Understanding India's Balance of Payments Measurement
The Balance of Payments (BoP) records a nation's transactions with the rest of the world. A deficit or surplus signifies an imbalance where payments exceed receipts or vice versa. Measuring this imbalance involves consolidating various accounts.
Key Components of BoP Measurement
The overall deficit or surplus in India's BoP is determined by the net balances of several key components:
- Current Account: This account tracks the flow of goods, services, primary income (like interest and dividends), and secondary income (transfers like grants and remittances). A deficit here means more money flowed out than in through these transactions.
- Capital Account: This tracks capital transfers and the acquisition/disposal of non-produced, non-financial assets. It reflects net capital inflows/outflows related to investments and loans.
- Financial Account: (Often considered alongside or as part of the broader 'capital' flows). This records transactions involving financial assets and liabilities, such as foreign direct investment (FDI), foreign portfolio investment (FPI), loans, and currency deposits. Changes in official reserves are key here.
- Allocation of Special Drawing Rights (SDRs): SDRs are international reserve assets created by the IMF. Their allocation affects a country's reserves and thus the BoP.
- Statistical Discrepancy: This item (also called errors and omissions) accounts for the difference between the sum of the recorded current, capital, and financial account balances and the overall BoP deficit/surplus, reflecting unrecorded transactions or measurement errors. It ensures the BoP identity holds (i.e., total credits equal total debits).
Therefore, the net balance across the current account, capital account, allocation of SDRs, and accounting for the statistical discrepancy is used to measure the overall deficit or surplus in India's balance of payments.
Important Questions from Balance of payments (BOP)
- If there is a balance of payments deficit then in a floating exchange rate system :
- Devaluation, will improve the balance of payment deficit, if sum of elasticity of exports and imports of the devaluing country is :
Match the following :
List – I List – II a. Sum of price elasticity of demand for exports and imports greater than unity. 1. J-curve effect b. Balance of Payments is the difference between National Income and expenditure 2. Import quota systems c. Empirical evidence showing lower short run price elasticities of exports and imports. 3. Marshall-Lerner condition d. Method to cut down imports 4. Absorption approach
Select correct code :
Codes :
- Which amongst the following is included in the Capital account of the Balance of payments ?
I. Foreign loans
II. Foreign Direct Investment
III. Private Remittances
Choose the correct answer from the codes below :
Codes : Match the items of List I with the items of List II and choose the correct answer from the code given below.
List I
List II
(a)
Balance of trade
(i)
Imports and exports of goods and services
and unilateral transfer of goods and services(b)
Current account
(ii)
Transactions leading to changes in the
financial assets and liabilities of a country(c)
Balance of payments
(iii)
All economic transactions between a country's
residents and residents of other countries(d)
Capital account
(iv)
Value of exports and imports of country
