CBSE Class 12 Economics Balance of Payments VBQs

BALANCE OF PAYMENTS

The balance of payment is a comprehensive and systematic records of all economic transaction between normal residents of a country and rest of the world during an accounting year. Economic Transaction: refer to those transactions which involve transfer of the title or ownership of goods, services, money and assets.
1. Visible Items: include all types of physical goods which are exported and imported.
2. Invisible Items: include all types of services like shipping, banking, insurance etc. which are given and received.
3. Unilateral Transfers include gifts, personal remittances and other “one-way” transactions.
4. Capital Transfers relate to capital receipts (through borrowings or sale of assets) and capital payments (through capital repayments or purchase of assets) Balance of trade is the net difference of Import and export of all visible items between the normal residents of a country and rest of the world.

Components of Balance of Payments
(a) Current Account
(b) Capital Account

Current Account refers to an account which records all the transactions relating to export and import of goods and services and unilateral transfers during a given period of time.
Components of Current Account are:
1. Export and Import of Goods (Merchandise Transaction or Visible Trade)
2. Export and Import of services (Invisible Trade)
3. Unilateral Transfers to and from abroad
4. Income receipts and payments to and from abroad

Components of Capital Accounts
1. Borrowings and lending to and from abroad
2. Investments to and from abroad
3. Change in foreign exchange reserve

Balance of Payment Surplus: BOP is in surplus when Receipts of foreign exchange are more than payments of foreign exchange
Balance of Payment Deficit: BOP is in deficit when receipts of foreign exchange are less than payments of foreign exchange

CBSE Class 12 Economics Balance of Payments Multiple Choice Questions

Question. From the following which is not included in "Residents" in Balance of Payments transactions?
a) Firms
b) Foreign Military Personnel
c) Government agencies
d) Individuals
e) None of these
Answer. B

Question. Balance of Payments is a .......... concept.
a) Flow
b) Stock
c) Vibrant
d) Narrow
Answer. A

Question. .................. 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
Answer. B

Question. '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
Answer. A

Question. In current account, when value of credit items are more than debt items, it indicates net ............. of foreign exchange.
a) Asset
b) Liability
c) Inflow
d) Outflow
Answer. B

Question. Identify the correct pair from the column I and II.

Alternatives:
(a) A - (i)
(b) B - (ii)
(c) C - (iii)
(d) D - (iv)
Answer. A

Question. Identify the correct pair from the column I and II :

Alternatives:
(a) A - (i)
(b) B - (ii)
(c) C - (iii)
(d) D - (iv)
Answer. C

Question. Identify the correct sequence of alternatives given in Column II by matching them with the respective terms in Column I.

Answer. A

Question. 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, as stated by Commerce and Industry Minister Piyush Goyal. Country's trade turned surplus for the first time in 18 years as imports dropped by a steeper 47.59% The country posted a trade surplus of $0.79 billion in June. It is because of government's efforts to support and promote domestic manufacturing and industry. Favourable balance of payments is due to :
(a) restrictions on exports
(b) increase in imports
(c) encouragement to domestic industries
(d) none of these
Answer. C

Question. Accommodating items in are not determined by profit maximisation but are conditioned by positive or negative BOP status of the country. These are known as "Below the line items”. This includes
(a) investment by an individual
(b) Investment by entrepreneur
(c) Transaction by Government
(d) None of these
Answer. C

Read the following passage carefully and answer Questions on the basis of the same.

For the first time in 11 years, in 2015-16 the combined fiscal deficit of India’s 29 States as a proportion of the size of their economies breached the 3% threshold recommended as a fiscally prudent limit by successive Finance Commissions. The Reserve Bank of India has warned that the States’ expectation to revert to the 3% mark in their 2016-17 Budgets may not be released, based on information from 25 States. While the Central government has projected a fiscal deficit of 3.2% of GDP for this year, States expect to bring theirs down further to 2.6% — still higher than the average of 2.5% clocked between 2011-12 and 2015-16. Taking on the massive debt of their chronically loss-making power distribution companies, as part of the UDAY restructuring exercise steered by the Centre, has surely dented the States’ fiscal health significantly over the past couple of years. But it is important that such funding remains sustainable and States stay solvent. Tepid economic growth hasn’t helped, and States have had to resort to higher market borrowings even after the Centre hiked their share from tax inflows to 42% from 32%, starting 2015-16. The N.K. Singh panel on fiscal consolidation has recommended a focus on overall government debt along with fiscal deficit and a 20% debt-to-GDP ratio for States by 2022- 23. Not just the Centre, but States (with outstanding liabilities to GDP of around 24% as of March 2017) also need to tighten their belts considerably from here, even as they await the constitution of the Fifteenth Finance Commission.

Question. How much fiscal deficit has been projected by the central government in this year?
(a) 2.5%
(b) 32%
(c) 3.7%
(d) 3%
Answer. D

Question. The States’ focus on bolstering capital expenditure in which of the following sector(s)?
I. Power
II. Economics
III. Transport
(a) Only I
(b) Only III
(c) Only I and II
(d) Only I and III
Answer. D

Question. Which of the following two biggest crises happened in recent decades?
I. Problem in transportation
II. interdisciplinary culture
III. the currency tumble in 2013
IV. the balance of payments trouble in 1991
V. macroeconomics
(a) only III
(b) only II and III
(c) only III and IV
(d) only V
Answer. C

Question. Which of the following is true according to the passage?
(a) Tepid economic growth has helped, and States have had to resort to higher market borrowings even after the Centre hiked their share from tax inflows to 42% from 32%, starting 2015-16
(b) Tepid economic growth hasn’t helped, and States have had to resort to higher market borrowings even after the Centre hiked their share from tax inflows to 47% from 32%, starting 2015-16
(c) Tepid economic growth hasn’t helped, and States have had to resort to higher market borrowings even after the Centre hiked their share from tax inflows to 42% from 32%, starting 2015-16
(d) None of these
Answer. C

Read the following passage carefully and answer Questions on the basis of the same.

The other day, a student asked me what exactly the word ‘liberal’ mean. She wanted to know whether ‘liberalisation’ promotes ‘liberal’ values. She had noticed that institutions of higher education, which are supposed to promote liberal values, were finding it difficult to resist ideological and commercial pressures education, which are supposed to promote liberal values, were finding it difficult to resist ideological and commercial pressures triggered by the process of economic liberalisation. Then, in 1991 came the dramatic announcement of a new economic policy, accompanied by a package of steps to be taken for ‘structural adjustment’ of the Indian economy. The purpose of ‘adjustment’ was to facilitate India’s integration into the global economy. In order to examine what happened, we must make a distinction between school and higher education. When Prime Minister P.V. NarasimhaRao spoke about liberalisation as the central theme of the new economic policy, he also referred to the ‘structural adjustment programme’. The District Primary Education Programme (DPEP), which later mutated into SarvaShikshaAbhiyan (SSA), symbolised the ‘safety net’ approach. It was designed to cushion the harsh effects that ‘structural adjustment’ under liberalisation was expected to cause in welfare sectors like children’s education and health. In higher education, the new economic policy designed on the principles of liberalisation offered no safety net. From the beginning, the assumption was that higher education ought to generate its own resources. An accompanying idea was that higher education should respond to market demands in terms of knowledge and skills. However, these unions have gradually lost their power and say because they are broken from within.

Question. Which of the following offered a safety net for primary education?
(a) Government of India
(b) World economic forum
(c) World bank
(d) The District Primary Education Programme (DPEP)
Answer. C

Question. Which of the following statement is/are true according to the passage?
I. The purpose of ‘adjustment’ was to facilitate India’s integration into the global economy.
II. It was designed to cushion the harsh effects that ‘structural adjustment’ under liberalisation was not expected to cause in welfare sectors like children’s education and health.
III. The national policy on education drafted in 1986 had mostly adhered to the established state-centric view.
(a) Only I
(b) Only I and III
(c) Only III
(d) Only II
Answer. B

Question. What was the central theme of new economic policy according to the given passage?
(a) SarvaShikshaAbhiyan (SSA)
(b) Education and health
(c) New economic policy
(d) Liberalization
Answer. D

Question. Which two guiding ideas have dented the established system of higher education in the country?
(a) The DPEP and SSA should serve their role efficiently
(b) Higher education should respond to market demands in terms of knowledge and skills.
(c) Cutting down on permanent staff, both teaching and non-teaching
(d) Additional resources and policy guidance to enable the system to expand its capacity
Answer. B

Read the following passage carefully and answer questions on the basis of the same.

Foreign Exchange Rate (also called Forex Rate) is the price of one currency in terms of another. It links the currencies of different countries and enables comparison of international costs and prices. For example, if we have to pay Rs50 for $1 then the exchange rate is Rs50 per dollar. To make it simple, let us consider that India and USA are the only countries in the world and so there is only one exchange rate that needs to be determined. People demand foreign exchange because: they want to purchase goods and services from other countries; they want to send gifts abroad; and, they want to purchase financial assets of a certain country. A rise in price of foreign exchange will increase the cost (in terms of rupees) of purchasing a foreign good. This reduces demand for imports and hence demand for foreign exchange also decreases, other things remaining constant. A rise in price of foreign exchange will reduce the foreigner’s cost (in terms of USD) while purchasing products from India, other things remaining constant.

Question. Foreign direct investment.
(a) Which of the following is also known as Forex Rate?
(b) Foreign Exchange Rate
(c) Foreign Direct Exchange
(d) Foreign Market Rate
Answer. C

Question. According to passage , if we have to pay Rs50 for $1 then the exchange rate is .................. .
(a) Rs50 per dollar.
(b) Rs60 per dollar.
(c) Rs80 per dollar.
(d) Rs90 per dollar.
Answer. A

Question. A rise in price of foreign exchange will ................ the cost (in terms of rupees) of purchasing a foreign good.
(a) sometimes decreases
(b) decrease
(c) increase
(d) remains constant
Answer. C

Question. A rise in price of foreign exchange will reduce the ...................... (in terms of USD).
(a) national cost
(b) regional cost
(c) foreigner’s cost
(d) money cost
Answer. C

Read the following news report and answer the questions given below:

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, as stated by Commerce and Industry Minister Piyush Goyal. "We are in July at about 91% export level of July 2019 figures. Imports are still at about 70-71% level 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 will see opportunities of growth", he said.
Country's trade turned surplus for the first time in 18 years as imports dropped by a steeper 47.59% The country posted a trade surplus of $0.79 billion in June.
It is because of government's efforts to support and promote domestic manufacturing and industry,

Question. Strong balance of payments for India is due to excess of .................. .
(a) exports
(b) imports
(c) both the above
(d) none of the above
Answer. A

Question. Favourable balance of payments is due to :
(a) restrictions on exports
(b) increase in imports
(c) encouragement to domestic industries
(d) none of these
Answer. C

Question. ...................... account of BOP records all those transactions between the residents of a country and the rest of the world, which cause a change in the assets or liabilities of financial nature.
(a) Current
(b) Capital
(c) Trade scrplus
(d) None of the above
Answer. B

Question. Accommodating transactions in BOP:
(a) are undertaken by both the private sector and government sector.
(b) are known as above the line items
(c) take place on capital account
(d) none of these
Answer. C

Directions: In the following questions, a statement of assertion is followed by a statement of reason.
Mark the correct choice as:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.

Question. Assertion (A): Balance of Trade is the difference between the value of exports and value of imports of goods of a country in a given period of time.
Reason (R): Export of goods is entered as a credit item in BOT.
Answer. B

Question. Assertion (A): Invisibles include services, transfers and flows of income that take place between different countries.
Reason (R): Services trade includes only non-factor income.
Answer. C

Question. Assertion (A): The market in which national currencies are traded for one another is known as the foreign exchange market.
Reason (R): It is the price of one currency in terms of another.
Answer. C

Question. Assertion (A): Flexible Exchange Rate is determined by the market forces of demand and supply.
Reason (R): It is also known as Floating Exchange Rate.
Answer. B

Question. Assertion (A): Balance of payments always balances.
Reason (R): It is true only in the accounting sense. It is movement of official reserves or below the line items that imparts balance to the BoP accounts.
Answer. A

Question. Assertion (A): If balance of trade is in deficit, the balance of payments is also in deficit.
Reason (R): Balance of trade is only a part of BoP accounts.
Answer. D

Question. Assertion (A): The essence of international payments is  that just like an individual who spends more than her income must finance the difference by selling assets or by borrowing,
Reason (R): Capital Account records all international transactions of assets.
Answer. B

Question. Assertion (A): Current Account is the record of trade in goods and services and transfer payments.
Reason (R): Current Account is in balance when receipts on current account are greater than the payments on the current account’s foreign trade.
Answer. C

Question. Assertion (A): Surplus in capital account arises when capital inflows are less than capital outflows.
Reason (R): Any current account deficit must be financed by a capital account surplus.
Answer. D

Question. Assertion (A): Surplus in capital account BoP reflects prosperity of the nation.
Reason (R): It may have been achieved through loans which are a financial obligation to rest of the world.
Answer. D

Question. Assertion (A): Economic transaction of Indians investing in assets (foreign direct investment or portfolio investments) abroad is recorded under debit side of capital account balance of payments account.
Reason (R): Balance of payments is the difference between inflow of foreign exchange and outflow of foreign exchange on account of economic transactions.
An outflow of foreign exchange is entire as a negative (debit) item in BOP accounts and inflow as a positive (credit) item in BOP account.
Answer. A

Question. Assertion (A): Accommodating items in are determined by profit maximisation and are conditioned by positive or negative BOP status of the country. These are known as "Below the line items”.
Reason (R): Accommodating transactions are undertaken by both private sector and the government sector to maintain BOP identity. These take place on capital and current account of BOP to bring balance in the debit and credit side of BOP.
Answer. C

CBSE Class 12 Economics Balance of Payments Assertion and Reason Type Questions

Read the following statements Assertion (A) and the Reason (R). Choose one of the correct alternatives given below:
a) Both Assertion (A) and Reason (R) are True and Reason (R) is the correct explanation of Assertion (A)
b) Both Assertion (A) and Reason (R) are True and the Reason(R) is not the correct explanation of Assertion (A)
c) Assertion (A) is True but Reason (R) is False
d) Assertion (A) is False but Reason (R) is True

Question. Assertion (A): A country always tries to balance the BOP i.e.; balance in the current account equals to balance in capital account
Reason (R): Balanced BOP indicates stable economic relation with the rest of the world
Answer. A

Question. Assertion (A): Current account is a part of balance of trade
Reason (R): Current account records exports and imports of goods and services and transfer payments
Answer. D

Question. Assertion (A): Current account transactions bring a change in the capital stock of country
Reason (R): Make in India will increase the inflow of foreign exchange
Answer. D

Question. Assertion (A): If an Indian buys a UK car company, it enters in capital account as a debit item
Reason (R): Sales of assets like sale of shares of an Indian company to a Chinese customer is a credit item in the capital account
Answer. B

Question. Assertion (A): The export of sugar is recorded in the capital account
Reason (R): “Atmanirbhar Bharat” will decrease the inflow of foreign exchange
Answer. D


Short Answer: Questions & Answer 

Question. Distinguish between balance of payments and balance of trade.
Answer. 

Question. State the components of capital account of balance of payments
Answer. The components of the Capital Account are foreign investment, such as FDI and FPI, immovable properties, intangible assets, trade credits, borrowings from other nations, banking capital, and changes in the foreign exchange reserve.

Question. Explain the meaning of deficit in balance of payment account
Answer. When total inflows of foreign exchange on account of autonomous transactions are less than total outflows on account such transaction then there is a deficit in Bop.

CBSE Class 12 Economics Balance of Payments Short Answers

Question. State the components of Current account of BOP
Answer. Current Account refers to an account which records all the transactions relating to export and import of goods and services and unilateral transfers during a given period of time.
Components of Current Account are:
1. Export and Import of Goods (Merchandise Transaction or Visible Trade)
2. Export and Import of services (Invisible Trade)
3. Unilateral Transfers to and from abroad
4. Income receipts and payments to and from abroad

Question. Distinguish between the components of current account and capital account.
Answer.  Components of Current Account            Components of Capital Account
1. Visible items (import and export of goods).                1. Foreign Direct investment.
2. Invisible items (import and export of services).          2. Loans.
3. Unilateral transfers. 3. Portfolio investment.
4.Income receipts and payments from and to abroad.    4. Banking capital transactions.
5. These are the transactions which do not affect           5. These are the transactions which affect
the assets or liabilities position of the country.                     assets or liabilities position of the country.
6. It is a flow concept.                                                      6.It is a stock concept

CBSE Class 12 Economics Balance of Payments Case Study Questions

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

Question. External debt is recorded at:
a) credit, capital account
b) debit, capital account
c) credit, current account
d) debit, current account
Answer. B

Question. Money sent by NRI to their families in India included in:
a) credit, capital account
b) debit, capital account
c) credit, current account
d) debit, current account
Answer. C

Question. Which of the following is not a component of BOP?
a) current account
b) revenue account
c) capital account
d) official reserves
Answer. B

Question. Positive balance of net capital flow shows:
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
Answer. D

Question. What is the likely effect of depreciation or devaluation of a currency of the country‘s foreign trade?
Answer. It encourages exports from the country and discourages imports from rest of the world.

Question. India is suffering from the problem of current Account deficit .How is it met or fianced?
Answer. Current Account deficit in BOP occurs when the sum of receipts of foreign Exchange on account of trade in visible and invisible goods is less than the sum of payments of foreign Exchange on account of trade in visible and invisible goods.
A CAD implies that a country has contracted to spend more foreign exchange than it has been able to earn during the year.
A CAD can be financed through various sources:
i) A country may use a part of its gold stocks and maka payments to foregners by means of gold.
ii) A country may draw upon the reserves of foreign currencies and foreign securities
iii) A country may borrow foreign exchange from different officials and private sources.
iv) It may mobilise foreign Exchange by attracting deposits from foreigners and investment of capital by foreigners.

Question. If Inflation is higher in a country A than in country B and the exchange rate between two countries is fixed , what is likely to happen to trade balance between two countries?
Answer. If Inflation is higher in country A than in country B , and the exchange rate between the countries is fixed, the trade balance of country A will be deficit while that of country B will be surplus. In case of Inflation in country A and prices of country B remaining constant, imports of country A will rise or Exports of country A will decline . As a result trade balance of country A will be unfavourable and trade balance f country B will be favourable.

Question. ‗A rise in BOP services in the economy can be considered a good source of supply of foreign currency ‗justify.
Answer. Indeed the post reform period, India has become the destination of global outsourcing. This has been mainly due to the cheaper cost wit reasonable degree of skill and accuracy of labour. There is a good inflow of supply of foreign exchange from the economy point of view,which proves beneficial.

Question. What is Balance of Payments?
Answer. It is a systematic record of all economic transactions between the residents of a country & rest of the world during a financial year. In other words, it is a summary record of all international economic transactions of a resident country with the rest of the world during a given period of time.

Question. State the measures to correct adverse BOP:
Answer. Dear money policy, depreciation of the external value of domestic currency, devaluation of the currency, exchange control restrictions, tariff & import duties, fixing of import quotas, export promotion measures, import substitution etc.

Question. What is meant by Disequilibrium in the BOP?
Answer. It refers to such a situation when the BOP of the country is deficit or surplus. In other words, it is a situation when the net balance of all receipts & payments is not zero. If the net balance is in (+), it is surplus; while the negative (-) balance is deficit. In both of the situation, the BOP is in disequilibrium.

Question. Differentiate between BOP & BOT.
Answer. The term 'Balance of Payments' refers to the account of both visible items & invisible items while 'Balance of Trade' refers to the record of visible items only. BOT is only one of the components of BOP while the BOP is a wider concept & therefore offers a more comprehensive picture of economic transactions of a country with the rest of the world.
Moreover, the BOT may be balanced, deficit or surplus, while BOP as a whole always remain balanced. BOT is a simple statements related to the foreign trade of the country while BOP presents a classified record of all receipts on account of goods exported, services rendered and capital received, and payments made on account of goods imported, services rendered from, and capital transferred to abroad.

Question. Differentiate between BOP on current account & capital account.
Answer. The current account deals with the receipts & payments for those goods which are currently produced, while the capital account deals with debts & claims. Secondly, the BOP on current account has a direct influence on the level of income of a country, while the capital account influences the volume of assets of the country.

Question. Briefly explain the other items in the BOP.
Answer. There are certain items which do not form the part of current & capital account.
These items are kept for balancing the BOP. These items are as follows:
I. Errors & Omissions are the balancing items in the BOP accounts which are used for correcting the BOP as it is difficult to keep an accurate record of all the transactions which may be due to sample of transactions, dishonesty of traders, smuggling etc.
AI. Official Reserve Transactions refer to those transactions which are carried out by the govt. and the Central bank on behalf of govt. with regard to certain economic policy & their effect on BOP, & the exchange rates. It includes the Country's Official Reserve Assets & Foreign official Assets in the country.
The Official Reserves are held in the form of foreign currency or foreign securities, gold & Special Drawing Rights (SDR) with the IMF. Reduction in these reserves implies purchase of foreign exchange which is taken as credit items in the BOP since it causes inflow of foreign exchange. On the contrary, an increase in these reserve assets is taken as a debit in the BOP as it causes outflow of foreign exchange.
The Foreign Official assets in the country are in the form of rupee reserves of foreign central banks. Increase in these rupee reserves of foreign banks is taken as a credit item as it causes inflow of foreign exchange in the resident country (India), while decrease in these reserves is taken as debit as it causes outflow of foreign exchange.

Question. Differentiate between Autonomous & Accommodating Items.
Answer. Items in the BOP account can be also classified into two categories viz. Autonomous or above the line items and Accommodating or below the line items.
Autonomous items refer to those items which are taken with the motive of profit maximization. These transactions are not related to the country's BOP position. It is, therefore, these items are called as autonomous items. These items are taken as first items before calculating deficit or surplus in BOP account, therefore these items are called as above the line items. If the receipts from autonomous items exceed the payments for autonomous items; the  BOP is called to be as surplus, and vice versa. It implies that the resident country has net claims against the ROW. On the other hand, if the payments fo these items exceed the receipts from these items, it implies that the ROW has some net claims against the resident country.
Accommodating items refer to those items which are undertaken by the govt. to keep the BOP balanced. These items are transacted when a country faces disequilibrium in the BOP. Through these transactions, the govt. or monetary authorities settle the deficit or surplus in the BOP.

Question. State the Items included in BOP account.
Answer. 1. Visible Items include all merchandise imports and exports i.e. the items which are recorded at the port & made of some material.
2. Invisible Items include receipts & payments for the services viz. shipping, banking, insurance, travel etc.; receipts and payments of income on foreign investments; interest on foreign loans & remittances of NRI's etc; govt's current expenditure in abroad viz. expenditure on embassies etc.; transfer payments & receipts.
3. Capital transfers include the capital receipts & capital expenditure of a resident country.

Question. State the causes for disequilibrium in BOP.
Answer. Disequilibrium in BOP may be due to the following reasons: Economic Factors viz. Cyclical fluctuations, huge public expenditure on development
projects, hike in inflation which induces large imports of essential goods, development of import substitutes, change in cost structure of the trading partner countries etc; Demonstration effect which implies the effect of developed countries on the lifestyle & consumption pattern of the less developed countries which leads to rise in imports; Political instability which may lead to large scale capital outflow; Social factors viz. changes in the social structure & norms which may affect the propensity to consume, comforts & exports; etc.

Question. Define the term Balance of Trade.
Answer. It refers to the systematic record of visible items in a financial year. In other words, it is
the value of imports and exports of commodities i.e. merchandise. If the exports exceed
imports, the BOT is said to be favourable, and unfavourable in case of vice versa. Thus,
Favourable BOT = Exports receipts > Import payments.