Question

A country’s Balance of Payment includes two components – Current account, Capital and financial account. Current account measures the value of all goods and services imported and exported during a given financial year. Current Account Deficit (CAD) arises when the value of imported goods and services exceeds the value of exported goods and services. As on June 30, 2020 RBI reported India’s current account deficit has been reduced to 0.9% of the GDP in 2019-20 as compared to 2.1% in FY 2018-19 due to curtailed imports.

a. Differentiate between Current account and Capital account. 400 Words

b. What measures can be taken to reduce the disequilibrium in the balance of payments’ position? 400 Words

The answer should be a min of 800 words

Answer 1

Answer:(A)Current Account:may refer to keeping records of country's transanction with whole world as it records value of exports and imports of goods and services.

Capital Account:It represents balance of payment for a country.It measures country's future predicted income, production and saving.

Current Account vs Capital Account

1.Factors of current account are income and current transfers and import and export of good and services while portofolio investment and loans sanctioned by one country to another country are factors of capital account.

2.Capital Account indicates transition of ownership of country's assets while current account simply shows net income of any nation.

3.Capital account has exhaustively examine source and application of capital while current account mainly look after receipts and payments of cash.

4.Current Account keep records of goods and services in current financial year while capital account indicate transition in the ownership of any country's asset.

5.Capital account helps out any investor in checking the net investment position of the country while current account helps out any investor to check trade deficit of a nation.

(B) Several measures can be taken to reduce the disequilibrium in balance of payment position are given below.

1.Monetary policy compression:By evaluating aggregate expenditure as well as demand in order to restricting the availability of credit.When RBI or central bank of any country start charging higher landing rates charge by the commercial bank.Result would be more reluctant to take money from bank and common consumer to buying goods like car etc.

Also when high inflation is going on any country especially developing country compressed monetary policy would be most production to rectify high inflation scenario.When aggregate demand comes short,aggregate expenditure also comes down.

2.Downturn Fiscal Policy:Fiscal policy is quite useful way to cut out government expenditure,mainly those which become non productive over a period of time.It will help in reduction of expenditure directly but also in a way indirectly due to multiplier activity.

Also when direct taxes increase it will result in reduction of aggregate expenditure,outcome of this reduction in imports .When exise duty and sales tax increase which is a component of indirect taxes will also result in reduction in expenditure.

3.Increase exports and decrease imports:By deduct export duties exports can be increase over a period of time.Lowering the interest rate also help in it.Providng subsidies to producer in the market also also increase export level of a nation.

By imposing lower income tax on export revenue of producers and less exise duty also help producer to produce for export purposes.By lowering exise duty export price goes down,thus,people around the world tilt towards goods and services which is good and affordable in price.