Chapter 10: Balance of Payments Class 12 Economics NCERT Solutions

Learn about current account, capital account, and international transactions with Chapter 10 NCERT Solutions. Download free PDFs for smarter revision. Scroll below to explore solved exercises and important concepts.

What You Will Learn in Chapter 10 – Balance of Payments

This chapter helps students understand how a country tracks its international transactions, how payments are made, and how these transactions affect a nation’s economic standing. The concepts of surplus, deficit, and equilibrium in BOP are crucial for analyzing international trade and economic policy.

Key Topics Covered:

1. Meaning of Balance of Payments (BOP)

  • BOP is a systematic record of all economic transactions between the residents of a country and the rest of the world during a given period (usually one year).

  • It includes two main accounts: the current account and the capital account.

2. Components of Balance of Payments

Current Account:

  • Exports and imports of goods and services.

  • Income receipts (earnings from abroad).

  • Unilateral transfers (gifts, foreign aid).

Capital Account:

  • Foreign investments (direct and portfolio).

  • Loans and borrowings (external).

  • Capital transfers.

3. Current Account Deficit and Surplus

  • Current Account Deficit (CAD): When a country imports more goods and services than it exports.

  • Current Account Surplus: When a country exports more than it imports.

4. Capital Account Deficit and Surplus

  • Capital Account Deficit: When a country’s liabilities (borrowings, etc.) exceed its assets (foreign investments).

  • Capital Account Surplus: When a country attracts more foreign investments than it borrows.

5. Balance of Payments Equilibrium

  • Equilibrium in BOP: When the sum of the current account and the capital account equals zero, meaning there is no surplus or deficit.

6. Official Reserves and Errors and Omissions

  • Official Reserves: Foreign exchange reserves held by a country’s central bank.

  • Errors and Omissions: Adjustments made due to discrepancies in data reporting.

7. Diagrammatic Representation of BOP

  • Graphical illustration showing the balance between current and capital accounts.

  • Helps to understand surplus, deficit, and equilibrium in BOP.

Concept Table – Balance of Payments Accounts

TermMeaningEffect
Current Account Deficit (CAD)Imports > ExportsOutflow of currency
Current Account SurplusExports > ImportsInflow of currency
Capital Account DeficitLiabilities > AssetsOutflow of capital
Capital Account SurplusAssets > LiabilitiesInflow of capital
Balance of Payments EquilibriumSum of current and capital accounts = 0No surplus or deficit

NCERT Solutions for Chapter 10 – Balance of Payments

Intext Questions:

  • Definitions of BOP components.

  • Current account vs capital account.

  • Factors influencing BOP surplus and deficit.

Exercise Questions (Q1–Q9):

  • Detailed answers on:

    • Components of BOP and their significance.

    • Calculations based on current account and capital account balances.

    • The relationship between BOP and a country’s economic stability.

    • Real-life examples of BOP imbalances.

Download Chapter 10 Solutions PDF – Balance of Payments

Get access to our free, comprehensive PDF containing:

  • All NCERT intext and exercise solutions.

  • Definitions and important formula-based explanations.

  • Visual representations of BOP accounts.

  • Board-exam-focused short and long answers.

Highlights of Our NCERT Solutions:

  • Clear explanations with real-world case studies.

  • Visual aids such as BOP diagrams.

  • Easy-to-understand definitions and terms.

  • Exam-ready answers for quick revision.

Recommended Preparation Tips:

  • Understand the difference between the current and capital accounts.

  • Focus on how BOP surplus/deficit impacts the economy.

  • Practice numerical questions related to BOP calculations.

  • Learn real-life examples, such as India’s current account deficit trends.

  • Revise key terms like ‘official reserves’ and ‘errors and omissions.’

Additional Study Resources:

  • Flashcards for key terms (Current Account, Capital Account, Surplus/Deficit).

  • Diagram practice sheets for BOP accounts.

  • Past year CBSE questions on BOP concepts.

  • Online quizzes and mock tests on BOP calculations.

Mastering Chapter 10 – Balance of Payments

Mastering this chapter is essential for understanding how a country’s international transactions affect its overall economic health. Whether it\’s analyzing trade deficits, understanding capital flows, or managing foreign exchange reserves, this chapter provides the tools needed to interpret global economic dynamics.

Ideal for CBSE Board Exams and entrance exams like CUET, this chapter lays the groundwork for international economics and macroeconomic policy.

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Chapter 10: Balance of Payments

NCERT Textbook Questions Solved – Class 12 Macro Economics

Question 1: Differentiate between Balance of Trade and Current Account Balance. [3 Marks]

Answer: Balance of Trade (BOT) refers to the difference between the value of a country’s exports and imports of goods, whereas the Current Account Balance includes the balance of trade along with net income from abroad (like remittances, interest, dividends) and net transfers.

Question 2: Should a current account deficit be a cause for alarm? Explain. [1 Mark]

Answer: No, if a deficit in the current account is offset by the capital account, it is not a cause for alarm. However, if the deficit persists, it could lead to depletion of foreign exchange reserves or borrowing, posing economic risks.

Value: Analytic

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? [1 Mark]

Answer: The exports from country B to country A will increase as the goods from country B become cheaper. This will improve the trade balance for country B and create a trade deficit for country A.

I. Very Short Answer Type Questions (1 Mark)

  • Question 1: What does balance of payments account of a country record?
    Answer: It records all economic transactions between residents of a country and the rest of the world during a specific period.
  • Question 2: What is meant by visible items?
    Answer: Physical goods that can be touched and measured, such as machines, cloth, etc.
  • Question 3: What is the meaning of invisible items?
    Answer: Intangible services like transport, insurance, and banking.
  • Question 4: Why are imports entered as negative items in the balance of payments account?
    Answer: Imports result in an outflow of foreign currency, hence recorded as negative items.
  • Question 5: What is meant by balance of trade?
    Answer: The difference between the value of exports and imports of goods.
  • Question 6: Name the items included in balance of trade account.
    Answer: Exports and imports of visible goods.
  • Question 7: When will balance of trade show a deficit?
    Answer: When imports exceed exports.
  • Question 8: How is a deficit or a surplus on the current account restored?
    Answer: Through surplus or deficit in the capital account.

II. Multiple Choice Questions (1 Mark)

  • Question 1: (d) Balance of payments
  • Question 2: (b) deficit of Rs 10 crore in balance of trade
  • Question 3: (c) Banking services provided in other countries
  • Question 4: (a) Balance of capital account
  • Question 5: (b) Accommodating items
  • Question 6: (d) all of them
  • Question 7: (a) flow
  • Question 8: (d) all of them

III. Short Answer Type Questions (3-4 Marks)

Question 1: State four items of current account of BOP account. [CBSE 2004, 08, 09]

  • Export and Import of Goods (Merchandise Transactions): Visible trade balance.
  • Export and Import of Services: Includes banking, shipping, and insurance services.
  • Unilateral Transfers: Gifts, donations, remittances.
  • Income Receipts and Payments: Profits, interests, and rent from abroad.

Question 2: What do you mean by capital account and what are its components?

  • Loans: Borrowings and lendings between countries.
  • Foreign Investment: Investments made abroad or by foreign investors.
  • Change in Foreign Exchange Reserves: Managed by the central bank.

Question 3: Distinguish between current account and capital account of BOP account.

Answer: Current account records trade in goods, services, and income transfers. Capital account records cross-border investments and loans.

Question 4: Distinguish between balance of trade and balance of payment.

Answer: Balance of trade refers to exports minus imports of goods, whereas balance of payments includes goods, services, income, and capital flows.

Question 5: Distinguish between autonomous and accommodating transactions of BOP account.

Answer: Autonomous transactions occur for economic reasons (trade, investments), while accommodating transactions restore BOP equilibrium (like loans to correct deficits).

Question 6: Where is ‘borrowings from abroad’ recorded in the Balance of Payments Accounts? Give reasons. [AT 2015]

Answer: It is recorded in the capital account as a credit item since it brings in foreign currency.

Question 7: Where will sale of machinery to abroad be recorded in the balance of payment accounts? [CBSE 2015]

Answer: It will be recorded under the current account as an export of goods, leading to a credit entry.

Question 8: What is meant by ‘official reserve transactions’? Discuss their importance in Balance of Payments. [CBSE Sample Paper 2016]

Answer: Transactions related to changes in foreign exchange reserves, crucial for maintaining BOP equilibrium and stabilizing the currency.

IV. True or False

  • Question 1: True
  • Question 2: True
  • Question 3: False
  • Question 4: False
  • Question 5: True
  • Question 6: False
  • Question 7: True
  • Question 8: True
  • Question 9: False

V. Higher Order Thinking Skills (HOTS)

Question 1: What does a deficit in a current account indicate?

Answer: It indicates that imports of goods and services exceed exports, causing outflow of foreign exchange.

Question 2: What does a deficit in capital accounts indicate?

Answer: It indicates more purchase of assets abroad than foreign investments in the home country.

Question 3: Explain the meaning of a deficit in BOP. [CBSE 2010, AI 13]

Answer: A BOP deficit means the total autonomous foreign exchange outflows exceed inflows, requiring balancing through reserve use or borrowing.

Question 4: The balance of trade shows a deficit of Rs 5,000 crore and the value of imports is Rs 9,000 crore. What is the value of exports? [CBSE 2004]

Answer: Rs 4,000 crore.

Question 5: The balance of trade shows a deficit of Rs 300 crore. The value of exports is Rs 500 crore. What is the value of imports? [CBSE 2004]

Answer: Rs 800 crore.

VI. Application-Based Questions

Question 1: How can an increase in foreign direct investment affect the price of foreign exchange? [CBSE 2013]

Answer: It increases supply of foreign exchange, thereby lowering its price.

Question 2: State whether the following transactions will be recorded on the debit or credit side of BOP:

  • Debit: (2) Repayment of loan, (5) Acquisition of foreign company, (6) Purchase of toys from China
  • Credit: (1) Loan from IMF, (3) Purchase of shares by Japanese resident, (4) Export of Jute

Question 3: Identify whether the following items are visible or invisible:

  • Visible Items: (2) Import of LCD, (4) Export of Tea
  • Invisible Items: (1) Export of software, (3) Banking services, (5) Consultancy services

Question 4: Classify whether the following are in current account or capital account:

  • Current Account: (2) Imports, (5) Gifts, (7) Import of machinery
  • Capital Account: (1) Purchase of shares, (3) Borrowings, (4) Loan repayment, (6) Purchase of land