Suppose, the Balance of Trade of an imaginary economy shows a favourable balance of ₹ 500 crore. The values of

Question 48 of 77

Q. Suppose, the Balance of Trade of an imaginary economy shows a favourable balance of ₹ 500 crore. The values of merchandise exports are ₹ 1200 crore and transfer payments are ₹ 400 crore. The value of merchandise imports would be ₹ ________ crore. (Choose the correct alternative to fill in the blank) (A) 1700 (B) 750 (C) 700 (D) 900

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Concept understanding — Current Account Deficit

The Current Account Deficit: Spending More Than You Earn, But With a Country

Think of your monthly allowance. If you spend ₹2,000 but only earn ₹1,500, you have a deficit of ₹500. You cover that gap by borrowing from a friend or dipping into savings. A country does the same thing on a massive scale — that's the Current Account Deficit (CAD).

The Everyday Intuition

A country's current account is like its income-and-expenditure diary with the rest of the world. It records three main things:

Goods (exports and imports of physical items — phones, wheat, oil)
Services (IT exports, tourism, shipping)
Transfers (money sent home by workers abroad, foreign aid)

When the total money flowing out for imports, services, and transfers exceeds the money flowing in from exports, services, and transfers, you have a deficit. The country is a net borrower from the world.

Note

A deficit is not automatically "bad." It means the country is consuming or investing more than it produces — which can be fine if the borrowed money goes into productive assets (factories, roads) that generate future income.

The Precise Definition (NCERT Style)

The current account is part of the Balance of Payments (BoP) — the record of all economic transactions between residents of a country and the rest of the world.

\text{Current Account Balance} = (X - M) + (X_{\text{services}} - M_{\text{services}}) + \text{Net Transfers} + \text{Net Income}

Where:

$X$ = Exports of goods
$M$ = Imports of goods
$X_{\text{services}}$ = Exports of services (e.g., Indian IT firms selling software to the US)
$M_{\text{services}}$ = Imports of services (e.g., Indians using Netflix)
Net Transfers = Money received from abroad minus money sent abroad (e.g., remittances from Indians working in the Gulf)
Net Income = Earnings from investments abroad minus payments to foreign investors (e.g., dividends paid to a Japanese company that owns a factory in India)

If this total is negative, the country has a Current Account Deficit.

Why It Matters (The "So What?")

A CAD must be financed. How? By borrowing from abroad or selling assets to foreigners. This shows up on the other side of the BoP — the Capital Account. If a country runs a CAD of $50 billion, it must attract$ 50 billion of foreign investment (FDI, FII, loans) to balance the books.

Three things to watch:

Sustainability — A small CAD (say 2-3% of GDP) is normal for a growing economy like India. A large, persistent CAD (5%+ of GDP) signals trouble: the country is living beyond its means and may struggle to repay.
Currency pressure — To finance a CAD, the country needs foreign currency (dollars). High demand for dollars can weaken the rupee. A weaker rupee makes imports costlier (inflation) but helps exports.
The J-Curve effect — When the rupee depreciates, the trade deficit often worsens initially before improving. Why? Imports are priced in dollars and become more expensive in rupees immediately, while export volumes take time to respond. The graph of the trade balance over time looks like a "J" — dipping first, then rising. …

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Balance of Trade measures only merchandise exports minus merchandise imports; transfer payments are excluded. With a favourable balance of ₹ 500 crore and exports of ₹ 1200 crore, merchandise imports must be ₹ 700 crore.

The Balance of Trade (BOT) is a narrow concept in the external sector accounts. It records the difference between the value of goods (merchandise) a country exports and the value of goods it imports over a period. The key word is merchandise — physical goods like wheat, steel, textiles, machinery. Services (like software exports or tourism receipts) and unilateral transfers (remittances, gifts, grants) do not enter the Balance of Trade; they appear elsewhere in the Balance of Payments.

A favourable (or surplus) Balance of Trade means merchandise exports exceed merchandise imports. An unfavourable (or deficit) balance means imports exceed exports. The question tells us the economy has a favourable balance of ₹ 500 crore, so exports are ₹ 500 crore more than imports.

\text{Balance of Trade} = \text{Merchandise Exports} - \text{Merchandise Imports}

The mention of transfer payments (₹ 400 crore) is a distractor. Transfer payments — remittances sent home by workers abroad, foreign aid, gifts — are unilateral flows with no quid pro quo. They do not involve the exchange of goods, so they are irrelevant to the Balance of Trade. They matter for the current account balance, but not here. …

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