Q. With reference to the Balance of Payment (BoP), consider the following statements:
1.The BoP is essentially the net outcome of the Current Account and the Capital Account.
2.If there is a negative outcome (deficit) in the BoP, the gap must first be filled by drawing from the country’s Foreign Exchange Reserves.
3.According to the principle of double-entry book-keeping, the total credits (inflows) must always equal the total debits (outflows), meaning the BoP is always technically in balance.
Which of the statements given above is/are correct?
Explanation:
Statement 1: Correct. The BoP is the outcome of the total transactions with the outside world, which is essentially the net outcome of the current and capital accounts.
Statement 2: Correct. If there is a negative outcome in the BoP, the necessary foreign exchange is drawn from the country’s forex reserves. If reserves are insufficient, it is a BoP crisis, and the economy seeks forex help (e.g., from the IMF) as a last resort.
Statement 3: Incorrect. While the BoP is calculated on the principles of double-entry book-keeping (every entry is shown as credit or debit) , which ensures that the accounting sum of all transactions must be zero, the final outcome of the Current Account + Capital Account (known as the BoP) might be positive or negative. The difference is managed by changes in the country’s reserves, but the statement implies that the Current Account + Capital Account outcome is always zero, which is false in economic terms (a deficit means it is not zero).
