Balance of Payment

Question 1

What is Balance of Payment?

Answer 1

It is the inflow and the outflow of foreign currency from a country through exports, imports, assets, investments etc.

Question 2

What is current account?

Answer 2

It includes

1) Balance of Trade ( Exports- Imports)
2) Trading of services ( Invisible Trade)
3) Incomes earned ( for eg. Fiverr, free lancing)
4) Foreign Remmitances

Question 3

What is Capital Account?

Answer 3

It includes buying fixed and hard assets in another country.

1) buying land
2) Government buying embassy
3) Migrant shifting all his assets abroad

Question 4

What is Financial Account?

Answer 4

Financial account includes.

1) Direct Investment ( Nirav Modi, opening your business abroad)
2) Portfolio Investment ( getting shares)
3) Foreign Reserves
4) Hot Money through Interest.

Question 5

Disadvantages of current account deficit?

Answer 5

1) May reduce AD
2) May Cause deflation and reduce GDP
3) May Increase Debt Burden of a country ( when government buy foreign assets or people buy foreign goods with loans)
4) Higher Unemployment
5) Worse terms of trade
6) negative balance of trade

Question 6

Advantages of Current Account Deficit

Answer 6

1) Higher SOL due to imports

2) Urge to improve domestic goods may increase due to competition

Question 7

Disadvantages of Current Account Surplus

Answer 7

1) All goods exported, none left for domestic market.
2) Lower Standard of living due to higher demand of goods by foreign countries and higher prices
3) Increases AD
4) causes inflation

Question 8

Advantages of Current Account Surplus

Answer 8

1) Export revenue.
2) higher foreign reserves, remittances and spending of dollars in domestic market.
3) May cause creeping inflation
4) Higher employment
5) higher SOL in the long run