MCom I Semester Environment Balance of payments Notes Study Material

MCom I Semester Environment Balance of payments Notes Study Material: Meaning of balance of Payment Definitions of Balance of payments Causes of Unfavourable Balance of Payments Difference between the balance of Payment and Balance of Trade balance of Payments Equilibrium fo balance of Payments Present Position of the Balance of Trade in India Suggestions for Balance of Trade Logn answer Questions Short Answer Questions Objectives Questions

CTET Paper Level 2 Previous Year Science Model paper II in Hindi

Balance of Payments

The international aspects of money are concerned with the two principal questions. The first is the problem of foreign exchange and other is the international finance. It involves mechanisms of adjustment, including international price and income relationship. In the modern world, there is hardly any country which is self sufficient in the sense that it produces all the goods and service that it needs. Every country imports from other countries the goods that cannot be produced at all in the country or can be produced only at higher cost than foreign suppliers. Similarly, a country exports to other countries the commodities which those countries prefer to buy from abroad rather than to produce at home.

MEANING OF BALANCE OF PAYMENT

The balance of payment is a comprehensive record of economic transactions of the residents of a country with the rest of the world during a given period of time. The record is so prepared as to provide meaning and measure to the various components of a country’s external economic transactions. Thus, the aim is to present an account of all receipts and payments on account of goods exported, service rendered and capital received by the residents of a country and goods imported, service received and capital transferred by the residents of the country. Among the principal international economic transactions are the movement of goods and services, interest and dividends, gifts, short and long term investments and gold movements.

Balance of payments Notes

DEFINITIONS OF BALANCE OF PAYMENTS

Some of the important definitions of balance of payments are as follows:

1 In the words of James O Ingram, “The balance of payments is a summary record of all economie transactions between residents of one country and the rest of the world during a given period of time.”

2. According to Walter Krause, “The balance of payments of a country is a systematic record of all economic transactions completed between its residents and the residents of rest of the world during a given period of time usually a year.”

3. According to Kindle Barger, “The balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting country and the residents of foreign countries during a given period of time.”

4. In the words of Benham, “Balance of payments of a country is a record of the monetary transactions over a period with the rest of the world.

5. According to Sodersten, “The balance of payments is merely a way of listing receipts and payments of international transactions for a country.

It is clear from the above definitions that each country has got to enter into economic dealings with other countries of the world. As a result of these dealing it receives payments from and makes payments to others countries. Ordinarily a country has to deal with other countries in respect of visible and invisible items. All visible items or material goods which are exported and imported are the items of current account and their record is available with the ports. The record of invisible items is not available with the ports. Invisible items include transportation, services of experts, travelling, investment income etc.

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BALANCE OF TRADE

Balance of trade is merchandise balance. It refers to the difference between the value of commodity exports and import. When the difference between the value of imports and exports of only physical goods or visible imports and exports of only physical goods or visible items is taken into account, it is called balance of trade. A proper record of all material goods exported and imported is kept at the ports, so they are called visible items.

In the words of Benham, “Balance trade is the relation over a period between the values of her exports and value of her imports.”

If exports of visible items exceed import of visible items, the balance of trade is said to be favorable. A country may have unfavourable balance of trade when the total value of goods imported is above the total value of the goods exported by it. A country may have equilibrium in balance of trade when the total value of the goods exported by it is equal to the total value of the goods imported by it.

BALANCE OF PAYMENTS

In addition to the import and export of goods, the country also imports and exports certain services. Such services may be of various kinds for which payments have to be made or received, e.g., transport charges, shipping freight, passenger fares, harbour and canal dues, commercial services (fees and commissions) financial services (brokers fee etc.) and services connected with the tourists traffic and payment on external debt. As against commodity or merchandise transactions, which are visible, these services are called invisible items of the balance of payments as they are not recorded at the customs barriers. If we group together both the visible and invisible transactions, we get the balance of payment on current account.

EQUILIBRIUM OF BALANCE OF PAYMENTS

As in accounting, the balance of payments must balance over a given period. Because of its double entry nature, debits must always equal credits if all the necessary information is included. It must be noted that the inevitable equality of debits and credits in the balance of payments follows from the system of accounting and does not necessarily imply equilibrium in the economic sense. The usual analytical approach to the balance of payments is to consider it as the difference between the receipts from and the payments to the foreigners by the residents of a country. The balance of payment can be said to be in equilibrium when the receipts of the country are equal to its payments on account of its transactions with other countries. Such a country is often called a country in ‘external balance. The positive difference is termed as a surplus and the negative difference is termed as a deficit in the balance of payments of a country. The are several ways in which the balance of payments can be broken down different sections. For instance, the export and import of goods gives us the balance of trade. The balance of trade need not always maintain the balance services, the balance of unrequited transfer. The balance of current account is a larger concept, as it includes the balance of trade, services, the balance of unrequited transfer. The balance of current account need not be equal but can show a surplus or deficit. The surplus or deficit in the balance of current can be settled by a transaction on the capital account.

DIFFERENCE BETWEEN BALANCE OF PAYMENTS AND IMP BALANCE OF TRADE

CAUSES OF UNFAVOURABLE BALANCE OF PAYMENTS

Balance of payments Notes

It is the usual experience of India to have serious difficulties in its balance of payments. After independence, in the initial stage of development, the import bill rapidly mounted up. The government formulated various policies to correct the disequilibrium, but it failed due to the following reasons:

1 Increase in imports: Heavy imports result in the unfavourable balance of nauments. An agreement between India and WTO was reached which envisaged the phasing out of all quantitative restrictions by India by April 1 2001. In line with agreement, India removed quantitative restrictions on 714 items in the Exim policy announced on March 31, 2000 and on remaining 715 items in Exim policy announced on March 31, 2001. India has to import a wide variety of goods to fulfil the target of its development plans.

2. Foreign debts : India has been borrowing from external sources to finance her developmental programmes, India lacks capital and, therefore, has to borrow capital from abroad. The loans have to be repaid and it has to meet yearly liabilities arising out of interest payment. During some years in 1990s, the dependence on external commercial borrowings has been quite high. In 1991-92, the share of external borrowing was $ 1,456 million, i.e., 31.9 percent. Their share in 1995-96 was 42.9 percent which rose further to 55.4 percent in 1998-99. During September 2014 external commercial borrowings were $ 455,929 million.

3. Increase in the price of petrol : Share of import of petrol occupies a major items in the total foreign trade of India. The import bill of India increased from 2,729.03 crore in 1973-74 to 39,97,885 crore in 2013-14. The gulf crisis during the year 1990-91 further worsened the balance of payments problem. The high trade deficit was due to rise in petroleum, oil and lubricants (POL). Supply and increasing demand of petrol adversely affected the position of balance of payments and trade deficit.

4. Foreign competition : International demand for most of the primary products exported by India had remained stagnant while it had to face serious competition with other countries interested in increasing their exports of these goods. India has to face tough competition from Sri Lanka and East Africa in tea. Competition from Bangladesh in the field of jute led to a reduction of India’s share in world export. In commodities where India held either a near monopoly or was marginal supplier, domestic policies also contribute in keeping India’s export earnings to low level, (for example, raw cotton, raw tabacco, raw hides and skins etc.)

5. Devaluation of money: Sometimes the government adopts the policy of devaluation to promote its exports when the currency is devalued, its value in foreign currency decreases. This would stimulate exports. But when we want to buy foreign goods, we have to pay more for them, imports are, thus discouraged. But India experienced more pressure due to the devaluation of rupee. Devaluation made the imports costlier than before and export demand did not increase to the same extent thereby it adversely affected the balance of payments.

6. Technical Assistance : India has chosen the path of rapid economic development thereby the import of heavily of machinery, equipment, technical assistance, expert advice etc. increased considerably. It also imported techinical knowhow. All these imports tilt the balance of payments against India.

7. Changing International Scenario : The Soviet Union was among our largest trading partners and a big market for Indian goods. Its disintegration caused a major set back to our exports. Disintegration of Soviet Union, increasing influence of China in global market agreement with WTO etc. adversely affected India’s balance of payments.

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ITEMS OF BALANCE OF PAYMENTS

As an accounting method, the balance of payments must balance over a given period. Every transaction gives rise to an equal entry on both sides-credits side and debits sides. Debits or payment side of the balance of payments account of country represents the total of all the uses made out of the exchange acquired by the country during a given period, while of all the uses made out of the total foreign receipts side represents the sources from which this foreign exchans country in the same period. The two sides as such should necessarily balance.

The balance of payments is usually composed of two accounts account; and (ii) capital account. is is usually composed of two accounts (i) current

1 Current account: The current account is made up of visible and invisible the former refers to goods and the latter refers to services. Visible items for to the merchandise account or the balance of trade, covering the transactions relating to all goods exported and imported. The invisible account usually consists of services account covering the payments for and the receipts from services. It includes such items as banking and insurance charges, investment income; interest, dividend and profit on foreign investments, tourist expenditure, transport charges and miscellaneous service items such as advertising, commission, rental, pensions, patent fees, royalties. subscriptions for periodicals and membership fees. Besides the service account, the invisible account also includes gifts or charities account usually referred to as ‘transfer payments.’ It comprises items of ‘unilateral payments and receipts for gifts, indemnities etc. made to the foriegners or received from the foreigners.

2. Capital account: The capital account is made up of long-term capital movements, short-term capital movements and changes in the foreign exchange reserves. The balance on government capital account consists of all governmental capital transactions in the form of grants or loans, short term as well as long term. It also consists of assistance by the international institutional agencies. Under private capital account, all the balances held by individuals, corporate bodies, or commercial banks are recorded. The movements of capital lead to the inflow and out flow of foreign exchange. Therefore, another major component in the capital account relates to the movements of the gold and foreign exchange.

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PRESENT POSITION OF BALANCE OF TRADE IN INDIA

India had been experiencing presistent trade deficit. Before 1947 when India was a colony of the British, the pattern of her trade was typically colonial, with the dawn of independence the trade had to be changed to suit the needs of the developing economy. The planned efforts of the government has improved the position of agriculture, industry and trade. The position of economic reforms is shown in the following

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table:

Table Position of Balance of Trade in Foreign Trade

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It is clear from the above table that India has been facing persistent trade deficit.

SUGGESTIONS FOR BALANCE OF TRADE

India should take following steps to correct its adverse balance of trade

1 The government should make all efforts to implement agriculture development programmes.

2. New market should be discovered and developed.

3. Efforts of export promotion should be made more effective.

4. Seed conservation for foodgrains and agriculture production should be adopted and production process should be modified.

5. For the export promotion agriculture products should be stored and protected.

6. Import substitution should be encouraged.

7. Production of chemicals and fertilizers should be increased and their import should be decreased.

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MEASURES FOR REMOVING UNFAVOURABLE BALANCE OF PAYMENTS

Each country makes efforts to correct its adverse balance of payment. Disequilibrium in the balance of payments may be short-term or long-term, When short term disequilibrium becomes chronic it may seriously affect the country’s economy and exchange stability. Under such circumstances, the country should take drastic steps to remove its deficit. Following measures are suggested to correct disequilibrium in the balance of payment:

1 Devaluation of money: A method of lowering domestic prices relative to foreign prices without the risk of depressing real output is to depreciate the exchange rate, i.e., to lower the price of domestic currency in terms of foreign currency. When the external value of a currency is lowered by the government itself as a deliberate policy measure, it is termed as ‘devaluation.’ Prices of deomestic product, measured in domestic currency, need not change, but the exports of the devaluing country will be cheaper, measured in foreign currency, and the prices of her imports will be dearer, measured in domestic currency. The effect of devaluation, therefore, will be to increase the quantity demanded of the devaluing country’s exports and to decrease the quantity of imports she demands. The country may, thus, achieve a favourable balance to pay off an earlier deficit.

2. Deflation : Deflation refers to the policy of reducing the quantity of money in order to reduce price and money income of the people. A reduction of the general level of domestic prices relative to foreign prices will increase the quantity of exports demanded and decrease the quantity of imports demanded with a fall in the income of people, demand for goods at home will be reduced, making more surplus available for exports. The propensity to import will decline and imports will be curtailed. Thus, the deflationary situation may automatically correct a deficit in the balance of payments.

3. Depreciating monetary value : Another method is to depreciate the external value of home currency, thus, cheapening domestic goods for foreigners. Local prices will be reduced, while prices of foreign goods will be raised. This will reduce demand for foreign goods. The latter course however, has serious limitations, because other countries may start doing depreciation of exchange rates may start as it happens Countries may start doing likewise and competitive years in the thirties. se rates may start as it happened during the depression

4. Restrictions on imports: A country experiencing ad of payments might accept non-monetary measures. A country experiencing a deficit in its balance non-monetary measures. It might resort to direct control as a means of forcing equality between the demand for and foreign exchange. Direct controls might take the form of ta affect demand by controlling trade. The government could controls might take the form of tariffs or quotas to imports which it deems desirable and not permit inessential Controlling trade. The government could permit only those produce those goods within the country which are imported Direct restrictions on imports will divert expenditures from imports to domestic production. In this way direct controls tend to be expansionary a home and contractionary abroad.

5. Export Promotion : With the limited scope for imports restrictions the only long term solution to the problem lies in the promotion of exports to earn sufficient foreign exchange to pay for our growing imports. The government should adopt various export promotion programmes such as reduction of inport duties, provision of export subsidies, quality control incentive for export etc. Exporter should be given all types of help by the government. The export promotion policy should not only aim at increasing foreign exchange earnings but also for raising income and employment within the country.

6. Foreign capital and aid : When monetary and non-monetary measures are not sufficient to correct deficit in the balance of payments, then government resorts to the items of capital account. These items include foreign capital investment, loans and foreign aid. The foreign capital investment gives pace to the economy.

7. Exchange control : The government may impose a control in the use of foreign currency to buy foreign goods. The object of exchange control is to correct a persistently adverse balance of payments. All the exporters are ordered to surrender their foreign exchange to the central bank, and it is then rationed out amongst the licensed importers. None else is allowed to import goods without a licence. The balance of payments is thus rectified by keeping the imports within limit. The national currency cannot be offered for exchange without previous permission. It is made a criminal offence to enter into an authorised exchange transactions, exchange control thus involves import control.

When serious disequilibrium arises in a country’s balance of payments, steps must be taken to correct it, if the country’s economy is to be kept in a sound condition. The causes which are responsible for such a state of affairs must be removed. No reliance can be placed on any single tool. There is room for more than one approach and for more than one device. But the application of the tool depends on the nature of disequilibrium. The main methods of desirable adjustments are monetary and fiscal policies which directly affect income and exchange depreciation which affects prices in the first instance. It can also have income effect through price effects. Monetary and fiscal policies affect relative price also.

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MEANINGFUL EFFECTS FOR FAVOURABLE BALANCE OF

PAYMENTS PROBLEM

Adverse balance of payments is a big obstacle in the path of economic try should adopt all possible measures to correct disquili development. A country should adopt all possible measures + hrium in the balance of payments. The measures which should be adent as follows:

1 Import Substitution : Import substitution is an important measure to bridge the balance of payment gap. It aims at saving foreign exchange. For almost three decades since the beginning of the Second Plan, import substitution had been the main element in India’s trade policy. The policy of import substitution enabled the country to save its valuable foreign exchange and in changing the structure of imports. Under the policy of import susbtitution, the imports of most luxury consumer goods are restricted by prohibitory tariffs, the profitiability of their domestic production automatically increased.

2.Self-sufficient economy: Self-sufficiency implies that a country produces all the goods and services it requires within the country itself without depending on others. Self-sufficiency, thus, rules out imports. Self-reliance implies that a country must, in a reasonable short period, bring to an end its dependence on foreign loans or grants and finance its imports by generating an export surplus in the economy.

3. Conservation of forest produce : Forests are important natural resources of India. Apart from providing industrial wood forests are source of a number of minor products like bamboo, canes, tandu leaves, lac, medicinal plants, essential oils, fatly oils and fats etc. The demand for some of the minor forest products exists in the foreign markets and if their output is stepped up, they can prone to be valuable foreign exchange earners. Moreover, development of forestry can save valuable foreign exchange. By raising the output of raw-materials for pulp alone, the country can substantially cut down the imports of pulp, news print and other paper, paper board etc. which would annually save foreign exchange worth of at least rupees one hundred crore.

4. Use of mineral resources: When we consider India’s mineral resources in their totality we find that this country has a wide range of useful minerals sufficient to make it industrially developed. On account of the efforts of the government, there has been great improvements in the production of mineral both in volume and value. The government is now allowing both domestic and foreign private concerns to make investment in mineral extraction and export.

5. Searching of new area : To correct the adverse balance of payments, possibilities of export in new areas may be recognised. India should keep on searching new markets in foreign countries. South East Asian countries have good potential from this angle. India has good future in the field of information technology, traditional products as well as non-traditional products.

6. Devaluation of Money : Persistent adverse balance of payments since 1951, acute shortage of foreign exchange, extensive external borrowing to overcome balance of payments problems all these factors induced India to devalue the rupee by 36.5 percent in June 1966. Devaluation was resorted to essentially(a) to reduce the volume of imports; (b) to boost exports; and (c) create a favourable balance of trade and balance of payments. Devaluation produced its healthy effect in stimulating exports. As a consequence of the policies of import restrictions and reduction in food grain imports coupled with vigorous measures of export promotion, during 1972-73, the country was able to have a favourable balance of trade for the first time since independence.

7. Control on domestic production : It is necessary to encourage the producer for exporting their produce and discouraging marketing in the domestic market only then the goods will be available for export in substantial quantities. Therefore, high duties should be imposed in respect of domestic consumption of export oriented goods and concessional duties should be imposed on the production of those goods for export purpose.

8. Tourist development : The most prom tourist traffic. We should adopt all such measures which elopement: The most promising item in this category is should adopt all such measures which encourage foreign tourists to visit India. When foreign tourists come to India, they. currency with them and convert it into our currency foreign tourists come to India, they bring in foreign and convert it into our currency to spend in our domestic market. The country receives foreign currency. Therefore, tourist commercialized to attract more foreigners. to reign currency. Therefore, tourism should be

GOVERNMENT EFFORTS TO MAKE FAVOURABLE

BALANCE OF PAYMENT

Balance of payments Notes

has been facing the persistent deficit in the balance of payments. India has adopted policy measures to remove deficit in the balance of payments. of the government to correct balance of payments deficit are as follows:

1 Liberal foreign investment policy: The balance of payments situation since 1991 has been distinctly different from the situation that prevailed in the earlier period. The Government of India has taken a number of measures to open up the foreign trade sector and has announced a massive import liberalisation. Since 1991, the government has been offering various concessions, facilities and incentives for the foreign investment into the country. Considering the sectoral composition of FDI (foreign direct investment), one finds that the largest recipient of such investment was the sector of electrical equipment including computer software and electronics. It was followed by service sector, telecommunication industry, transportation industry, power and oil refinery, chemicals excluding fertilisers, food processing industries, drugs and pharmaceuticals and cement etc.

2. Liberalised Exchange rate management : The exchange rate movement can be used for correcting the imbalances in the current of the balance of payments. In July, 1991 when the Government of India announced major trade and industrial policy, liberalisation measures, a two-step downward adjustment of 18-19 percent was carried out in exchange rate of the Indian rupee. This was expected to help the country in increasing the export earnings and thus in tackling the serious imbalances in balance of Payments. On the basis of the report of the High level Committee on Balance of payments chaired by C. Rangrajan, the Government introduced partial convertibility of rupee in 1992-93 Budget known as liberalised exchange rate management system (LERMS.) This was followed by market determined exchange rate regime in 1993.

3. Efforts of export promotion : Export promotion was actively attempted in India only from the second-half of the seventies. The government gave various monetary and fiscal incentives for promoting exports. Search for new markets for traditional exports was vigorously undertaken. Diversification of exports was attempted by including many non-traditional item. Exporters are provided credit and financial facilities. Finished goods are made duty free, taxes are removed and reduced. Exporters are granted incentives and procedural difficulties are simplified and they are granted different types of facilities for export promotion. Government of India has set up permanent organisations for export promotion.

4. Import Substitution : The two broad objectives of the programme of import substitution in India were to save scarce foreign exchange for the import of more important goods and to achieve self reliance in the production of as many goods as possible. The policy of import substitution enabled the country to save valuable foreign currency and in changing the structure of imports. Many products that were previously being imported are now manufactured in the country itself and in the case of many of these, the country has been able to achieve a position of self-sufficiency. Not only this, the process of import substitution also contributed directly to the process of economic growth.

In June 1979, Agarwal Committee was set up for making import substitution policy more effective. The Committee submitted its report in October 1980. The Committee recommended following suggestions :

1 The people should be encouraged to consume domestic-produced goods.

2. To help exporters to compete in the world market, special facilities should be provided to them for import of technical skills, knowhows and researches.

3. The process of import substitution should be more selective with a choosen sectors and industries where a concentration of efforts and resources could maximise the gain in efficiency.

4. The allocation of investment for import substitution should be diverted toward primary industries.

5. Direct foreign investment should be induced for the industries capable of import substitution.

6. Public and private sectors should make the joint efforts for import substitution.

7. An Advisory Committee to be set up for import substitution.

The import policy of the government of India till 1977-78 varied in degrees of restrictiveness during different plans. The year 1977-78 initiated a new era of import liberalisation in the country. This process was carried forward in 1980s.

8. Committees to Solve Balance of payments problems : Dr. C. Rangarajan, former Governor, Reserve Bank of India who headed the high level Committee on balance of payments submitted its report on June 1993. The Committee recommended that it is necessary that a realistic exchange rate and a gradual relaxation of restrictions on current account transactions have to go hand by hand. A number of recommendations were made regarding foreign borrowings, foreign investment and external debt management. The Committee speaks of continuous monitoring of the debt position to ensure sustainability, cost-effectivity and use-efficiency.

The framework of Reserve Bank’s approach to capital account convertibility was provided by report of the Committee on capital account convertibility (chairman S. S. Tarapore) submitted in may 1997. For the purpose of its report, the Committee defined capital account convertibility (CAC) as the freedom to convert local financial assets into foreign financial assets and vice-versa at market determined rate of exchange. The Committee preferred a phased liberalisation of controls on out flows and inflows over a three-year period (ending 1999-2000.) As a prequisite for CAC, the Committee had laid down that the current account deficit should not exceed 1.6 percent of GDP. In addition, Committee stressed that important macro economic indicators should also be a assessed on an ongoing basis.

New economic reforms initiated in 1991 were an effort made to step up export so that a major part of the import bill is paid by exports. Secondly, with a view to bring about technological upgradation, imports were liberalised. India’s trade policy since independence has been used as part of general economic policy to develop the country and to diversify the economic progress. Initially it took the form of restriciting imports and boosting exports. It also took the form of organising international trade and bilateral and multilateral a bilateral and multilateral agreements. In the Balance of Payments | 189 later year, trade policy has taken the form of export promotion through import nberansation. Formulated by bureaucrates under the influence and guidance of Indian business houses and multinational giants, India’s trade policy did have an important influence on the rapid economic development of the country, but it is basically responsible for leading the country into the classic debt trap.

Balance of payments Notes

EXERCISE QUESTIONS

 Long Answer Questions

1 Define the balance of payments and explain its various segments.

2. What are the current feature of balance of payments on capital account? Explain its strength and weaknesses.

3. Discuss the reasons of disequilibrium in the balance of payments of a country and explain how can it be corrected?

4. Why the deficit in India’s balance of payments is increasing? Evaluate the measures taken by the government to solve this problem.

5. What do you understand by trade balance? How does it differ from balance of payments?

6. Explain visible and invisible exports and imports.

Short Answer Questions

1 What do you understand by the balance of payments?

2. What do you understand by import substitution?

3. What do you understand by trade balance?

4. Give the reasons for India’s adverse balance of payment.

5. Distinguish between trade balance and balance of payments.

6. Why the deficit in Indian balance of payments is increasing?

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Objective Questions

(I) Select the Correct Alternatives :

1 The cause of adverse balance of payments is :

(a) Current account

(b) Capital account

(c) Devaluation of money

(d) Trade balance

2. Capital account of the balance of payments comprises :

(a) banking capital

(b) foreign competition

(c) external debts

(d) all of above

3. The balance of payments include:

(a) visible items

(b) invisible items

(c) both (a) and (b)

(c) none of these

4. The best measure to correct deficit in the balance of payments is:

(a) exchange control

(b) self-reliant economy

(c) export promotion

(d) monetary depreciation

5. The main administrative measure to correct adverse balance of payments is :

(a) efforts for export promotion

(b) control on domestic consumption

(c) devaluation of money

(d) all of above

[Ans. 1. (c), 2. (a), 3. (c), 4. (b), 5. (a).]

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(II) Write True or False :

1 The government must take corrective measures to deal with the causes contributing to persistent deficit in their balance of payments.

2. The balance of trade is much wider concept as compared to the balance of payments.

3. The favourable balance of payments is not the indicator of strong economy.

4. Trade balance is more useful in the decisions of economic analysis.

[Ans. 1. True, 2. False, 3. False, 4. True.)

(III) Fill in the Blanks :

1 The current account of the …………… includes visible and invisible items.

2. The current account is the statement of the …………….. actual transactions.

3. The balance of payments is divided into two major accounts, viz, current and

4. To correct the deficit in the balance of payments, the government adopts the measure of export promotion and ……….

(Ans. 1. balance of payments, 2. short-term, 3. capital account, 4. import substitution]

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