Balance of Payments Test - 14

Gifts and remittances to abroad are recorded on the Debit side of current Account.

Capital transfers involve transfers of ownership of fixed assets, funds linked to acquisition or disposal of fixed assets, or cancellation of liabilities without any counterparts received in return. Forgiveness of liabilities without any counterparts being received falls under capital transfers.

Flexible exchange rate is determined by the forces of demand and supply i.e. where demand equals supply eliminating the undervaluation or overvaluation of currencies.

The four major components of a current account are goods, services, income, and current transfers.

 When receipts of foreign exchange are more than payments. BoP results in surplus.

Currency devaluation, Import substitution and Exchange control to improve the adverse balance of payment.

Banking, shipping and communication are the invisible item of Balance of Payment.

 It is determined by market forces because every currency area must decide what type of exchange rate arrangement to maintain. Between permanently fixed and completely flexible however, are heterogeneous approaches. They have different implications for the extent to which national authorities participate in foreign exchange markets.

Flexible exchange rates creates instablity because there is too frequent fluctuations in exchange rate under it create uncertainty about the exact amount of receipts and payments in foreign exchange transac­tions.And this instability hampers foreign trade and capital movements between the countries.

Increase  in domestic currency price of the foreign currency implies decrease in the purchasing power of  domestic currency in terms of foreign currency.