Question 1

If a country's Balance of Payments shows a current account deficit, which of the following must be true to maintain overall BoP equilibrium?

Accepted Answer

The Balance of Payments must always balance in accounting terms. If the Current Account is in deficit (negative), the Capital Account must be in surplus (positive) by an equal amount to offset it, or the country must draw down its foreign exchange reserves.

Question 2

Which of the following best describes the 'Current Account' component of a country's Balance of Payments?

Accepted Answer

The Current Account records all transactions related to goods, services, income, and transfers between residents of one country and the rest of the world. It includes exports and imports of merchandise, services, primary income (like investment returns), and secondary income (like remittances and aid).

Question 3

Which of the following best describes the 'Balance of Payments' (BoP) of a country?

Accepted Answer

Balance of Payments is a systematic record of all economic transactions between a country and the rest of the world during a specific period, comprising the Current Account and Capital Account.

Question 4

The 'Capital Account' of a country's Balance of Payments primarily records:

Accepted Answer

The Capital Account records all transactions involving the transfer of ownership of assets and financial flows, including Foreign Direct Investment (FDI), portfolio investment, loans, and changes in reserves.

Question 5

Which of the following is an example of an 'invisible export' in India's Balance of Payments?

Accepted Answer

Invisible exports refer to services and intangible items exported by a country, as opposed to physical goods. India's IT services, tourism, and remittances are major invisible exports.

Question 6

The 'Current Account' of a country's Balance of Payments includes which of the following?

Accepted Answer

The Current Account records all transactions related to trade in goods and services, primary income (like wages and investment returns), and secondary income (like remittances and grants).

Question 7

A country is said to have a 'Trade Deficit' when:

Accepted Answer

A Trade Deficit occurs when the value of a country's imports exceeds the value of its exports, resulting in a negative trade balance.

Question 8

If a country's Current Account is in deficit but its Capital Account is in surplus, what does this indicate about the country's overall Balance of Payments?

Accepted Answer

A Current Account deficit means the country is spending more on imports and transfers than it earns from exports and income. A Capital Account surplus means foreign investment and loans exceed outflows. The overall BoP depends on which is larger.

Question 9

A country has exports worth $500 billion and imports worth $550 billion. What is its Trade Balance, and what does it indicate?

Accepted Answer

Trade Balance = Exports − Imports = $500B − $550B = −$50 billion (deficit). A negative trade balance indicates a trade deficit, meaning the country imports more than it exports.

Question 10

India's Balance of Payments is divided into two main accounts. Which of the following correctly identifies them?

Accepted Answer

The Balance of Payments consists of the Current Account (trade in goods and services, income, transfers) and the Capital Account (investment flows, loans, asset transfers).

Question 11

Which of the following best defines 'Balance of Payments' in international trade?

Accepted Answer

Balance of Payments (BoP) is a comprehensive record of all economic transactions between a country and the rest of the world during a specific period, including trade in goods, services, income flows, and capital transfers.

Question 12

Which of the following transactions would be recorded in the Current Account of India's Balance of Payments?

Accepted Answer

The Current Account records all transactions related to trade in goods and services, income flows (wages, interest, dividends), and current transfers (gifts, remittances, aid).

Question 13

Which of the following best defines the Balance of Payments (BoP) of a country?

Accepted Answer

Balance of Payments is a systematic record of all economic transactions between a country and the rest of the world over a specific period, typically one year. It includes the current account (trade in goods and services, income flows) and the capital account (investment flows, loans).

Question 14

What is the Current Account in the Balance of Payments primarily concerned with?

Accepted Answer

The Current Account records all transactions related to the exchange of goods, services, primary income (like wages and investment returns), and secondary income (like remittances and gifts) between a country and the rest of the world.

Question 15

A country has exports worth $500 billion and imports worth $550 billion in a year. What is the country's trade balance, and what does it indicate?

Accepted Answer

Trade Balance = Exports − Imports = $500 billion − $550 billion = −$50 billion. A negative trade balance (trade deficit) means the country imports more than it exports, indicating it is consuming more goods and services than it produces domestically.

Question 16

Which of the following transactions would be recorded in the Capital Account of India's Balance of Payments?

Accepted Answer

The Capital Account (or Financial Account in modern BoP terminology) records all transactions involving the transfer of ownership of financial assets, including Foreign Direct Investment (FDI), portfolio investments, loans, and changes in reserves.

Question 17

India's merchandise trade deficit occurs when:

Accepted Answer

A trade deficit in merchandise occurs when the value of goods imported exceeds the value of goods exported.

Question 18

The 'Capital Account' in India's Balance of Payments primarily records:

Accepted Answer

The Capital Account (now called Financial Account under IMF BPM6) records investment flows and changes in external assets/liabilities.

Question 19

Which sector has been the primary driver of India's services exports and a major contributor to offsetting the merchandise trade deficit?

Accepted Answer

India's services sector, particularly Information Technology (IT) and IT-enabled services, has been crucial in maintaining overall BoP stability despite merchandise trade deficits.

Question 20

Which of the following best explains why a country might have a Current Account deficit despite having a Financial Account surplus?

Accepted Answer

A country can have a Current Account deficit (spending more on imports than earning from exports) while simultaneously having a Financial Account surplus (attracting more foreign investment than it sends abroad). The overall Balance of Payments remains balanced through the offsetting accounts.

KVS PGT Trade & Balance of Payments

Trade & Balance of Payments— Rules & Concept

Key Points to Remember

Exam-Specific Tips

Trade & Balance of Payments — Practice Questions

60-Second Revision — Trade & Balance of Payments