Balance of Payments Test - 16

Export of the Machinery recorded on the Credit side of Current Account.

Decrease in foreign exchange reserve will be recorded on the  Credit side of BoP.

Foreign exchange reserves include foreign currency assets, gold, SDRs (Special Drawing Rights), and reserve tranche position (RTP) in the International Monetary Fund (IMF). Therefore, SDRs are included in the category of foreign exchange reserves.

Exchange rate stability, it is said, is necessary for orderly development of the international economy and rapid growth of world trade.

If the exchange rate is unstable or variable, the exporters will not be certain about the price they would receive for the goods to be expedited by them; the importers will not be certain about the price and the payments they have to make for their imports.

 When exports of goods is less than the imports of goods. it is the situation of Trade Deficit

Autonomous transactions are done for profit motive. Such transactions are the main cause of deficit in BoP.

Gifts, Remittances, and grants are not recorded in the capital account of BoP.

A donation of ₹50 million received from Microsoft raises the supply of foreign exchange. Along with this the amount that foreigners invest in their home country increases the supply of foreign exchange.

Investment income receipts include interest earned on the investments of RBI, interest earned on holdings of SDRs, and payments such as interest and commitment charges on foreign loans. Therefore, interest earned on foreign loans is part of investment income receipts.

The nominal exchange rate is defined as the number of units of the domestic currency that can purchase a unit of a given foreign currency. A decrease in this variable is termed nominal appreciation of the currency.