Question

1.Explain the difference between a Balance of Payment (BOP) deficit and surplus?

2. Suppose that a certain country has a current account surplus. Does this mean that the country will necessarily have a financial account deficit? Explain why or why not? please be specific and use your own words.

Answer 1

1.Explain the difference between a Balance of Payment deficit and Balance of Payment surplus?

Balance of Payment is a measure of all the transactions like imports and exports of goods and services,as well as transfer payments between a country and the rest of the world at a given period of time which may be a quarter or a year.

Balance of Payment deficit is a situation when the receipts of the nation are less than the payments of the country.Here imports are more as compared to the commodities exported.It arises only in account of autonomous transactions,which means that it includes those transactions which hold economic motive irrespective of the current Balance of payments.

Balance of payment deficit=Receipts of Current A/C +Receipts of Capital A/C < Payments of Current A/C+Payments of Capital A/C.

The government corrects the Balance Of Payments deficit by withdrawing amount from its foreign exchange reserve,or by borrowing funds from the IMF.

Balance of Payment surplus is a situation when the receipts of the nation exceed its payments.The exports exceed the imports in this situation.It also arises only in autonomous transactions.

Balance of Payment Surplus=Receipts of Current A/c +Receipts of Capital A/C> Payments of Current A/C+Payments of Capital A/C.

The government corrects the Balance of Payments surplus by depositing the excess funds in its foreign exchange reserve.