REVISION - Short Questions - Balance of Payment



REVISION - Short Questions - Balance of Payment  

1.     Define Balance of payment?
Balance of payment is the systematic recording of transaction of a country with the rest of the world
2.     What are the main parts of Balance of payment?
The main parts of Balance of payment are; 1) current account 2) the capital account and 3) the financial account.
3.     Define visible trade?
The export and import of goods are referred to as visible trade
4.     Define the balance of visible trade?
The difference between the value of exports and imports of physical items is known as balance of visible trade.
5.     Define invisible trade? 
The export and import of services are referred to as invisible trade
6.     Define balance of invisible trade?
The difference between the value of import and export is known as balance of invisible trade.
7.     When does Balance of payment become deficit or unfavourable?
When import exceeds export, the balance of payment become deficit or unfavourable. 
8.     What are the measures to correct the imbalances in Balance of payment?
There are different measures to correct the imbalance. 1) Deflation, 2) Government raise interest rates, 3) Protectionism, 4) Devaluation
9.     Define Deflation?
Deflation is a decrease in the general price level of goods and services.
10. What situation is referred to as deflation?
When the inflation rate falls below 0% (a negative inflation rate) it is referred to as deflation.
11. What would happen to the value of money when deflation takes place?
Deflation increases the real value of money.
12.What happen to the pattern of consumer expenditure when there is an increase in the real value of money?
Increase in the real value of money allows one to buy more goods with the same amount of money over time.
13.What is the effect of raising interest rate in an economy?
When the government raise interest rates,  the economy attract flow of money into the country. High interest rate make borrowing expensive and consumers borrow less to spend and firms less to invest.
14. Define protectionism?
Protectionism refers to the policies designed to prevent trade between countries, such as tariff, quota, embargo, exchange control, and so on. 
15. Define devaluation?
Devaluation refers to the lowering of the value currency to make the exports cheaper for foreign countries to buy.  At the same time, the imports will become more expensive
16. What transactions are included in Current account of balance of payment?
Current account of balance of payment includes all the transactions of visible trade, invisible trade, income and current transfers.  
17. What transactions are included in Capital Account of Balance of Payment?
The Capital Account of Balance of Payment includes the
1)  Payment for a change of ownership of fixed assets such as houses, machinery and factories (fixed assets)
2) Cancellation of debts. 
18. What transactions are included in Financial Account of Balance of Payment?
The Financial Account of Balance of Payment includes all records of
1)    Investments in capital, shares and loans. 
2)    Direct inward investment received as foreign firm sets up a factory, office or retail outlet, any reinvestment of profits.
3)    Portfolio investments received or paid overseas for purchases or sales of shares of companies (equity) and loans (debt).
4)    Government drawing on or additions to their reserves of foreign currencies.  
19.  What is the reason for the errors in the Balance of payments?
There are numerous errors and omissions which are due to payments not being recorded and to delays in obtaining information.
20. How do the errors and omissions are represented in the balance of payment account?
The balancing item represents the total of the errors and omissions.