CBSE Class 12 Economics Balance of Payments VBQs

CBSE Class 12 Economics Balance of Payments VBQs

1. What is the likely effect of depreciation or devaluation of a currency of the country‘s foreign trade?

Ans: It encourages exports from the country and discourages imports from rest of the world.

2. India is suffering from the problem of current Account deficit .How is it met or fianced?

Ans: 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.

3. 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?

Ans: 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.

4. ‗A rise in BOP services in the economy can be considered a good source of supply of foreign currency ‗justify.

Ans: 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.