Balance of Payments & Foreign Exchange NCERT Solutions Class 12 PDF 2026

Ans:
1. Scope: Balance of Trade (BOT) is a narrow concept. It only includes the export and import of visible items (physical goods). Balance of Payments (BOP) is a broader concept that includes BOT, plus invisible items (services), unilateral transfers, and capital transfers.
2. Nature: BOT is only a part of the Current Account of BOP. BOP is a complete record containing both Current and Capital accounts.
3. Deficit: A deficit in BOT can be covered by a surplus in the overall BOP, but a deficit in BOP cannot be covered by a surplus in BOT.

Ans:
Current Account: It records transactions relating to the export and import of goods and services, and unilateral transfers (like gifts, remittances) during a year. It does not alter the asset-liability status of a country.
Capital Account: It records transactions like foreign investments (FDI, FII) and borrowings/lendings to and from abroad. These transactions cause a change in the asset or liability status of the country's residents or its government.

Ans:
Autonomous Transactions: These are international transactions undertaken for their own sake, usually for profit maximization, independent of the BOP situation. They are called 'above the line' items. Example: Export of goods by a private company.
Accommodating Transactions: These are undertaken by the Central Bank to cover the gap (deficit or surplus) created by autonomous transactions and bring the BOP into balance. They are called 'below the line' items. Example: Borrowing from the IMF to cover a BOP deficit.

Ans:
Fixed Exchange Rate: The exchange rate is officially fixed and maintained by the Government or Central Bank. The Central Bank buys and sells foreign currency to maintain this fixed rate. (Historically tied to Gold).
Flexible (Floating) Exchange Rate: The exchange rate is determined by the free market forces of Demand and Supply of foreign exchange in the international market, without government intervention.

Ans: Foreign exchange refers to all currencies other than the domestic currency of a given country. For India, the US Dollar, Euro, Yen, etc., are all foreign exchange.

Ans: Two major sources are:
1. Exports: When foreigners buy our goods/services, they pay in foreign currency.
2. Foreign Investment: When foreign companies (FDI/FII) invest in our domestic market.

Ans: Managed floating is a mixture of a flexible and fixed exchange rate system. The exchange rate is determined by market forces (demand and supply), but the Central Bank intervenes by buying/selling foreign currency to restrict heavy fluctuations and keep the rate within a desired limit.

Ans: Import of machinery involves the physical movement of goods. Therefore, it will be recorded on the Debit side (negative side) of the Current Account (under visible items) of the BOP.

Ans: Unilateral transfers are one-way transactions or unrequited transfers for which no service or return payment is expected. Examples include gifts, donations, and personal remittances sent by NRIs to their families.

Ans:
Depreciation: It refers to the fall in the value of the domestic currency in relation to foreign currency due to free market forces (demand and supply) in a flexible exchange rate system. No government intervention is involved.
Devaluation: It refers to the deliberate reduction in the value of the domestic currency by the Government or Central Bank in a fixed exchange rate system.
Both result in exports becoming cheaper and imports becoming costlier, but the mechanism (market vs. government) is entirely different.

Ans: There is an inverse relationship between the price of foreign exchange and its demand. When the price of foreign exchange falls (e.g., $1 drops from ₹80 to ₹70), it means the domestic currency has appreciated.
1. Cheaper Imports: Foreign goods become cheaper for domestic consumers, increasing the demand for imports, which requires more foreign exchange.
2. Tourism: Travelling abroad becomes cheaper, prompting more people to travel and demand foreign currency.
3. Investment: Purchasing assets or shares in foreign countries becomes relatively less expensive.

Ans: The main components of the Capital Account are:
1. Foreign Investments: Includes Foreign Direct Investment (FDI - purchasing physical assets and gaining control) and Portfolio Investment (FII - buying shares/bonds without control).
2. Borrowings and Lendings: Commercial borrowings from international money markets and external assistance (soft loans) from foreign governments or institutions like the World Bank.
3. NRI Deposits: Deposits made by Non-Resident Indians in domestic banks.
4. Changes in Foreign Exchange Reserves: Transactions by the Central Bank to settle BOP deficits/surpluses.

Ans: Under the flexible exchange rate system, the equilibrium rate is determined at the point where the Demand curve for foreign exchange intersects the Supply curve of foreign exchange.
• The demand curve slopes downwards (inverse relation with price).
• The supply curve slopes upwards (direct relation with price).
At the intersection point, the quantity of foreign exchange demanded exactly equals the quantity supplied. If the rate is above equilibrium, there will be excess supply, pushing the rate down. If the rate is below equilibrium, excess demand will push the rate up until equilibrium is restored.

Ans: No, a deficit in the Current Account is not *always* a cause for alarm, especially for developing countries like India.
If the deficit is due to the massive import of capital goods (machinery, advanced technology), it will build the productive capacity of the nation, leading to higher exports and economic growth in the future. However, if the deficit is merely due to the import of consumer goods (like gold or luxury cars) that do not generate future income, then it leads to a debt trap and is definitely a cause for severe alarm.

Ans: 'Make in India' encourages domestic and foreign companies to manufacture goods within India.
1. BOP Impact: It will increase exports (increasing foreign exchange inflows) and reduce the dependence on imports. This will help reduce the Current Account Deficit. Further, it will attract huge FDI, creating a surplus in the Capital Account.
2. Foreign Exchange Rate: The massive inflow of foreign currency (supply increases) will shift the supply curve to the right, leading to the Appreciation of the Indian Rupee (e.g., $1 might go from ₹83 to ₹80).

Ans: Assertion (A) is True, but Reason (R) is False (in this context).
FDI is recorded on the credit side of the Capital Account because it brings an immediate inflow of foreign exchange into the country, increasing the liability/asset status. The future outflow of profits is recorded in the Current Account and is not the reason for its initial classification as a capital credit.

Ans: When the domestic currency appreciates (e.g., $1 changes from ₹80 to ₹70), domestic goods become relatively more expensive for foreign buyers. As a result, the volume of domestic exports tends to fall.

Ans: It is an Autonomous transaction because it is made for personal motives (supporting family) and is completely independent of the country's overall Balance of Payments situation. It will be recorded in the Current Account.

Ans: The depletion of foreign exchange reserves by the Central Bank to settle a BOP deficit is an accommodating transaction, and it is recorded in the Capital Account, as it directly reduces the financial assets held by the country's monetary authority.