<<–2/”>a >a href=”https://exam.pscnotes.com/balance-of-payments/”>Balance of Payments is a systematic record of all economic transactions undertaken by residents of one country i.e. households, firms and the government with their counterparts in rest of the world. It consists of:
1. Current Account,
2. Capital Account and
3. Reserve Account.
The Current Account covers transactions in goods and Services and transfers during the current period. Current Account = Value of Exports- Value of Imports + Net Transfers from Abroad = Net Exports + Net Transfers from Abroad
The current account records exports and imports in goods and services and Transfer Payments. When exports exceed imports, there is a trade surplus and when imports exceed exports there is a Trade Deficit.
Directorate General of Foreign Trade (DGFT) organisation is an attached office of the Ministry of Commerce and Industry and is headed by Director General of Foreign Trade. Right from its inception till 1991, when Liberalization-2/”>Liberalization in the economic policies of the Government took place, this organization has been essentially involved in the regulation and promotion of foreign trade through regulation. Keeping in line with liberalization and Globalization/”>Globalization-3/”>Globalization and the overall objective of increasing of exports, DGFT has since been assigned the role of “facilitator”. The shift was from Prohibition and control of imports/exports to promotion and facilitation of exports/imports, keeping in view the interests of the country.
Foreign Trade Policy of India has always focused on substantially increasing the country’s share of global merchandise trade. Accordingly the Government of India has been taking various steps towards boosting its trade with the rest of the world by adopting policies and procedures which would help to increase and facilitate both exports and imports with the other countries of the world.
India’s exports declined by 1.3 per cent and 15.5 per cent in 2014-15 and 2015-16 respectively. The trend of negative Growth was reversed somewhat during 2016-17 (April-December), with exports registering a growth of 0.7 per cent to US$ 198.8 billion from US$ 197.3 billion in 2015-16 (April-December). During 2016-17 (AprilDecember) Petroleum, oil and lubricants (POL) exports constituting 11.1 per cent of total exports.
India’s exports to Europe, Africa, America, Asia and CIS and Baltics declined in 2015-16. However, India’s exports to Europe, America and Asia increased by 2.6 per cent, 2.4 per cent and 1.1 per cent respectively in 2016-17 , while exports to Africa declined by 13.5 per cent. USA followed by UAE and Hong Kong were the top export destinations.
Value of imports declined from US$ 448 billion in 2014-15 to US$ 381 billion in 2015-16, mainly on account of decline in crude oil prices.Top three import destinations of India were China followed by UAE and USA in 2016-17.
India’s trade deficit declined by 13.8 per cent (vis-à-vis 2014- 15) to US$ 118.7 billion. Furthermore, it declined by 23.5 per cent to US$ 76.5 billion in 2016-17 (April-December) as compared to US$ 100.1 billion in the corresponding period of previous year.
The exchange rate policy is guided by the broad principle of careful monitoring and management of exchange rates with flexibility, while allowing the underlying demand and supply conditions to determine exchange rate movements over a period in an orderly manner. Subject to this predominant objective, RBI intervention in the Foreign Exchange market is guided by the objectives of reducing excess volatility, preventing the emergence of destabilizing speculative activities, maintaining adequate level of reserves, and developing an orderly Foreign exchange market.
In modern Monetary Policy, a Devaluation is an official lowering of the value of a country’s currency within a Fixed Exchange Rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency or currency basket. In contrast, a depreciation is a decrease in a currency’s value (relative to other major currency benchmarks) due to market forces under a Floating Exchange rate, not government or central bank policy actions.
India has been experiencing trade deficit for more than a couple of decades. The value of Indian rupee has been fluctuating and devaluation could not bring sufficient impact to the export sector. This is because the Indian economy is heavily dependent upon imported energy and industrial goods.,
The balance of payments is a statement of all the economic transactions between a country and the rest of the world over a period of time, usually a year. It is divided into three main accounts: the current account, the capital account, and the financial account.
The current account records all the flows of goods, services, income, and current transfers between a country and the rest of the world. The capital account records all the flows of capital between a country and the rest of the world, including both long-term and short-term capital. The financial account records all the flows of financial assets between a country and the rest of the world, including both direct Investment and portfolio investment.
The balance of payments is always in balance, but it can be in surplus or deficit. A surplus occurs when the value of a country’s exports is greater than the value of its imports. A deficit occurs when the value of a country’s imports is greater than the value of its exports.
Devaluation is a decrease in the value of a country’s currency relative to other currencies. Depreciation is a decrease in the value of a currency relative to a basket of currencies. Revaluation is an increase in the value of a currency relative to other currencies.
The exchange rate is the price of one currency in terms of another. The exchange rate regime is the system that a country uses to determine the value of its currency. There are three main exchange rate regimes: fixed exchange rate, floating exchange rate, and Managed floating exchange rate.
A fixed exchange rate is a system in which the value of a currency is pegged to the value of another currency or a basket of currencies. A floating exchange rate is a system in which the value of a currency is determined by market forces. A managed floating exchange rate is a system in which the government intervenes in the foreign exchange market to influence the value of its currency.
Currency intervention is the buying or selling of a country’s currency by its government in order to influence the value of its currency.
The Balance of Trade is the difference between the value of a country’s exports and the value of its imports. A trade surplus occurs when the value of a country’s exports is greater than the value of its imports. A trade deficit occurs when the value of a country’s imports is greater than the value of its exports.
The terms of trade are the ratio of the prices of a country’s exports to the prices of its imports. A deterioration in the terms of trade means that a country has to give up more of its exports to get the same amount of imports.
An international reserve is a country’s stock of foreign exchange and other assets that can be used to settle international transactions. The International Monetary Fund (IMF) is an international organization that provides financial assistance to countries in economic difficulty. The World Bank is an international organization that provides financial assistance to developing countries. The World Trade Organization (WTO) is an international organization that promotes trade between countries.
Devaluation can be used to improve a country’s balance of trade. When a country’s currency is devalued, its exports become cheaper for foreign buyers and its imports become more expensive for domestic buyers. This can lead to an increase in exports and a decrease in imports, which can improve the balance of trade.
However, devaluation can also have negative effects. It can lead to Inflation, as the prices of imported goods increase. It can also lead to a loss of confidence in the currency, as investors may believe that the government will devalue the currency again in the future.
Devaluation should only be used as a last resort, when other measures have failed to improve the balance of trade. It is important to carefully consider the potential costs and benefits of devaluation before taking this step.
What is a balance of payments?
A balance of payments is a statement of all economic transactions between a country and the rest of the world during a specific period of time, usually a year. It records all payments made to and from the country for goods, services, income, current transfers, and capital transfers.
What are the main components of a balance of payments?
The main components of a balance of payments are the current account, the capital account, and the financial account. The current account records payments for goods, services, income, and current transfers. The capital account records payments for capital transfers and changes in ownership of assets. The financial account records payments for financial assets and liabilities.
What is a balance of trade?
A balance of trade is the difference between a country’s exports and imports of goods and services. A positive balance of trade means that the country is exporting more goods and services than it is importing. A negative balance of trade means that the country is importing more goods and services than it is exporting.
What is a balance of payments deficit?
A balance of payments deficit is when a country’s total payments to the rest of the world are greater than its total receipts from the rest of the world. This can happen for a number of reasons, such as a country importing more goods and services than it exports, or a country’s citizens investing more Money abroad than foreign investors are investing in the country.
What is a balance of payments surplus?
A balance of payments surplus is when a country’s total payments to the rest of the world are less than its total receipts from the rest of the world. This can happen for a number of reasons, such as a country exporting more goods and services than it imports, or a country’s citizens investing more money abroad than foreign investors are investing in the country.
What is devaluation?
Devaluation is a decrease in the value of a country’s currency relative to other currencies. This can happen for a number of reasons, such as a country’s central bank lowering the value of its currency, or a country’s government printing too much money.
What are the effects of devaluation?
Devaluation can have a number of effects on a country’s economy. It can make the country’s exports more competitive in international markets, which can lead to increased exports and economic growth. However, devaluation can also make the country’s imports more expensive, which can lead to increased inflation.
What are the benefits of devaluation?
The benefits of devaluation include:
- Increased exports: When a country’s currency is devalued, its exports become more competitive in international markets. This can lead to increased exports and economic growth.
- Reduced imports: When a country’s currency is devalued, its imports become more expensive. This can lead to reduced imports and a decrease in the trade deficit.
- Increased foreign investment: When a country’s currency is devalued, it becomes more attractive for foreign investors. This can lead to increased foreign investment and economic growth.
What are the risks of devaluation?
The risks of devaluation include:
- Increased inflation: When a country’s currency is devalued, the prices of imported goods and services tend to increase. This can lead to increased inflation.
- Reduced economic growth: If devaluation is not accompanied by other Economic Reforms, it can lead to reduced economic growth.
- Increased social unrest: If devaluation leads to increased inflation and reduced economic growth, it can lead to social unrest.
What are the alternatives to devaluation?
The alternatives to devaluation include:
- Monetary policy: The central bank can use monetary policy to increase interest rates, which can make the currency more attractive to investors.
- Fiscal Policy: The government can use fiscal policy to increase spending or reduce taxes, which can stimulate the economy and increase demand for the currency.
- Structural reforms: The government can implement structural reforms to make the economy more competitive, which can lead to increased exports and economic growth.
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Which of the following is not a component of the balance of payments?
(A) Current account
(B) Capital account
(C) Financial account
(D) Official reserve account -
Which of the following is not a factor that can affect a country’s balance of payments?
(A) Exchange rates
(B) Trade flows
(C) Foreign Direct Investment
(D) Government spending -
A country’s balance of payments is in surplus when:
(A) The value of its exports is greater than the value of its imports.
(B) The value of its imports is greater than the value of its exports.
(C) The value of its capital inflows is greater than the value of its capital outflows.
(D) The value of its capital outflows is greater than the value of its capital inflows. -
A country’s balance of payments is in deficit when:
(A) The value of its exports is greater than the value of its imports.
(B) The value of its imports is greater than the value of its exports.
(C) The value of its capital inflows is greater than the value of its capital outflows.
(D) The value of its capital outflows is greater than the value of its capital inflows. -
Devaluation is a policy that:
(A) Reduces the value of a country’s currency relative to other currencies.
(B) Increases the value of a country’s currency relative to other currencies.
(C) Keeps the value of a country’s currency unchanged relative to other currencies.
(D) None of the above. -
The main purpose of devaluation is to:
(A) Increase exports and decrease imports.
(B) Decrease exports and increase imports.
(C) Keep exports and imports unchanged.
(D) None of the above. -
Devaluation can have the following effects:
(A) It can make a country’s exports more competitive in international markets.
(B) It can make a country’s imports more expensive.
(C) It can lead to inflation.
(D) All of the above. -
The main disadvantage of devaluation is that it can lead to:
(A) Inflation.
(B) Decreased exports.
(C) Increased imports.
(D) All of the above. -
Which of the following is not a factor that can affect the value of a country’s currency?
(A) Inflation
(B) Interest rates
(C) Government policy
(D) The balance of payments -
Which of the following is not a reason why a country might want to devalue its currency?
(A) To make its exports more competitive in international markets.
(B) To reduce its trade deficit.
(C) To increase its foreign exchange reserves.
(D) To discourage imports.