrect d) Statement 1 is incorrect and statement 2 is correct

Answer: (a) Both are correct

45. Read the following statement given below and choose the correct alternative Statement 1- Autonomous items are occured due to profit Statement 2- Accommodating items are occured due to losses a) Both are correct b) Both are incorrect c) Statement 1 is correct and statement 2 is incorrect d) Statement 1 is incorrect and statement 2 is correct

Answer: (c) Statement 1 is correct and statement 2 is incorrect

46. Read the following statement given below and choose the correct alternative Statement 1- Balance of trade is a broad concept Statement 2- Current account is a narrow concept a) Both are correct b) Both are incorrect c) Statement 1 is correct and statement 2 is incorrect d) Statement 1 is incorrect and statement 2 is correct

Answer: (b) Both are incorrect

47. Read the following statement given below and choose the correct alternative Statement 1- Deficit in current account can be met by balance of trade Statement 2 – Deficit in balance of trade can be met by current account a) Both are correct b) Both are incorrect c) Statement 1 is correct and statement 2 is incorrect d) Statement 1 is incorrect and statement 2 is correct

Answer: (d) Statement 1 is incorrect and statement 2 is correct

48. Choose the correctly matched pair from the following

a) A-1 b) B-2 c) C-3 d) D-4

Answer: (b) B-2

49. Choose the correctly matched pair from the following

a) A-2 b) B-3 c) C-1 d) D-4

Answer: (a) A-2

50. Choose the correctly matched pair from the following

Answer: (a) A-1

51. Choose the correctly matched pair from the following

52. Choose the correctly matched pair from the following

Answer: (d) D-4

53. “When we say, current account is in balance”, what can be the possible reasons for it a) Receipts and payments on current account are equal b) Receipts and payments on capital account are equal c) Receipts are more than payment in capital account d) Receipts are less then payment on current account

Answer: (a) Receipts and payments on current account are equal

54. “Current account is in surplus” because, a) Receipts on current account are less than payment on current account b) Value of exports of goods and services is more than the value of import of goods and services c) Receipts on capital account are more than payment on capital account d) Receipts on current account are less than payment on capital account

Answer: (b) Value of exports of goods and services is more than the value of import of goods and services

55. “Current account deficit is unfavourable for the country” because, a) It signifies that the nation is a borrower from rest of the world b) It reflects that the country does not have enough foreign exchange to finance its international payment c) It has demerits for the country d) Both (a) and (b)

Answer: (d) Both (a) and (b)

56. “BOP is always balanced in accounting sense” because, a) It occurs when autonomous payment exceeds autonomous receipt b) Any surplus in the current account is balanced by an equal amount of deficit in capital account and vice versa c) Due to the increased number of receipts in autonomous items d) Government intervention to balance BOP

Answer: (b) Any surplus in the current account is balanced by an equal amount of deficit in capital account and vice versa

57. “Interest on the deposit from a foreign bank is recorded in the current account”.Choose the correct reason. a) It is visible good b) It is invisible service c) Income from abroad d) It is a transfer receipt

Answer: (c) Income from abroad

58. Read the following statement given below and choose the correct alternative Assertion (A)- Decrease in financial assets of the government is recorded on the credit side Reason ( R)- Government withdraws from foreign exchange reserves to use it in their country a) Both assertion and reason are true. Reason is the correct explanation of assertion b) Both assertion and reason are true. Reason is not the correct explanation of assertion c) Assertion is true but reason is not d) Reason is true but assertion is not

Answer: (a) Both assertion and reason are true. Reason is the correct explanation of assertion

59. Read the following statement given below and choose the correct alternative Assertion (A)- Transactions in the current account do not affect assets and liabilities but affect output , employment and income levels of economy Reason (R )- All transactions in the current account are short term transactions a) Both assertion and reason are true. Reason is the correct explanation of assertion b) Both assertion and reason are true. Reason is not the correct explanation of assertion c) Assertion is true but reason is not d) Reason is true but assertion is not

Answer: (b) Both assertion and reason are true. Reason is not the correct explanation of assertion

60. Read the following statement given below and choose the correct alternative Assertion (A) – Unilateral transactions are an example of current account component Reason ( R)- Capital account is recurring in nature. a) Both assertion and reason are true. Reason is the correct explanation of assertion b) Both assertion and reason are true. Reason is not the correct explanation of assertion c) Assertion is true but reason is not d) Reason is true but assertion is not

Answer: (c) Assertion is true but reason is not

61. Balance of payment records all economic transactions leading to _______during an accounting year. ( Fill in the blank with correct option) a) Outflow of foreign exchange b) Visible transaction c) Flow of foreign exchange d) Capital transactions

Answer: (c) Flow of foreign exchange

62. Read the following statement given below and choose the correct alternative Statement 1- Any transaction which leads to inflow of foreign exchange is recorded on the left side Statement 2- Any transaction which leads to outflow of foreign exchange is recorded on the right side a) Both are correct b) Both are incorrect c) Statement 1 is correct and statement 2 is incorrect d) Statement 1 is incorrect and statement 2 is correct

63. Choose the correctly matched pair from the following

Answer: (c) C-3

64. Which of the following statement is incorrect a) Current transactions affect output employment and income levels of economy b) Capital transactions doesn’t affect assets and liabilities c) Current transactions do not affect assets and liabilities d) Capital transactions do not affect output employment and income levels of economy

Answer: (b) Capital transactions doesn’t affect assets and liabilities

65. Read the following statement given below and choose the correct alternative Assertion (A)- When Indian residents receives unilateral items it is recorded in credit Reason (R )- Indian residents receiving unilateral items leads to inflow of foreign exchange a) Both assertion and reason are true. Reason is the correct explanation of assertion b) Both assertion and reason are true. Reason is not the correct explanation of assertion c) Assertion is true but reason is not d) Reason is true but assertion is not

Read the Case study given below and answer the following questions.

Current Account – The current record is fundamentally a record of fare and import of labor and products.

Capital Account – The Capital Account is a record of all such exchanges between ordinary occupants of a nation and the remainder of the world which incorporates deal and acquisition of unfamiliar resources and liabilities during a given bookkeeping year.

Balance of trade – Balance of exchange can be characterized as the net distinction of import and fare of things between the occupants of a nation and the remainder of the world.

Autonomous items  – Can be characterized as those things of equilibrium of installment which are identified with such exchanges that are controlled by the thought process of benefit amplification and not to keep up with balance in equilibrium of installments. These things are recorded as the primary things prior to working out the shortfall or surplus yet to be determined of installment a/c. These things are otherwise called ‘Over the Line things’ in equilibrium of installment.

Accommodating items – Accommodating things incorporate those exchanges that occur because of other movement in equilibrium of installment. Otherwise called ‘Beneath the Line things’ in equilibrium of installment.

66.  ______is basically a record of exports and imports of goods and services.( Fill in the blank with correct alternative) a) Capital account b) Current account c) Accommodating transactions d) Autonomous transactions

Answer: (b) Current account

67. Read the following statement given below and choose the correct alternative Statement 1- Accommodating items are called above the line items Statement 2- Autonomous items are called above the line items a) Both are correct b) Both are incorrect c) Statement 1 is correct and statement 2 is incorrect d) Statement 1 is incorrect and statement 2 is correct

68. Transactions that are determined by the motive of profit maximization are called ( Choose the correct alternative) a) Autonomous items b) Accommodating items c) Both (a) and (b) d) None of the above

Answer: (a) Autonomous items

69. ________is defines as the net difference of imports and exports of goods a) Balance of payment b) Accommodating items c) Balance of trade d) All of the above

Answer: (c) Balance of trade

70. Sale and purchase of foreign assets and liabilities during a given accounting year comes under;( choose the correct alternative) a) Current account b) Capital account c) Balance of trade d) Balance of payment

Answer: (b) Capital account

CBSE Class 12 Economics Term 1 MCQ Based Questions

Part A: Introductory Macroeconomics

• Money and Banking Class 12 MCQs – 6 Marks
• Government Budget and the Economy – 6 Marks
• Balance of Payments Class 12 MCQs – 6 Marks
• Foreign Exchange Rate MCQs

Part B: Indian Economic Development

Development Experience (1947-90) and Economic Reforms since 1991:- 12 Marks

• Indian Economy on the eve of Independence MCQs
• Indian Economy (1950-90) MCQs
• Economic Reforms since 1991 MCQs

Current challenges facing Indian Economy – 10 Marks

• Poverty MCQs
• Human Capital Formation MCQs
• Rural development MCQs

1. Are these MCQ’s on Balance of Payment Class 12 are based on 2021-22 CBSE Pattern ?

Yes . There are 70 MCQ’s on this Chapter in this blog.

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Important Questions Class 12 Macro Economics Chapter - Balance of Payment

Cbse class 12 economics chapter- balance of payment important questions – free pdf download.

Free PDF download of Important Questions with Answers for CBSE Class 12 Economics Chapter – Balance of Payment prepared by expert Economics teachers from latest edition of CBSE(NCERT) books only by CoolGyan to score more marks in CBSE board examination. You can also Download  Economics Revision Notes Class 12  to help you to revise complete Syllabus and score more marks in your examinations. Jump to 3-4 Marks Questions

CBSE Class 12 Economics Important Questions Chapter -Balance of Payment

1 mark questions.

Very Short Answer Type Questions(1 Mark)

• Define foreign exchange rate. Ans.  Foreign exchange rate is the price of a foreign currency in terms of domestic currency
• What is foreign exchange? Ans.  Any currency other than the domestic currency.
• What is balance of payment Accounts? Ans.  It is a systematic record of all economic transactions between the residents of a country and the rest of the world in a given period (one year) of time
• State two sources of supply of foreign exchange. Ans.  Exports and foreign tourism.
• State two sources of demand of foreign exchange. Ans.  Import of goods & services and to get education in abroad.
• What does a deficit in balance of trade indicate. Ans.  Deficit in balance of trade indicates that the imports of good are greater than the exports.
• What is meant by balance of trade? Ans . It is the difference between monetary value of exports and imports of material goods or visible items.
• Define balance of payment. Ans.  A balance of payment is a statement of double entry system of all economic transactions between residents of a country and the residents of foreign countries during a given period of time.
• When is there a deficit in the balance of trade. Ans . When the value of imports is more than value of exports.
• Borrowing and lending to and from abroad.
• Investment to and from abroad.
• Change in foreign exchange reserves
• Which transactions determine the balance of trade? When is balance  of trade in surplus? Ans.  Exports of goods and imports of goods determines BOT. When the value of exports of goods is greater than the value of imports of goods.
• Exports and imports of goods
• Exports and imports of services
• Unilateral transfers
• Explain the meaning of deficit in BOP Ans.  When autonomous foreign exchange payments exceeds autonomous foreign exchange receipts, the difference is called balance of payments deficit.
• The balance of trade shows a deficit of Rs. 300 crs. and the value of  exports is Rs. 500 crs. What is the value of imports? Ans.  800 Crores.
• List two items included in the balance of trade account. Ans.  Visible items Watch, Petrol, Electronic item.
• List two items of the capital accounts of balance of payment. Ans.( i) Direct Foreign Investment (ii) Loans
• Give meaning of managed floating exchange rate. Ans.  Exchange rate influenced by the intervention of the central bank in the foreign exchange market.
• Distinguish between devaluation and depreciation of domestic currency Ans.  When Government or authorities reduce the price of domestic currency in terms of all foreign currencies is called devaluation. The fall in market price of domestic currency (due to demand supply in the market) in terms of a foreign currency is called depreciation.
• When price of a foreign currency rises its supply also rises. explain   why? Ans.  If exchange rate increases, this will make domestic country’s goods cheaper to foreigners. The demand for our exports will rise. It implies more supply of foreign exchange.
• What is meant by invisible items? Ans.  Invisible items are all those type of services which are exported and imported.
• What is meant by unilateral transfer? Ans.  These refers to one sided transfers from one country to other. These are not trading transactions.
• What is meant by Autonomous transactions? Ans.  Autonomous transactions refer to international economic transactions in the current and capital account that are undertaken for profit.
• Write the name of those economic transactions which are made by the  government to make equilibrium in balance of payment. Ans . Accommodating items.
• What do you mean by Fixed Exchange Rate? Ans.  Fixed exchange rate is the rate which is officially fixed in terms of Gold or any other currency by the govt. or adjusted only frequently.
• Define Flexible Exchange rate? Ans.  Flexible exchange rate is determined by demand for and supply of a given currency in foreign exchange market.
• State two merits of Flexible Exchange Rate. Ans.  (i) No need to hold foreign exchange reserve. (ii) Optimum resource allocation.
• State two demerits of Flexible Exchange Rate. Ans.  (i) Fluctuations in foreign exchange rate. (ii) Encourages speculation.
• State two merits of fixed exchange rate. Ans.  (i) Stability in Exchange rate. (ii) No scope for speculation.
• State two demerits of fixed exchange rate. Ans.  (i) Need to hold foreign exchange reserves. (ii) No automatic adjustment in the ‘Balance of Payments.’
• What is the slope of demand curve of foreign exchange? Ans.  Negative slope.
• What is the slope of supply curve of Foreign Exchange? Ans.  Positive slope.
• What will be the effect on exports, if foreign exchange rate increases? Ans.  Exports will increase because Indian goods have become cheaper for foreigners.
• What will be the effect on imports if foreign exchange rate increases. Ans.  Import will decrease because foreign goods have become costlier for Indians.
• Define Devaluation of Domestic Currency. Ans.  Devaluations means to reduce parity rate of its currency with respect of gold or any other currency by the Government.
• What is meant by Depreciation of Domestic Currency? Ans.  When the value of domestic currency reduce with respect to other currency by the demand and supply forces of foreign exchange in a free exchange market.
• What is meant by Appreciation of Domestic Currency? Ans.  Appreciation of currency refer when the value of foreign currency reduce with respect to domestic currency. It occurs in a free exchange market by the forces of demand and supply of currency.

HOTS (1 MARK)

• In which circumstances, the devaluation of currency will be in favour of  economy? Ans . Appreciation of currency refer when the value of foreign currency reduce with respect to domestic currency. It occurs in a free exchange market by the forces of demand and supply of currency.
• In which circumstances the appreciation of currency will be non favourable  for the economy? Ans.  When we adopt the policy of Import Substitution.
• Under which circumstances, the purchasing power of foreign currency  increases in comparison to domestic currency? Ans.  Capital account records capital transfer such as loans and investment between one country and the rest of the world which causes a change in the asset or liability status of the residents of a country or its government.
• With the help of which item BOP gets balanced? Ans . With the help of international loans.
• Does BOP always remain balanced? Ans.  Always in equilibrium in the sense of accounting.

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3-4 Mark Questions

Short Answer Type Questions(3-4 Marks)

• State which type of exchange rate has no official intervention in the foreign  exchange market? How it is determined? Ans . Flexible exchange rate has no official intervention. It is determined by the interaction of supply and demand in the foreign exchange market.
• State which of the following is a visible item and which is an invisible item in  Balance of payments. (a) Export of jute product (b) Software services exports. Ans.  (a) Export of jute product – Visible Item (b) Software services exports – Invisible Item
• Name the items which are not included in the current account of India’s Balance of payment, Ans.  The capital transactions in the form of direct and portfolio investment that take place the countries are not included in the current account of India’s Balance of payments.
• In which account of balance of payment tourism services to tourist are included? Ans.  Tourism services to tourist are included in current account of Balance of payments.
• Which transactions- autonomous or accommodating bring balance in the balance of payments. Ans.  Accommodating transactions bring balance in the balance of payment.
• Why foreign currency/exchange is needed? Ans.  i) To purchase of goods and services from other countries. ii) To send a gift abroad. iii) To purchase financial assets in a particular country . iv) To speculate on the value of foreign currencies.
• What are the factors responsible for inflow of foreign currency? Ans . i) foreigners purchasing home country goods and services through exports. ii) Foreigners investment in home country through joint ventures and through financial market operation. iii) Foreign currencies flow into the economy due to currency dealers and speculators
• When exchange rate of foreign currency falls it’s supply also falls. Explain how? Ans.  When exchange rate falls, experts become less profitable hence supply of foreign currency through exports falls.
• When exchange rate of foreign currency falls, its demand rises. Explain how? Ans.  When exchange rate falls, imports become cheaper, demand for imports rises and so rises the demand of foreign exchange to purchase more imports.
• What will be the value of imports, if the net imports are Rs 160 crores and the value of exports are Rs 400 crores. Ans . Balance of Trade = Exports- Imports Imports= Exports – Balance of trade= 400-(-160)=560 OR  Imports= Exports + net imports = 400+160=560 Ans Rs 560 crores
• If Balance of payment of a country is Rs (-) 100 crores and total payment are Rs 500 crores. Find out its total receipts. Ans.  Balance of Payment = Total receipts- Total payments Total receipts= Total Payment +BOP = 500 + (-100) = 500-100=400 Ans Rs 400 crores
• Balance of payments always balances. Discuss it. Ans.  Balance of payments is always balanced. A negative balance on the current account is equated with positive balance in the capital account. The monetary authorities may finance a deficit by depleting their reserves of foreign currencies or by borrowing from the IMF etc. Hence BOP is always in balance.

NCERT Solutions for Class 12 Macroeconomics Chapter 5 Case Study

NCERT Solutions for Class 12 Macroeconomics Chapter 5 Case Study Questions in English Medium updated for session 2024-25. Case based questions of Class 12 Economics chapter 5 Government Budget and the Economy are given here with Case Study MCQ to get more practice in Case Studies.

Class 12 Macroeconomics Chapter 5 Case Studies Question Answers

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There is a constitutional requirement in India (Article 112) to provide earlier than the Parliament an assertion of envisioned receipts and costs of the authorities in appreciate of each economic 12 months which runs from 1 April to 31 March. This ‘Annual Financial Statement’ constitutes the principle price range report of the authorities. Although the price range report pertains to the receipts and expenditure of the authorities for a specific economic 12 months, the effect of it is going to be there in next years. Therefore, there may be a want to have accounts- those who relate to the modern economic 12 months most effective are covered within the sales account (additionally referred to as sales price range) and people that problem the belongings and liabilities of the authorities into the capital account (additionally referred to as capital price range).

Budget is ready via way of means of authorities in any respect levels, i.e., vital authorities, country Government and neighbourhood authorities, prepares its respective annual price range. Estimated costs and receipts are deliberate as in step with the goals of the authorities. It is needed to be authorised via way of means of the parliament, earlier than it could be implemented. The price range well-known shows the economic overall performance of the authorities in the remaining 12 months and economic rules for the approaching financial 12 months. In India, price range is supplied inside the parliament on this kind of day, because the President can also additionally direct. By convention, Finance Minister offers the yearly price range of the authorities, on the primary day of February, every 12 months.

• Question 1: Who offers the yearly price range and whilst?
• Question 2: Fill within side the Blanks: (a) Estimated costs and receipts are ____________ as in step with the goals of the authorities. (b) Budget is needed to be authorised via way of means of the ___________, earlier than it could be implemented. (c) The price range well-known shows the ____________ overall performance of the authorities within the remaining 12 months and economic rules for the approaching financial 12 months. (d) In India, price range is supplied inside the parliament on this kind of day, because the ____________ can also additionally direct. (e) Although the price range report pertains to the receipts and expenditure of the authorities for a specific ___________, the effect of it is going to be there in next years.
• Question 3: State whether or not True or False. (a) The ‘Annual Financial Statement’ constitutes the principle price range report of the authorities. (b) In India, price range is supplied within the parliament on this kind of day, because the Prime Minister can also additionally direct. (c) Budget is ready via way of means of authorities in any respect levels, i.e., vital authorities, country Government and neighbourhood authorities, prepares its respective annual price range. (d) Budget is needed to be authorised via way of means of the President, earlier than it could be implemented.
• Question 4: Why there may be a want to have accounts?
• Answer 1: By convention, Finance Minister offers the yearly price range of the authorities it on the primary day of February every 12 months.
• Answer 2: (a) deliberate; (b) parliament; (c) economic; (d) President; (e) economic 12 months By convention, Prime Minister offers the yearly price range of the authorities, on the primary day of February, every 12 months.
• Answer 3: (a) True; (b) False; (c) True; (d) False; (e) False
• Answer 4: Although the price range report pertains to the receipts and expenditure of the authorities for a specific economic 12 months, the effect of it is going to be there in next years. Therefore, there may be a want to have accounts: – those who relate to the modern economic 12 months most effective are covered within the sales account (additionally referred to as sales price range) and people that problem the belongings and liabilities of the authorities into the capital account (additionally referred to as capital price range).

Government prepares the price range for pleasing positive goals. These goals are the direct final results of presidency’s financial, social and political rules. The numerous goals of presidency price range are: Reallocation of assets: Through the price range policy, authorities’ pursuits to reallocate assets in according with the financial and social priorities of the country. Government can impact allocation of assets via: (i) Tax concession or subsidies: To inspire investment, authorities can deliver tax concession, subsidies, etc. to the producers. For example, authorities discourage the manufacturing of dangerous intake items via heavy taxes and encourages the usage of khadi merchandise via way of means of imparting subsidies. (ii) Directly generating items and services: There are many non-worthwhile financial sports, which aren’t undertaken via way of means of the personal region like, water deliver, sanitation, regulation and order, countrywide defence, etc. These are referred to as public items. Such sports are always undertaken via way of means of the authorities in public hobby and to elevate social welfare.

Reducing inequalities in profits and wealth: Economic inequality is an inherent a part of each financial system. Government pursuits to lessen such inequalities of profits and wealth, via its budgetary policy. Government pursuits to persuade distribution of profits via way of means of enforcing taxes on wealthy and spending extra at the Welfare of the poor. It will lessen profits of the wealthy and the increase well known of residing of the poor, as a consequence decreasing inequalities inside the distribution of profits. three. Economic balance: Economic balance manner absence of huge-scale fluctuation in costs. Such fluctuations create uncertainties within the economic system. Government can exercising manipulate over those fluctuations via taxes and expenditure. four. Management of public Enterprises: There are huge numbers of public region industries, which might be set up and controlled fall social welfare of the general public. Budget is ready with the goal of creating numerous provisions for handling such Enterprises and imparting them economic assist.

• Question 1: How the Government can impact allocation of assets?
• Question 2: What is financial balance?
• Question 3: Fill within side the blanks: (a) Budget is ready with the goal of creating numerous provisions for _______________ such Enterprises and imparting them economic assist. (b) Government pursuits to lessen such inequalities of ____________, via its budgetary policy. (c) Government prepares the _______________ for pleasing positive goals. (d) There are many non-worthwhile financial sports, which aren’t ______________ via way of means of the personal region like, water deliver, sanitation, regulation and order, countrywide defence, etc. (e) Through the price range policy, authorities’ pursuits to ______________ in according with the financial and social priorities of the country. (f) Government pursuits to persuade distribution of profits via way of means of ____________ on wealthy and spending extra at the Welfare of the poor.
• Question 4: State whether or not True or False. (a) Government can deliver down combination call for via way of means of decreasing its personal expenditure. (b) During deflation, authorities can growth its expenditure and deliver tax concession and subsidies. (c) Government prepares the price range for pleasing positive goals. These goals aren’t the direct final results of presidency’s financial, social and political rules. (d) Government can’t exercising manipulate over financial fluctuations via taxes and expenditure. (e) Budget is ready with the goal of creating numerous provisions for handling such Enterprises and imparting them economic assist. (f) Government discourages the manufacturing of dangerous intake items via heavy taxes and encourages the usage of khadi merchandise via way of means of imparting subsidies.
• Question 5: How do the authorities lessen inequalities in profits and wealth of an economic system?
• Answer 1: Government can impact allocation of assets via: Tax concession or subsidies: To inspire investment, authorities can deliver tax concession, subsidies, etc. to the producers. For example, authorities discourage the manufacturing of dangerous intake items via heavy taxes and encourages the usage of khadi merchandise via way of means of imparting subsidies. Directly generating items and services: There are many non-worthwhile financial sports, which aren’t undertaken via way of means of the personal region like, water deliver, sanitation, regulation and order, countrywide defence, etc. These are referred to as public items. Such sports are always undertaken via way of means of the authorities in public hobby and to elevate social welfare.
• Answer 2: Economic balance manner absence of huge-scale fluctuation in costs. Such fluctuations create uncertainties within the economic system. Government can exercising manipulate over those fluctuations via taxes and expenditure.
• Answer 3: (a) handling; (b) profits and wealth; (c) price range; (d) undertaken; (e) reallocate assets; (f) enforcing taxes
• Answer 4: (a) True; (b) True; (c) False; (d) False; (e) True; (f) True
• Answer 5: Economic inequality is an inherent a part of each financial system. Government pursuits to lessen such inequalities of profits and wealth, via its budgetary policy. Government pursuits to persuade distribution of profits via way of means of enforcing taxes on wealthy and spending extra at the Welfare of the poor. It will lessen profits of the wealthy and the increase well known of residing of the poor, as a consequence decreasing inequalities inside the distribution of profits.

Components of price range seek advice from shape of the price range. Two most important additives of price range are: Revenue price range: It offers with the sales issue of the authorities’ price range. It explains how sales is generated or accumulated via way of means of the authorities and the way its miles allotted amongst numerous expenditure heads. Revenue price range has parts: Revenue receipts and sales costs. In short, sales price range is the assertion of envisioned sales receipts and envisioned sales expenditure at some point of a financial 12 months. Capital price range: It offers with the capital issue of the authority’s price range and it includes: Capital receipts and capital costs. In different words, capital price range is the assertion of envisioned capital receipts and envisioned capital expenditure at some point of a financial 12 months. Budget receipts seek advice from the envisioned cash receipts of the authorities from all reasserts at some point of a given financial 12 months. Budget receipts can be similarly categorised as sales receipts and capital receipts.

The authorities can also additionally want to accurate fluctuations in profits and employment. The standard degree of employment and costs within the economic system relies upon the extent of combination call for which relies upon at the spending selections of hundreds of thousands of personal financial marketers other than the authorities. These selections, in turn, rely on many elements which includes profits and credit score availability. In any duration, the extent of call for might not be enough for complete utilisation of labour and different assets of the economic system. Since wages and costs do now no longer fall under a degree, employment can’t be introduced again to the sooner degree automatically. The authorities’ desires to interfere to elevate the combination call for. On the alternative hand, there can be instances whilst call for exceeds to be had output beneath Neath situations of excessive employment and as a consequence can also additionally deliver upward push to inflation. In such situations, restrictive situations can be had to lessen call for. The intervention of the authorities whether or not to amplify call for or lessen it constitutes the stabilisation function.

• Question 1: Fill within side the blanks: (a) The authorities can also additionally want to accurate _________ in profits and employment. (b) The intervention of the authorities whether or not to _________ call for or lessen it constitutes the stabilisation function. (c) Budget receipts can be similarly categorised as __________ and capital receipts. (d) There can be instances whilst call for exceeds to be had output beneath Neath situations of excessive employment and as a consequence can also additionally deliver _________. (e) Revenue price range offers with the _________ of the authorities’ price range.
• Question 2: State whether or not True or False. (a) The intervention of the authorities whether or not to amplify call for or lessen it constitutes the stabilisation function. (b) Revenue price range explains how sales is generated or accumulated via way of means of the authorities and the way its miles allotted amongst numerous expenditure heads. (c) Revenue price range isn’t the assertion of envisioned sales receipts and envisioned sales expenditure at some point of a financial 12 months. (d) Budget receipts might not be similarly categorised as sales receipts and capital receipts. (e) Capital price range is the assertion of envisioned capital receipts and envisioned capital expenditure at some point of a financial 12 months. (f) Capital price range includes capital receipts and capital costs.
• Question 3: On what does the extent of employment and costs within the economic system relies upon?
• Question 4: What are the additives of price range?
• Question 5: What takes place whilst call for exceeds to be had output?
• Question 6: Complete the subsequent sentence: Budget receipts can be similarly categorised as _______.
• Answer 1: (a) fluctuations; (b) amplify; (c) sales receipts; (d) upward push to inflation; (e) sales issue
• Answer 2: (a) True; (b) True; (c) False; (d) False; (e) True; (f) True
• Answer 3: The standard degree of employment and costs within the economic system relies upon the extent of combination call for which relies upon at the spending selections of hundreds of thousands of personal financial marketers other than the authorities. These selections, in turn, rely on many elements which includes profits and credit score availability.
• Answer 4: Components of price range seek advice from shape of the price range. Two most important additives of price range are: Revenue price range: It offers with the sales issue of the authorities’ price range. It explains how sales is generated or accumulated via way of means of the authorities and the way its miles allotted amongst numerous expenditure heads. Capital price range: It offers with the capital issue of the authorities’ price range and it includes: Capital receipts and capital costs. In different words, capital price range is the assertion of envisioned capital receipts and envisioned capital expenditure at some point of a financial 12 months.
• Answer 5: When call for exceeds to be had output beneath Neath situations of excessive employment, it is able to deliver upward push to inflation. In such situations, restrictive situations can be had to lessen call for. The intervention of the authorities whether or not to amplify call for or lessen it constitutes the stabilisation function.
• Answer 6: Sales receipts and capital receipts.

Revenue receipts seek advice from the ones receipts which neither create any legal responsibility nor purpose any discount inside the belongings of the authorities. They are ordinary and ordinary in nature and authorities gets them in its ordinary path of sports. A receipt is a sales receipt, if it satisfies the subsequent crucial situations: The receipt should now no longer create a legal responsibility for the authorities. For example, taxes levied via way of means of the authorities are sales receipts as they do now no longer create any legal responsibility. However, any quantity, borrowed via way of means of the authorities, isn’t a sales receipt because it reasons a growth within the legal responsibility in phrases of reimbursement of borrowings.

The receipt should now no longer purpose lower inside the belongings. For example, receipts from sale of stocks of a public Enterprise isn’t a sales receipt because it ends in a discount in belongings of the authorities. Revenue receipts of the authorities are usually categorised beneath Neath heads: Tax sales and non-tax sales Tax sales refers to sum general of receipts from taxes and different responsibilities imposed via way of means of the authorities. Tax is a unilateral obligatory price made via way of means of human beings and groups to the authorities without connection with any direct advantage in return. Tax sales may be similarly categorised as: Direct taxes and Indirect taxes.

• Question 1: What are tax sales?
• Question 2: Fill within side the blanks: (a) Receipts from sale of stocks of a public Enterprise isn’t a ______ because it ends in a discount in belongings of the authorities. (b) Taxes levied via way of means of the authorities are sales receipts as they do now no longer create any _________. (c) Tax sales refers to sum general of receipts from _______ imposed via way of means of the authorities. (d) Revenue receipts are ordinary and ordinary in nature and authorities gets them in its ______ of sports.
• Question 3: State whether or not True or False. (a) Tax is a unilateral obligatory price made via way of means of human beings and groups to the authorities without connection with any direct advantage in return. (b) The sales receipt ought to create a legal responsibility for the authorities. (c) Receipts from sale of stocks of a public Enterprise isn’t a sales receipt because it ends in a discount in belongings of the authorities. (d) Taxes levied via way of means of the authorities are sales receipts as they do create a legal responsibility.
• Question 4: When can a receipt be referred to as sales receipt? Explain.
• Question 5: What are sales receipts?
• Answer 1: Tax sales refers to sum general of receipts from taxes and different responsibilities imposed via way of means of the authorities. Tax is a unilateral obligatory price made via way of means of human beings and groups to the authorities without connection with any direct advantage in return.
• Answer 2: (a) sales receipt; (b) legal responsibility; (c) taxes and different responsibilities; (d) ordinary path.
• Answer 3: (a) True; (b) False; (c) True; (d) False
• Answer 4: A receipt is a sales receipt, if it satisfies the subsequent crucial situations: i) The receipt should now no longer create a legal responsibility for the authorities. For example, taxes levied via way of means of the authorities are sales receipts as they do now no longer create any legal responsibility. However, any quantity, borrowed via way of means of the authorities, isn’t a sales receipt because it reasons a growth within the legal responsibility in phrases of reimbursement of borrowings. ii) The receipt should now no longer purpose lower inside the belongings. For example, receipts from sale of stocks of a public Enterprise isn’t a sales receipt because it ends in a discount in belongings of the authorities.
• Answer 5: Revenue receipts seek advice from the ones receipts which neither create any legal responsibility nor purpose any discount within the belongings of the authorities. They are ordinary and ordinary in nature and authorities gets them in its ordinary path of sports.

Direct taxes seek advice from taxes which are imposed on belongings and profits of people and groups and their burden can’t be shifted to the alternative character. They are imposed on people and groups and their financial burden is borne via way of means of the ones on whom they’re levied. The ‘legal responsibility to pay’ the tax and real burden of the tax lie at the equal position, manner, its burden can’t be shifted to others. They immediately have an effect on the profits degree and buying energy of human beings and assist to alternate the extent of combination call for within the economic system. Examples of direct tax are: Income tax, company tax, hobby tax, wealth tax, dying duty, capital profits tax, etc.

Indirect taxes are the ones taxes which may be shifted to some other character. Their financial burden is in the long run borne via way of means of very last customers of products and services, instead of the character on whom the tax is levied. Indirect taxes all imposed on items and services. The ‘legal responsibility to pay’ the tax and ‘real burden’ of the tax lie on unique persons, manner, its burden may be shifted to others. Examples of oblique taxes are: GST, primary custom duty, vital excise and VAT on petroleum merchandise, excise on liquor, energy responsibilities, stamp duty, securities transaction tax, belongings tax, access taxes and toll, etc. Indirect taxes are obligatory bills however they may be prevented via way of means of now no longer getting into the one’s transactions, which name for such taxes. For example, customers can also additionally store taxes via way of means of buying Khadi Gram Udyog objects as there may be no oblique tax on Khadi objects.

• Question 1: What are oblique taxes?
• Question 2: State whether or not True or False. (a) Indirect taxes are obligatory bills however they may be prevented via way of means of now no longer getting into the ones transactions, which name for such taxes. (b) Examples of oblique taxes are: GST, primary custom duty, vital excise and VAT on petroleum merchandise, excise on liquor, energy responsibilities, stamp duty, securities transaction tax, belongings tax, access taxes and toll, etc. (c) Direct taxes aren’t imposed on people and groups and their financial burden isn’t borne via way of means of the ones on whom they’re levied. (d) Consumers can also additionally store taxes via way of means of buying Khadi Gram Udyog objects as there may be no oblique tax on Khadi objects. (e) Direct taxes in a roundabout way have an effect on the profits degree and buying energy of human beings and assist to alternate the extent of combination call for inside the economic system.
• Question 3: Fill within side the blanks: (a) The ‘legal responsibility to pay’ the tax and ‘real burden’ of the tax lie on unique persons, manner, its burden may be _________ to others. (b) The ‘legal responsibility to pay’ the tax and ________ of the tax lie at the equal position, manner, its burden can’t be shifted to others. (c) Direct taxes immediately have an effect on the profits degree and __________ of human beings and assist to alternate the extent of combination call for within the economic system. (d) Indirect taxes are obligatory bills however they may be ________ via way of means of now no longer getting into the ones transactions, which name for such taxes. (e) The financial burden of oblique taxes is in the long run borne via way of means of _______ of products and services, instead of the character on whom the tax is levied.
• Question 4: What are direct taxes?
• Question 5: What are the variations among direct taxes and oblique taxes?
• Answer 1: Indirect taxes are the ones taxes which may be shifted to some other character. Their financial burden is in the long run borne via way of means of very last customers of products and services, instead of the character on whom the tax is levied. Indirect taxes all imposed on items and services.
• Answer 2: (a) True; (b) True; (c) False; (d) True; (e) False
• Answer 3: (a) shifted; (b) real burden; (c) buying energy; (d) prevented; (e) very last customers
• Answer 4: Direct taxes seek advice from taxes which are imposed on belongings and profits of people and groups and their burden can’t be shifted to the alternative character. They are imposed on people and groups and their financial burden is borne via way of means of the ones on whom they’re levied.
• Answer 5: Direct taxes levied on people and groups. The burden of an instantaneous tax can’t be shifted and they’re usually modern in nature. They have confined attain as they do now no longer attain the all of the sections of the economic system. Indirect taxes are levied on items and services. The burden of an oblique tax may be shifted and they’re usually proportional in nature. They have an extensive insurance as they attain all of the sections of the society.

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Arinjay Academy » Economics Class 12 » Balance of Payments | Economics Class 12

Balance of Payments | Economics Class 12

Meaning of balance of payment:.

Balance of payment(BoP) is an accounting statement which records economic transactions between Normal Resident of a specific country with the rest of the world.

It is a double entry system, which means it compromises of debit and credit.

In this we ‘Credit’ All Incomes and Gains.

‘Debit’ All Expenses and Loses.

In an ideal scenario, BoP should be zero, but it rarely happens.

Either a country has surplus BoP(favourable) or Deficient BoP(unfavourable).

Surplus BoP arises when exports are more than imports. Deficient BoP arises when imports are more than exports. In India’s case we mostly have a deficient BoP.

Components of BoP

BoP consists of two main components:

• Current Account
• Capital  Account

Current Account of BoP :

Current Account records the flow of goods and services between the countries during a given period of time. It consists of :

• Visible Items
• Invisible Items
• Income Receipts
• Unilateral Transfers

Visible Items:

It records the imports and exports of visible items which in most of the cases are goods. These items can be touched, seen and measured.

The import and export of visible items is often known as ‘Balance of Trade’. Balance of Trade= Export of Goods-Import of Goods

Invisible Items:

It means those items which are intangible i.e it can’t be seen or felt. Eg Shipping, Banking, Insurance etc are part of invisible items.

Income Receipts:

Income Receipts include Rent, Interest, Dividend, Wages etc received from or paid to the rest of the world.

Unilateral Transfers :

It means one-sided transfers. It can be in the forms of remittances, donations, gifts etc. Eg A person living in Germany sends money to his family in India.

Foreign Aid received from other countries are also a part on unilateral transfers.

Capital Transfers of Balance of Payment (BoP) :

It is the account which records change in assets and liabilities of normal resident with the rest of the world. It accounts for change in non financial assets, like borrowings from UN or from the other countries etc. It includes:

• Borrowings and lendings from and to the rest of the world.
• Investments to and from rest of the world.
• Change in foreign exchange reserves.

Borrowings and Lendings :

It includes commercial borrowings and external assistance, i.e  external borrowings from international institutions like World Bank etc. Borrowings and Lendings goes on the Debit side of the account.

Investments:

It includes I nvestments to and from the rest of the world. It includes Foreign Direct Investment and Portfolion Investments.  Investments by rest of the world includes Investments in Indian companies  shares, real estate and are recorded on the credit side. Investments by Indian companies in rest of the world is recorded on the debit side.

Change in Foreign Exchange Reserve :

It refers to the holding of Foreign Exchange with the Central Bank. The change in Foreign Reserves due to current demand or supply is recorded accordingly. When there is decrese in Foreign Reserve it is recorded on Credit side and when there is increase in Foreign Exchange it is recorded on Debit side.

Errors and Omissions

Since it is such a large account. It’s not always possible to record all the transcations in an accurate manner. So Errors and Omissions act in BoP as balancing items.

MCQs for Class 12

Cbse notes for class 12, leave a comment cancel reply.

• IAS Preparation
• UPSC Preparation Strategy
• Balance Payment Crisis 1991

Balance of Payment Crisis (1991), India

India faced the Balance of Payment crisis in 1991 due to huge macroeconomic imbalance. Balance of Payment (BoP) Crisis is also called currency crisis. It occurs when a nation is unable to pay for essential imports or service its external debt payments. This article throws light on the many causes behind the Balance of Payment Crisis India faced in 1991.

Aspirants would find this article very helpful while preparing for the IAS Exam .

Balance of Payment Crisis 1991 – UPSC Notes:- Download PDF Here

What were the Causes of the Balance of Payment Crisis 1991?

There was a huge Macroeconomic imbalance of high current account deficit and high fiscal deficit. The crisis did not develop overnight. It was caused by decades of imprudence. There was reliance on populist measures.  The causes of Balance of Payment Crisis are listed below.

• The Government Expenditure was more than the earnings. Hence the Fiscal Deficit was high. The Gross Fiscal deficit rose from 9 % of GDP in 1980-81 to 12.7 % of GDP in 1990-91.
• The Internal Debt of the Government rose due to the above reason. It rose from 35 % of GDP in 1985-86 to 53 % of GDP in 1990-91.
• In addition the country was importing more than exporting. Hence the Current Account Deficit was high. 
• The current account deficit was triggered by the rise in crude oil prices because of the Gulf War. Due to this, the Forex Reserves of India depleted massively. Despite substantial borrowings from the International Monetary Fund (IMF) earlier in the year.
• By June 1991, India had less than $ 1 billion forex reserves, just sufficient to meet import requirements for a period of 3 weeks.
• India did not have enough Forex reserves to conduct business with the world.
• India was on the verge of defaulting on its International Debt Obligations.  
• Investors pulled out their money.
• Short term credit dried up, as exporters were apprehensive that they would not be paid.
• There was a massive rise in inflation rates.

The above crisis was treated as Balance of Payment Crisis. 

The effects of the Balance of Payment Crisis are mentioned below.

• Imports were restricted.
• The price of fuels were raised.
• Bank rates were raised.
• Government had to cut its spending.
• India had to secure an emergency loan of $ 2.2 billion from the International Monetary Fund by pledging 67 tonnes of Gold as collateral security.
• In May 1991, India sent 20 tonnes of Gold to Union Bank of Switzerland, Zurich and in July, 47 tonnes of Gold was given to Bank of England to raise a total of $ 600 million.

What did Manmohan Singh do in 1991?

The Government of India led by PV Narasimha Rao, with Manmohan Singh as Finance Minister initiated a 4 pronged strategy to put the economy back on track.

Industrial Policy Reforms

• License Raj and Inspector Raj were removed.
• Industrial licensing was abolished.
• Measures were taken to ease domestic supply constraints.
• Measures were taken to spur investments.

Trade Policy Reforms

• To make exports competitive Rupee was devalued by 20%.
• Licensing controls and regulations on exports were eased.

Public Sector Reforms

• There was liberalisation of Foreign Direct Investment (FDI).
• Public Sector companies were given more operational freedom to scale up and make bigger contributions to the economy.

Fiscal Correction

• Subsidies for Exports were abolished.

Read more about the Economic Reforms in India – 1991 at the linked article.

Frequently Asked Questions related to Balance of Payment

What are the components of balance of payment.

The 3 components of Balance of Payment are Current Account, Financial Account, Capital Account.

• The current account records exports and imports in goods and services and transfer payments. These are a record of international transactions that do not create liabilities.
• Financial Account is the measurement of increase or decrease in international ownership of assets.
•  The capital account records all international purchases and sales of assets such as money, stocks, bonds, etc.

What is Balance of Payment Surplus?

What is the difference between balance of trade and balance of payments.

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Important Questions for Class 12 Economics Balance of Payments

Table of Contents

Foreign Exchange Rate and Balance of Payments Important Questions for class 12 economics Balance of payments

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Target Exam ---

1. Balance of Payments The Balance of Payment (BoP) of a country is a systematic record of all economic transactions between its residents and residents of foreign countries.

2. Classification of Economic Transactions in BoP (i) Visible items (physical goods) (ii) Invisible items (services) (iii) Capital transfers (capital receipts and payments) (iv) Uni-lateral transactions

3. Balance of Trade The difference between export and import of goods, i.e. only the visible items of economic transactions is termed as Balance of Trade. Balance of Trade = Export of Goods – Import of Goods Balance of Trade does not include the export and import of invisible items (services) or capital transfers.

4. Components of BoP Account (i)Current account (ii) Capital account (iii) Official international reserve account

5. Current Account of BoP Current account is that account of BoP, which records exports and imports of visible and invisible items and unilateral transfers.

6. Components of Current Account (i) Export and import of visible items (ii) Exports and imports of invisible items (iii) Unilateral transfer to and from rest of the world.

7. Capital Account of BoP It records capital transfer such as loans and investments between one country and the rest of the world, which causes a change in the assets or liability status of the residents of the domestic country or its government.

8. Components of Capital Account (i)Investment to and from rest of the world which includes FDI and FII. (ii) Borrowing and lendings to and from rest of the world. (iii) Foreign exchange reserves.

9. Official International Reserve Account Official international reserve account includes the foreign exchange reserves, gold reserves and Special Depository Receipts (SDRs).

10. Autonomous Items in BoP Autonomous items, also termed as ‘above the line items’, are those items, these transactions are done by consideration of profit (economic motive). Hence, these transactions have nothing to do with the state of BoP.

11. Accommodating Items of BoP Accommodating items, also termed as ‘below the line items’, are those items of BoP that are not determined by considerations of profit but to restore identity of BoP i.e. to balance the BoP.

12. Balance of Payments Identity Current Account + Capital Account + Official Reserve = 0 Current Account + Capital Account = – (Official Reserve)

13. BoP Surplus When the receipts of the country on account of autonomous transactions exceed the payments of a country on account of autonomous transactions, this difference is termed as BoP surplus. BoP Surplus = R > P, where R = Receipts of the country, P = Payment of the country.

14. BoP Deficit When the payments of a country on account of autonomous transactions exceed the receipts of a country on account of autonomous transactions, this difference is termed as BoP deficit. BoP Deficit = Receipts on account of autonomous transactions < Payments on account of autonomous transactions or Bop Deficit = R<P Where, R = Receipts P = Payments . Disequlibrium in BoP BoP is said to be in state of disequilibrium when there is either surplus or deficit in BoP. Causes of Disequilibrium in BoP (i) Economic factors (ii) Social factors (iii) Political factors

Important Questions for class 12 economics Balance of payments:

1 Mark Questions

1. What is the meaning of deficit in Balance of Payments? (Delhi 2014,2010) or How is Balance of Payment ‘deficit’ measured? Explain(Foreign 2014) Ans. When the payments of a country on account of autonomous transactions exceed the receipts of the country on account of autonomous transactions, this difference is termed as BoP deficit. Deficit in BoP = Receipts on account of autonomous transactions < Payments on account of autonomous transactions Suppose, the receipts of the domestic country is r 200 crore. Where as payments are r 220 crore. Then BoP deficit will be = 220 – 200 crore = Rs. 20 crore

2. Distinguish between current account and capital account of the Balance of Payments account on the basis of its components.(Compartment 2014) Ans. Current account of BoP measures the transaction of export and import natures which do not affects the assets and liabilities positions of a country whereas, capital of BoP includes of Investment and borrowing nature which has direct import on assets and liabilities of a country. Current account includes export and imports of visible and invisible items and unilateral transactions to and from abroad, while capital account includes: (a)Investment to and from abroad, (b) Borrowings and landings to and from abroad (c) Official reserves which contains foreign currency, SDRs and gold.

3. Give meaning of Balance of Trade (Delhi 2014) or What is trade balance? (All India 2010,2008) Ans. The difference between export and import of goods, i.e. only the visible items of economic transactions is termed as Balance of Trade.

4. Name two invisible items of the Balance of Payments account. (Delhi 2010c) Ans. Two invisibles of the Balance of Payments account are: (i) Banking services (ii) Insurance services

5. What does a deficit in Balance of Trade indicate? (All India 2009) Ans. A deficit in Balance of Trade indicates that the value of exports of goods are less than the imports of goods for a country. 3 Mark Questions

6. Distinguish between autonomous and accommodating transactions of Balance of Payments account. (All India 2014,2010; Delhi 2010c) Ans. Autonomous items, also termed as ‘above the line items’, are those items, which are related to transactions which are determined by considerations of profit (economic motive) and hence, was no concern with the state of BoP. Autonomous transactions are present in both current and capital account of BoP, While accommodating transactions are present only in capital account of BoP. Accommodating items, also termed as ‘below the line items’, are those items of BoP that are not determined by considerations of profit but to restore identity of BoP. The difference between autonomous and accommodating transacting is mat while deficit or surplus in BoP due to autonomous items, the accommodating items, are meant to restore the BoP identity.

7. Distinguish between Balance of Trade and balance on current account. (Delhi 2013) or Distinguish between Balance of Trade and balance on current account of Balance of Payments. (All India 2013) Ans. Difference between Balance of Trade and balance on current account

8. State the components of capital account of Balance of Payments. (Delhi 2011) Ans. Components of capital account of Balance of Payments: (i) Investments It includes investments to and from abroad in the form of FDI and Fll. Investment from abroad is a ‘credit’ item, whereas investment to abroad is a ‘debit’ item. (ii) Borrowing and lending It includes the borrowings by residents from the residents of abroad (credit item), and sending to the resident of foreign country (debit item). (iii) Foreign exchange It includes the reserve of foreign currency gold and Special Drawing Rights (SDRs) with the domestic country.

9. What does a Balance of Payments account show? Name the two parts of the Balance of Payments account. (Delhi 2011) Ans. The Balance of Payment (BoP) of a country is a systematic record of all economic transactions between its residents and residents of foreign countries. It summarises the exports and imports and other international transaction of a country with other countries. Two parts of Balance of Payments account are as follows: (i) Current account (ii) Capital account

10. Which transactions determine the Balance of Trade? When is Balance of Trade in surplus? (All India 2011) Ans. The transactions involving export and import of goods, i.e. only the visible items of economic transactions, determine the Balance of Trade. Balance of Trade is in surplus, when the value of export of goods are more than the value of import of goods.

11. List the transactions of current account of the Balance of Payments. (All India 2011; Delhi 2008C)

Ans. The transactions included in the current account of the Balance of Payments are: (i) Export and import of visible items (ii) Export and import of services (invisible items) (iii) Unilateral transfers

12. Explain the concept of surplus in the Balance of Payments account. (All India 2010) Ans. Balance of surplus When the receipts of the country on account of autonomous transactions exceed the payments of a country on account of autonomous transactions, this difference is termed as BoP surplus. BoP Surplus = R>P, where R = Receipts of the country, P = Payment of the country, e.g., if the receipts of the country is Rs. 200 crore and the payments are Rs. 190 crore, then BoP surplus will be (200 -190) = Rs. 10 crore. 4 Mark Questions

13. What is Balance of Payments account? Where are borrowings from abroad recorded in it and why? (Delhi 2011,2009c) Ans. Balance of Payment The Balance of Payment (BoP) of a country is a systematic record of all economic transactions between its residents and residents of foreign countries. Balance of Payments account are classified into current account and capital account. Borrowing from abroad are recorded in the capital account (credit side) of Balance of Payments as it is a foreign liability on the country and it is to be repaid with interest.

14. What is Balance of Payments? Give meanings of trade balance and current account balance. (Delhi 2011; All India 2011,2009) Ans. Balance of Payment Balance of Payment The Balance of Payment (BoP) of a country is a systematic record of all economic transactions between its residents and residents of foreign countries. Balance of Payments account are classified into current account and capital account. Borrowing from abroad are recorded in the capital account (credit side) of Balance of Payments as it is a foreign liability on the country and it is to be repaid with interest.

Trade Balance The difference between export and import of goods, i.e. only the visible items of economic transactions is termed as Balance of Trade. Balance of Trade = Export Goods – Import of Goods Current account balance Current account is that account of BoP, which records exports and imports of visible and invisible items and unilateral transfers.

15. Giving reasons, state whether the following statements are true or false (i) Current account of Balance of Payment account records only export and import of goods and services. (ii) Foreign investments are recorded in the capital account of Balance of Payments. (All India 2011) Ans. (i) False, as current account of Balance of Payments account also records unilateral transfers. (ii) True, as all kind of foreign investments (foreign direct investments and portfolio investments) are included in the capital account of Balance of Payments as they affect the assets positions of the country.

16. Giving reasons, state whether the following statements are true or false. (i) Excess of foreign exchange receipts over foreign exchange payments on account of accommodating transactions equals deficit in the Balance of Payments. (ii) Export and import of machines are recorded in capital account of Balance of Payments account. (Delhi 2011C) Ans. (i) False, as accommodating transactions removes both surplus and deficit of Balance of Payments account. (ii) False, export and import of machine, it will be recorded in current account as it is a producer good exported.

17. State whether the following statements are true or false. Give reasons for your answer. (i) Difference between value of exports and imports of goods and services are called Balance of Trade. (ii) External assistance is not recorded in Balance of Payments account. (Delhi 201 1C) Ans. (i) False, because Balance of Trade only records the export and import of visible items, i.e. goods. (ii) False, because external assistance are included in the current account of Balance of Payments as unilateral receipts..

19. List the items of the current account of Balance of Payments account. Also define Balance of Trade. (Delhi 2009,2008) Ans. Components of current account are as follows: (i) Export and import of goods (visible items). (ii) Export and import of services (invisible items). (iii) Unilateral transfers to and from abroad. Balance of Trade Balance of Payment The Balance of Payment (BoP) of a country is a systematic record of all economic transactions between its residents and residents of foreign countries. Balance of Payments account are classified into current account and capital account. Borrowing from abroad are recorded in the capital account (credit side) of Balance of Payments as it is a foreign liability on the country and it is to be repaid with interest. Trade Balance The difference between export and import of goods, i.e. only the visible items of economic transactions is termed as Balance of Trade. Balance of Trade = Export Goods – Import of Goods Current account balance Current account is that account of BoP, which records exports and imports of visible and invisible items and unilateral transfers.

19. Distinguish between Balance of Trade account and current account balance of BoP account.(All India 2009,2008) Ans. Difference between Balance of Trade and current account balance of BoP account

20. Distinguish between current account and capital account of Balance of Payments. (All India 2008) Ans. Current account is that account of BoP, which records exports and imports of visible and invisible items and unilateral transfers. Current account shows the trade position of the country. Whereas capital account shows the assets and liabilities position of the country. It records capital transfer such as loans and investments between one country and the rest of the world, which causes a change in the assets or liability status of the residents of a country or its government.

6 Mark Question

21. Explain the distinction between autonomous and accommodating transactions in Balance of Payments. Also explain the concept of Balance of Payments deficit in this context. (Delhi 2012) Ans. Autonomous items, also termed as ‘above the line items’, are those items, which are related to transactions which are determined by considerations of profit (economic motive). Autonomous transactions are that transaction between the residents of two countries which take place due to the considerations of profit. Autonomous items are not conditioned by the BoP status of the country, i.e. these are independent. Autonomous transactions are not done to establish identity of BoP. i.e. current account and capital account. Accommodating items, also termed as ‘below the line items’, are those items of BoP that are not determined by considerations of profit but to restore identity of BoP. These are undertaken to maintain balance in the BoP account. These transactions correct the disequilibrium in autonomous items of BoP account. Accommodating transactions are also known as ‘below the line items’ and include foreign exchange reserve and borrowings to meet BoP deficit. BoP Deficit When the payments of a country on account of autonomous transactions exceed the receipts of the country on account of autonomous transactions, this difference is termed as BoP deficit. Deficit in BoP = Receipts on account of autonomous transactions < Payments on account of autonomous transactions Suppose, the receipts of the domestic country is r 200 crore. Where as payments are r 220 crore. Then BoP deficit will be = 220 – 200 crore = Rs. 20 crore

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Important MCQs of Balance of Payments chapter Class 12

• September 30, 2021
• MCQS , Balance of Payments

Looking for Multiple choice questions (MCQs) of Balance of Payments chapter of Macroeconomics class 12

I have a collection of 100 Mulitple choice questions from the BoP chapter with answers with valid reasons.

Multiple choice question of Balance of Payments chapter of class 12

Let’s practice.

1. Balance of Payments of a country is a statement that records:-

a) Sources of Foreign Exchange b) Uses of Foreign Exchange c) Both a) and b) d) None of the above

Ans:- c) Explanation:- Balance of Payments is an accounting statement that records the foreign exchange transactions of a country with the rest of the world

2. The categories of transactions that are included in current account of Balance of Payments are:-

a) Exports and imports of goods b) (a) + Exports and Imports of services c) (b) + Income from and to abroad d) (c) + Transfers from and to abroad

Ans – d) Explanation:- Current Account of BoP records 1) export and imports of goods, services, income from and to abroad, unilateral transfers from and to abroad

3. Balance of Trade equals:-

a) Exports less imports b) Exports of goods less imports of goods c) Exports of services less imports of services d) None of the above

Ans – b) Explanation:- Balance of Trade is the part of Current account of BoP. It is the differnce between Export and Import of physical goods

4. The categories of transactions that are included in the capital account of the Balance of Payments are:-

a) Investments from and to abroad b) Borrowings and lendings from and to abroad c) Changes in foreign exchange reserves d) All the above

Ans – d) Explanation:- Capital account of BoP records the financial transactions of a country in foreign exchange with the rest of the world that changes assets and liabilities status of a country. It includes three transactions. 1) Investments from and to abroad, 2) Borrowings and lendings from and to abroad, 3) Changes in foreign exchange reserves.

5. The measurement of Balance of Payments deficit is based on:-

a) Autonomous transactions b) Accommodating transactions c) Current account transactions d) Capital account transactions

Ans – a) Explanation:- Autonomous transactions are done for profit motive. Such transactions are the main cause of deficit in BoP.

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6. Choose the correct statement from given below:

a) Balance of trade records the exports and imports of invisible items. b) A surplus in BoT can rectify the deficit in Bop. c) Accommodating items are only recorded in the capital account of the BOP. d) Import of machinery will be recorded in the capital account of BoP.

Ans – c) Explanation:- Accommodating transactionsa are only recorded in Capital Account. Main motive of such transactions are to settle the surplus and deficit of BoP due to autonomous transactions.

7.Choose the correct statement from given below.

a) Balance of Trade is a component of the capital account of Balance of Payments. b) Floating exchange rate is used to stabilize the price of foreign currency. c) Increase in the supply of foreign exchange results in a fall in its price d) Rise in the exchange rate leads to the revaluation of the currency.

Ans – c) Explanation:- Higher is the supply of foreign exchange, lesser is the foreign exchange rate.

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8. Current accounts records all payments to rest of the world as_________and all receipts from rest of the world as______

a) Credit, Debit b) Debit, Credit c) Debit, Debit d) Credit, Credit

Ans – b) Explanation:- Foreign exchange inflow is recorded on the credit side. The outflow of foreign exchange is recorded at the debit side of the BoP.

9. Balance on invisible trade is equal to

a) Export of goods – Import of goods b) Export of services – Import of services c) Import of goods – Export of goods d) Import of services – Export of goods

Ans – b) Explanation:- Invisible trade means trade of intangible goods like services

10. If value of visible exports is greater than the value of invisible imports, the balance relates to

a) Current account Bop b) Trade Deficit c) Capital account BoP d) Can’t be determined

Ans – d) Explanation:- Only visible exports are compared with visible imports and invisible exports are compared to invisible imports.

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11. Balance of trade is a__________concept as compared to balance of payments.

a) narrower b) broader c) similar d) None of the above

Ans – a) Explanation:- Balance of trade is the difference between exports and imports of visible goods. It is just a part of current account

12. If trade deficit is ₹ 1500 crores and import of goods are ₹ 3500 crores, value of export of goods will be ₹ 2000 crores?

a) True b) False c) Partially true d) Can’t be predicted

Ans – a) Explanation:- Trade deficit = Imports of goods – Exports of goods

13. Trade deficit refers to the situation where

a) Export of goods is more than the import of goods b) export of goods is less than the import of goods c) export of services is more than the import of services d) export of services is less than the import of services

Ans – b) Explanation:- When exports of goods is less than the imports of goods. it is the situation of Trade Deficit.

14. Uni-lateral transfers are included in

a) current account Bop b) capital account Bop c) Both a) and b) d) None of these

Ans – a) Explanation:- Unilateral transfers are the part of invisible sections of Current account of BoP.

15. An Indian real estate company received rent from google in New York. This transaction would be recorded on____________side of_____________account.

a) credit, current b) debit, capital c) credit, capital d) debit, current

Ans – a) Explanation:- It is an income out of Investment. It is recorded as income receipts at credit side under invisible trade in current account

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16. A company located in India receives a loan from a company located abroad. How is this transaction recorded in India’s Balance of Payments Account?

a) Credit side of current account b) Debit side of current account c) Credit side of Capital account d) Debit side of Capital account

Ans – c) Explanation:- It is financial transaction and increases the liabilities

17. An Indian Company located in India invests in a company located abroad. This transaction is entered in India’s Balance of Payments Account on:-

Ans – d) Explanation:- It is financial transaction and increases the assets of a country in rest of the world and results in outflow of foreign exchange

18. Foreign Exchange Transactions which are independent of other transactions in the Balance of Payments Account are called:

a) Current transactions b) Capital transactions c) Autonomous transactions d) Accommodating transactions

Ans – c) Explanation:- Autonomous transactions are the transactions that are not influenced by other foreign exchange transactions. For example an Indian company wants to invest in USA rest state market.

19. Foreign Exchange Transactions dependent on other Foreign Exchange Transactions are called:

a) Current account transactions b) Capital account transactions c) Autonomous transactions d) Accommodating transactions

Ans – d) Explanation:- Accommodating transactions are those that are undertaken as a consequence of the autonomous transactions

20. Which of the following statements is not true?

a) Borrowings from the Asia Development Bank by the government is an accommodating transaction. b) Loans given to Sri Lanka by the government are an accommodating transaction. c) Buying of machinery from Japan is an accommodating transaction d) Borrowing from the public is an accommodating transaction.

Ans – c) Explanation:- Autonomous items refers to those Balance of Payment (BoP0 transactions which are undertaken for profit.

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21. Who out of the following is included in “Residents” in BoP transactions?

a) Firms b) Foreign military personnel c) Government agencies d) Individuals

Ans – a),c),d) Explanation:- Here residents means normal residents who has economic interest in the country

22. An accounting statement that provides a systematic record of all the economic transactions, between residents of a country and the rest of the world is________

a) Balance of Payments b) Balance of Trade c) Government Budget d) None of these

Ans – a) Explanation:- BoP is the accounting statement that records the foreign exchange transactions of a country with the rest of the world.

23. Balance of Payments is a___________Concept.

a) Stock b) Flow c) Both a) and b) d) Neither a) nor b)

Ans – b) Explanation:- BoP is prepared for a fiscal (accounting) year for 12 months.

24. Inflow of foreign exchange is recorded on the_________side.

a) Credit b) Debit c) Either a) or b) d) Neither a) nor b)

Ans – a),c),d) Explanation:- Credit side of BoP records the inflow of foreign exchagne.

25. When receipts of foreign exchange are more than payments of foreign exchange, BOP is:

a) Balanced b) Surplus c) Deficit d) None of these

Ans – b),c),d) Explanation:- When receipts of foreign exchange are more than payments. BoP results in surplus.

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26. Unilateral Transfers are also known as:

a) Bilateral Transfers b) One-way Transfers c) Unrequited Transfers d) Neither a) nor b)

Ans – b) Explanation:- Unilateral transfers are one way transactions. where one person does not receive anyting in return from another person.

27. Balance on ‘Balance of Trade’ can be:

a) Surplus b) Balanced c) Deficit d) Either a) or b) or c)

Ans – d) Explanation:- Balance of trade is the difference between exports of goods and imports of goods. exports can be more, less and equal to imports of goods

28. Which of the following is a component of the Balance of Payment?

a) Current Account b) Capital Account c) Nominal Account d) Real Account

Ans – a),b) Explanation:-

29. Export and import of goods is also known as:

a) Indivisible Trade b) Visible Trade c) One-sided Transactions d) Unrequited transfers

Ans – b) Explanation:-

30. __________refers to the difference between exports and imports of visible items.

a) Balance of Payments b) Balance of Trade c) Both a) and b) d) Neither a) nor b)

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31. Autonomous transactions take place on

a) Real Account b) Capital Account c) Current Account d) None of these

Ans – b), c) Explanation:-

32. ____________transactions are undertaken to cover the deficit or surplus in autonomous transactions.

a) current account b) current account c) Accommodating d) None of these

Ans – c) Explanation:-

33. ________is the difference between value of goods sold to the rest of the world and value of goods imported from rest of the world.

a) Balance of Payment b) Balance of trade c) Balance of current account d) Balance of capital account

34. Gifts and remittances to abroad are recorded on the:

a) Credit side of current Account b) Debit side of Capital Account c) Debit side of current Account d) Credi side of Capital Account

35. Export of the Machinery recorded on the:

a) Debit side of Current Account b) Credit side of Current Account c) Credit side of Capital Account d) Debit side of capital Account

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36. Surplus in BoP arises when

a) Autonomous Payments > Autonomous Receipts b) Accommodating Receipts > Accommodating Payments c) Accommodating Payments > Accommodating Receipts d) Autonomous Receipts > Autonomous Payments

Ans – d) Explanation:-

37. Balance of Trade is also known as:

a) Balance of Visible Trade b) Balance of Payments c) Trade Balance d) None of these

Ans – a) Explanation:-

38. Import of Machinery is recorded in the_________Account and ‘Borrowings from abroad’ is recorded in the______Account.

a) Current, Capital b) Capital, Current c) Capital, Capital d) Current, Current

39. Foreign Exchange transactions are dependent on other foreign exchange transactions are called:

a) Current Account Transactions b) Capital Account Transactions c) Autonomous Transactions d) Accommodating Transaction

40. Foreign Exchange transactions which are independent of other transactions in the Balance of Payments Account are called:

a) Current Transactions b) Capital Transactions c) Autonomous Transactions d) Accommodating Transactions

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41. A company located in India receives a loan from a company located abroad. How is this transaction recorded in India’s Balance of Payments account?

a) Credit side of current account b) Debit side of current account c) Credit side of Capital account d) Debit side of capital account

42. Balance of Payments ‘deficit’ is the excess of:

a) Current account payments over current account receipts b) Capital account payments over capital receipts c) Autonomous payments over autonomous receipts d) Accommodating payments over accomodating receipts

43. “Unilateral Transfers’ are also known as:

a) One-way transfers b) Bilateral transfers c) Both a) and b) d) Neither a) nor b)

44. If Japanese import more goods from India:

a) India’s BoP will improve b) Japan’s BoP will deteriorate c) India’s BoP will deteriorate d) Both a) and b)

45. Autonomous transactions take place on

a) Capital Account b) Current Account c) Both a) and b) d) None of these

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46. Which one of the following is not recorded in the capital account of BoP?

a) Equity Capital b) Gifts, Remittances, and grants c) Government aid d) Offshore funds

47. Measures to improve the adverse balance of payment include:

a) Currency devaluation b) Import substitution c) Exchange control d) All of the above

48. Identify the correct statement.

a) Balance of Trade is the difference between export and import of goods and services b) Repayment of the loan is an item of the current account. c) Increase in supply of foreign exchange appreciates the domestic currency d) Depreciation of currency is used under a fixed exchange rate system.

49. Identify the correct statement.

a) NRI deposits are not the items of capital account of BoP. b) BoP is always balanced when accomodating items are reflected as a part of capital account c) BoT includes services also d) Autonomous items help in balancing the BoP

50. Decrease in foreign exchange reserve will be recorded on the:

a) Credit side of BoP b) Debit side of BoP c) Not added in BoP d) Any side

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51. Borrowings from IMF is a part of:

a) Current Account b) Capital Account c) Both a) and b) d) None of these

52. Surplus in Balance of Payment (BoP) arises when:

a) Autonomous payments > Autonomous receipts b) Accommodating receipts > Accommodating payments c) Accommodating payments > Accommodating receipts d) Autonomous receipts > Autonomous payments

53. Export of Machinery is recorded on the:

a) debit side of capital account b) credit side of current account c) credit side of capital account d) debit side of capital account

54. Which of the following items raises the supply of foreign exchange?

a) Import of goods from china b) Indian students going to USA for MBA c) Donation of ₹50 million received from Microsoft d) Purchase of land in England

55. Which one is the invisible item of Balance of Payment?

a) Banking b) Shipping c) Communication d) All of these

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56. Which items are included in the Balance of Payments?

a) Visible Items b) Invisible Items c) Capital Transfers d) All the above

57. When there is unfavourable balance of trade?

a) X>M b) X = M c) X<M d) None of these

58. Trade of visible items between the countries is known as________

a) Balance of Payment b) Blanance of Trade c) Deficit Balance d) All of these

59. ‘Make in India’ will increase the balance of:

a) Debit side of BoP b) Credit side of BoP c) Both of these d) None of these

60. Investment abrod in case of surplus BoP is an example of:

a) Autonomous transaction b) Accommodating transaction c) Both a) and b) d) Neither a) nor b)

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61. Export of capital goods is an:

a) Autonomous item b) Accommodating Item c) Both autonomous and accommodating d) Neither autonomous nor accommodating

62. Which of the following statements is false?

a) Current account of BoP records export and import of goods and services only. b) Foreign investments are also part of BoT c) Import of Machinery is the component of capital account of BoP d) All of the above

63. Borrowing from IMF is a part of:

64. which of the following is a component of capital account of balance of payment account.

a) Foreign investment b) Foreign loans c) Monetary movements d) All of these

65. Unilateral are a part of:

a) Capital Account b) Current Account c) Balance of Trade Account d) Balance of Payment Account and Current Account

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66. A company located in India receives a loan from a company located abroad. How is this transaction recorded in India’s baance of payments account?

a) Credit side of current account b) Debit side of current account c) Credit side of capital account d) Debit side of capital account

67. Foreign exchange transactions which are independent of other transactions in the Balance of Payments accounts are called:

68. foreign exchange transactions dependent on other foreign exchange transactions are called:.

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bhut low key question hai give me some tough ones!!!!!!!!

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