CBSE Class 12 Economics HOTs for Balance of Payment

Please refer to CBSE Class 12 Economics HOTs for Balance of Payment. Download HOTS questions and answers for Class 12 Economics. Read CBSE Class 12 Economics HOTs for Part B Macroeconomics Chapter 6 Open Economy Macroeconomics below and download in pdf. High Order Thinking Skills questions come in exams for Economics in Class 12 and if prepared properly can help you to score more marks. You can refer to more chapter wise Class 12 Economics HOTS Questions with solutions and also get latest topic wise important study material as per NCERT book for Class 12 Economics and all other subjects for free on Studiestoday designed as per latest CBSE, NCERT and KVS syllabus and pattern for Class 12

Part B Macroeconomics Chapter 6 Open Economy Macroeconomics Class 12 Economics HOTS

Class 12 Economics students should refer to the following high order thinking skills questions with answers for Part B Macroeconomics Chapter 6 Open Economy Macroeconomics in Class 12. These HOTS questions with answers for Class 12 Economics will come in exams and help you to score good marks

HOTS Questions Part B Macroeconomics Chapter 6 Open Economy Macroeconomics Class 12 Economics with Answers

Question. The balance of trade shows a surplus of 10000 Crore and the import of merchandise is half of the export of merchandise. Find the value of export.
(i) 20000
(ii) 10000
(iii) 5000
(iv) 1000

Answer. (ii)

Question. Statement I: Unilateral transfers made by way of gifts, grants and remittances are treated as current transfers.
Statement II: Expenditure by tourists is included in balance of trade.
(i) Both statements are incorrect
(ii) Both statements are correct
(iii) Statement I is correct and statement II is incorrect
(iv) Statement I is Incorrect and statement II is correct
Answer. (iv)

Question. Foreign exchange transactions which are independent of other transactions in the balance of payments account are called :( Choose the correct alternative)
(a) Current transactions
(b) Capital transactions
(c) Autonomous transactions
(d) Accommodating transactions
Answer. (c)

 

Question. Indian investors lend abroad.

Answer the following questions –
(i) In which sub-account and on which side of Balance of Payments Account such lending is recorded? Give reasons.
(ii) Explain the impact of these lending on Market Exchange Rate.
Answer. (i) Indians lending abroad is recorded in Capital Account of BOP Account because it leads to creation of foreign exchange assets. It is recorded on the debit side because it leads to outflow of foreign exchange.
(ii) Lending abroad increases demand for foreign exchange. Supply of foreign exchange remains unchanged, exchange rate may rise.

Question. (i) In which sub-account and on which side of Balance of Payments Account will foreign investments in India be recorded ? Give reasons.
(ii) What will be the effect of foreign investments in India on exchange rate? Explain.
Answer. (i) Foreign investments will be recorded in the Capital Account of the BOP Account because these give rise to foreign exchange liabilities. Foreign investment will be recorded on the credit side because these bring in foreign exchange to the economy.
(ii) Foreign investment adds to supply of foreign exchange. Demand remaining unchanged, it brings downward influence on exchange rate.

Question. Indian investors borrow from abroad. Answer the following
(i) In which sub-account and on which side of the Balance of Payments Account will this borrowing be recorded ? Give reason.
(ii) Explain what is the impact of this borrowing on exchange rate.
Answer. (i) Borrowings from abroad are recorded in the Capital Account of the BOP because these give rise to foreign exchange liabilities. These are recorded on the credit side because these bring foreign exchange into the country.
(ii) Borrowing from abroad raise supply of foreign exchange. Demand for foreign exchange remaining unchanged, exchange rate is likely to fall.

Question. What is meant by 'Official Reserve Transactions'? Discuss their importance in Balance of Payments.
Answer. Transactions by a Central Bank that cause changes in its official reserves. These are usually purchases or sales of its own currency in the exchange market in exchange for foreign currencies or other foreign-currency-denominated assets. 2 They may be Autonomous Receipts and Autonomous Payments, disequilibrium between which may occur as deficit/surplus in Balance of payments.

Question. Distinguish between trade account and current account of balance of payments account.
Answer. In trade account import and export of goods are recorded.
In current account import and export of goods and services are recorded. Factor income and transfer payment are also recorded.

Question. State the effect of the following on the balance of payments situation.
(i) Increase in import duty of gold.
(ii) Rise in the price of foreign currency.
Answer. (i) This will reduce import of gold and thus will have a favourable effect on BOP situation, as demand for foreign exchange will fall.
(ii) Rise in price of foreign currency will make imports costlier, so import will fall and it will be favorable for BOP, as demand for foreign exchange will fall.

Question. What will be the effect of the following on the balance of payments ?
(i) 'Make in India' programmed.
(ii) import of pulses.
Answer. (i) 'Make in India' will increase supply (inflow) of foreign exchange in India causing improvement in the balance of payments position.
(ii) Import of pulses will lead to outflow of foreign exchange from the country causing adverse effect on balance of payment position.

Question. Are the following entered
(a) On the credit side or debit side and
(b) In the Current Account or Capital Account in the Balance of Payments Account?
You must give reason for your answer.
(i) Investment from Abroad.
(ii) Transfer of funds to relatives abroad.
Answer. (a) (i) Investment from abroad-It is entered to credit side.
(ii) Transfer of Funds to relatives abroad: It is entered to debit side.
(b) (i) Investment from abroad-Capital Account because Capital Account records capital transfers between one country and rest of the world.

Question. In the context of Balance of Payments Account, state whether the following statements are true or false. Give reasons for your answer.
(i) Profits received from investments abroad is recorded in Capital Account.
(ii) Import of machines is recorded in Current Account.
Answer. (i) False, it is recorded in current account as it neither affects foreign exchange assets nor foreign exchange liabilities.
Ii True, all imports and exports of goods are recorded in trade account which is a part of current account, because it is simply import/export of a good.

Question. State whether the following statements are true or false. Give reasons for your answer:
(i) Difference between value of exports and imports of goods and services is called Trade Balance.
(ii) External assistance is not recorded in Balance of Payments Account.
Answer. (i) False. Difference between the value of exports and imports of goods and services is called Balance of Payment not Balance of Trade.
(ii) False. It is a part of Balance of Payments or external assistance is recorded in Balance of Payments Account.

Question. Giving reasons state whether the following:-
(i) Excess of foreign exchange receipts over foreign exchange payments on account of accommodating transactions equals deficit in Balance of Payments.
(ii) Export and Import of machines are recorded in Capital Account of the Balance of Payments Account.
Answer. (i) False. As Accommodating Transactions remove both surplus and deficit of Balance of Payments Account.
(ii) False. As export and import of machines are recorded in Current Account of Balance of Payments Account.

Question. Giving reasons state whether the following statements are true or false:
(i) Current Account of Balance of Payments Account records only exports and imports of goods and services.
(ii) Foreign investments are recorded in Capital Account of Balance of Payments.
Answer. (i) False. As Current Account of Balance of Payments Account also records unilateral transfers. (ii) True. As all kind of foreign investments (Foreign Direct Investments and Port Folio Investments) are included in the Capital Account of Balance of Payments.

Question. What is ‘appreciation’ of domestic currency? What is its likely effects an exports and how?
or
Explain the effect of appreciation of domestic currency on imports.
Answer. Domestic currency appreciates when there is a fall in foreign exchange rate, the domestic economy can now buy more quantity of goods and services from foreign countries with the same amount of domestic currency. As a result imports rise. e.g. When Rs. / $ exchange rate falls from 55 to 50, it leads to currency appreciation and this will help in buying more and more units of foreign goods as a result demand for foreign goods will rise. i.e. imports will rise.

Question. Explain the effect of depreciation of domestic currency on exports.
Answer. Domestic currency depreciates when there is a rise in foreign exchange rate. Depreciation has an expansionary effect on Aggregate Demand and output. Depreciation increases the demand for domestically produced goods by reducing their relative price. This will lead to increase in exports and hence fall in imports, as now foreign country can buy greater units in the domestic country with same amount of their currency.

Question. How can increase in foreiqn direct investment affect the price of foreign exchange?
Answer. Increase in foreign direct investment will result in more supply of foreign exchange therefore, due to excess supply, price of foreign exchange will fall. i.e. exchange rate falls which leads to appreciation of domestic currency.

Question. Explain the Different Concepts of Foreign Exchange Rate
Answer. (i) Nominal exchange rate It refers to the number of units of domestic currency, one must give up to get an unit of foreign currency. In simple term, it refers to the price of foreign currency in terms of domestic currency.
(ii) Real exchange rate The real exchange rate is the ratio of foreign to domestic prices, measured in the same currency. It is defined as
(iii) Nominal Effective Exchange Rate (NEER) It is that type of effective exchange rate which does not account for change in price level while measuring average strength of one currency in relation to the other.
(iv) Real Effective Exchange Rate (REER) It is that type of effective exchange rate which accounts for changes in the price level across different countries of the world.

Question. Do you think that a surplus in capital account BoP reflects prosperity of the nation?
Answer. No, it is incorrect to say because surplus in capital account balance of payments may have been achieved through loan which are a financial obligation to rest of the world.

Question. How would you argue for and against foreign investment?
Answer. Arguments against foreign investment:
Leads to rise in claims by foreigners against assets in the domestic economy.
Arguments in favour of foreign investment:
Overall investment in the domestic economy is expanded.

Question. State which type of exchange rate has no official intervention in the foreign exchange market? How it is determined?
Answer. Flexible exchange rate has no official intervention. It is determined by the interaction of supply and demand in the foreign exchange market.

Question. State which of the following is a visible item and which is an invisible item in Balance of payments.
(a) Export of jute product (b) Software services exports.
Answer.
(a) Export of jute product - Visible Item
        (b) Software services exports - Invisible Item

Question. Name the items which are not included in the current account of India’s Balance of payment,
Answer. The capital transactions in the form of direct and portfolio investment that take place between the countries are not included in the current account of India’s Balance of payments.

Question. In which account of balance of payment tourism services to tourist are included?
Answer.
Tourism services to tourist are included in current account of Balance of payments.

Question. Which transactions- autonomous or accommodating bring balance in the balance of payments.
Answer. Accommodating transactions bring balance in the balance of payment.

Question. Why foreign currency/exchange is needed?
Answer. i) To purchase of goods and services from other countries.
        ii) To send a gift abroad.
        iii) To purchase financial assets in a particular country and
       iv) To speculate on the value of foreign currencies.

Question. What are the factors responsible for inflow of foreign currency?
Answer. i) foreigners purchasing home country goods and services through exports.
        ii) Foreigners investment in home country through joint ventures and through financial market operation.
iii) Foreign currencies flow into the economy due to currency dealers and speculators

Question. When exchange rate of foreign currency falls it’s supply also falls. Explain how?
Answer.When exchange rate falls, experts become less profitable hence supply of foreign currency through exports falls.

Question. When exchange rate of foreign currency falls, its demand rises. Explain how?
Answer. When exchange rate falls, imports become cheaper, demand for imports rises and so rises the demand of foreign exchange to purchase more imports.

Question. What will be the value of imports, if the net imports are Rs 160 crores and the value of exports are Rs 400 crores.
Answer. Balance of Trade = Exports- Imports
Imports= Exports – Balance of trade= 400-(-160)=560
Or Imports= Exports + net imports
= 400+160=560 Ans Rs 560 crores
 
Question. If Balance of payment of a country is Rs (-) 100 crores and total payment are Rs 500 crores. Find out its total receipts.
Answer. Balance of Payment = Total receipts- Total payments
Total receipts= Total Payment +BOP
               =500 + (-100)
               =500-100=400                 Ans Rs 400 crores
 
Question. Balance of payments always balances. Discuss it.
Answer. Balance of payments is always balanced. A negative balance on the current account is equated with positive balance in the capital account. The monetary authorities may finance a deficit by depleting their reserves of foreign currencies or by borrowing from the IMF etc. Hence BOP is always in balance.
 
 
1. Define foreign exchange rate.
Answer. Foreign exchange rate is the price of a foreign currency in terms of demestic currency
 
2. What is foreign exchange?
Answer.Any currency other than the domestic currency.
 
3. What is balance of payment Accounts?
Answer. It is a systematic record of all economic transactions between the residents of a country and the rest of the world in a given period (one year) of time
 
4. State two sources of supply of foreign exchange.
Answer. Exports and foreign tourism.
 
5. State two sources of demand of foreign exchange.
Answer. Import of goods & services and to get education in abroad.
 
6. What does a deficit in balance of trade indicate.
Answer.Deficit in balance of trade indicates that the imports of good are qreater than the exports.
 
7. What is fixed exchange rate?
Answer.When rate of exchange is fixed by the Government in an economy.
 
8. Define flexible exchange rate
Answer. The rate of exchange in terms of other currencies are determind by market forces of demand and supply.
 
9. Define managed floating exchange rate.
Answer. It is a system in which the central bank or Government allow the exchange rate to determined by market forces but they take decisions to intervene whenever they feel it appropriate.
 
10. State the components of capital account of balance of payment.
Answer. 1. Borrowing and lending to and from abroad.
2. Investment to and from abroad.
3. Change in foreign exchange reserves
 
11. Which transactions determine the balance of trade? When is balance of trade in surplus?
Answer. Exports of goods and imports of goods determines BOT. When the value of exports of goods is greater than the value of imports of goods.
 
12. What are the components of current account of the BOP account?
Answer.(1) Exports and imports of goods
(2) Exports and imports of services
(3) Unilateral transfers
 
13. Explain the meaning of deficit in BOP
Answer. When autonomous foreign exchange payments exceeds autonomous foreign exchange receipts, the difference is called balance of payments deficit.
 
14. Distinguish between devaluation and depriciation of domestic currency
Answer. When Government or authorities reduce the price of domestic currency in terms of all foreign currencies is called devaluation.
The fall in market price of domestic currency (due to demand supply in the market) in terms of a foreign currency is called depreciation.
 
15. When price of a foreign currency rises its supply also rises. explain why?
Answer.If exchange rate increases, this will make domestic country's goods cheaper to foreigners. The demand for our exports will rise. It implies more supply of foreign exchange.

 

VERY SHORT ANSWER TYPE QUESTIONS: - 

Q.1 What is foreign exchange?
Answer. It is the amount of currency reserves of all countries other than the domestic currency .
 
Q.2 What does a change from Rs. 52 = $ 1 to Rs. 56 = $ 1 indicate?
Answer. Indian rupee depreciate in terms of $.
 
Q.3 Why are autonomous items called „above the line ` items?
Answer. Because autonomous items are recorded in BOP as first items before calculating surplus or deficit.
 
Q.4 Is import of machinery recorded in current account or capital account?
Answer. Since import of machinery is import item , it is recorded in current account.
 

SHORT ANSWER TYPE QUESTIONS: -
 
Q.1 Why foreign currency/exchange is needed?
Answer. i) To purchase of goods and services from other countries.
ii) To send a gift abroad.
iii) To purchase financial assets in a particular country and
iv) To speculate on the value of foreign currencies.
 
Q.2. What are the factors responsible for inflow of foreign currency?
Answer. i) foreigners purchasing home country goods and services through exports.
ii) Foreigners investment in home country through joint ventures and through financial market operation.
iii) Foreign currencies flow into the economy due to currency dealers and speculators
 
Q.3 When exchange rate of foreign currency falls it‟s supply also falls. Explain how?
Answer. When exchange rate falls, experts become less profitable hence supply of foreign currency through exports falls.
 
Q.4 When exchange rate of foreign currency falls, its demand rises. Explain how?
Answer. When exchange rate falls, imports become cheaper, demand for imports rises and so rises the demand of foreign exchange to purchase more imports.
 
Q.5 What will be the value of imports, if the net imports are Rs 160 crores and the value of exports are Rs 400 crores.
Answer. Balance of Trade = Exports- Imports
Imports= Exports – Balance of trade= 400-(-160)=560
Or Imports= Exports + net imports
                = 400+160=560 Ans Rs 560 crores
 
Q.6. If Balance of payment of a country is Rs (-) 100 crores and total payment are Rs 500 crores. Find out its total receipts.
Answer. Balance of Payment = Total receipts- Total payments
Total receipts= Total Payment +BOP
                  =500 + (-100)
                  =500-100=400 Ans Rs 400 crores
 
Q.7. Find the primary deficit if fiscal deficit is Rs 15,000 crores and interest payment is Rs 4,000 crores
Answer. Primary deficit= Fiscal deficit- Interest Payment
                             =15,000-4,000
                             = 11,000 Ans. Rs. 11,000 crores
 
Q.8 Balance of payments always balances. Discuss it.
Answer. Balance of payments is always balanced. A negative balance on the current account is equated with positive balance in the capital account. The monetary authorities may finance a deficit by depleting their reserves of foreign currencies or by borrowing from the IMF etc. Hence BOP is always in balance.
 
Q .9 Should a current account deficit be always a cause for alarm? Explain.
Answer. If the increase in current account deficit indicates rise in investment , then it will increase future output , so it is not a cause of alarm but it is a cause of worry if the increase in current account deficit reflects smaller savings or large budget deficit because it indicates higher government or private consumption.
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CBSE Class 12 Economics HOTs Introduction
Part A Microeconomics Chapter 03 Production and Costs
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