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Chapter 10 Balance of Payment Solutions

Question - 1 : - Differentiate between Balance of Trade and Current Account Balance.

Answer - 1 : -

Question - 2 : - Should a current account deficit be a cause for alarm? Explain.

Answer - 2 : -

No, if deficit in current account is offset by the capital account, otherwise such deficit has to be met by following which is a cause for alarm.

  1. Depleting Foreign Exchange reserves
  2. Taking foreign Loans.

Question - 3 : - If inflation is higher in country A than in country B, and the exchange rate between the two countries is fixed. What is likely to happen to the trade balance between the two countries?

Answer - 3 : - The exports from country B to country A will go up in this situation resulting in improvement or surplus trade balance for B. But due to higher price in country A, its imports will increase for country B and it will lead to deficit in trade balance for country A.

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