Macro

Balance of Payments

Easy

Read the passage carefully and answer the question based on the passage:

Balance of Payment is defined as the statement of accounts of a country's inflow and outflows of foreign exchange during a specified period of time. It consists of two main accounts, i.e. Current Account and Capital Account. A deficit or surplus in the current account is determined by the country's exports and imports, whereas the capital account records transactions involving non-financial and financial assets.

India's BOP typically reflects its trade deficit, services surplus and capital inflows. To finance the deficit in its overall BOP, few transactions take place in its official reserves of foreign exchange.

How can a country reduce the BOP deficit?

Promoting exports and attracting investment.

Increasing imports.

Stopping trade with other countries.

Increasing domestic borrowings.

✅ Correct Option: 1

Option 1 -> Promoting exports increases foreign exchange inflows and attracting investment brings in foreign capital, both helping reduce BOP deficit.

Option 2 -> Increasing imports leads to more foreign exchange outflow, worsening the BOP deficit rather than reducing it.

Option 3 -> Stopping trade is impractical and would severely harm the economy without addressing the fundamental BOP issue.

Option 4 -> Domestic borrowings do not bring in foreign exchange and therefore do not directly affect or reduce BOP deficit.

Hence, Option 1: Promoting exports and attracting investment -> A BOP deficit occurs when a country's total imports and outflows exceed its exports and inflows. To reduce this deficit, a country needs to increase its foreign exchange earnings. Promoting exports directly increases revenue from abroad (current account credit), while attracting foreign investment (FDI, FPI, foreign loans) brings in foreign capital (financial/capital account credit). Both measures improve the overall BOP position by increasing credits relative to debits, thereby reducing or eliminating the deficit. -> correct

Question 46

What does capital account of BOP record?

Question 47

What is the role of official reserve account?

Question 48

What could persistent current account deficit lead to?

Question 49

What does the BOP record?

How can a country reduce the BOP deficit?

Solution

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