Read the following statements : Assertion (A) and Reason (R). Choose the correct alternative from those given

Question 56 of 77

Q. Read the following statements : Assertion (A) and Reason (R). Choose the correct alternative from those given below : Assertion (A): In case of an unfavourable Balance of Trade, the Current Account of the nation may be in surplus. Reason (R): Net invisible receipts of a nation can exceed the Net visible receipts. Alternatives : (A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of the Assertion (A). (B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A). (C) Assertion (A) is true, but Reason (R) is false. (D) Assertion (A) is false, but Reason (R) is true.

Uttarakhand UbseCBSE Class XII Board 2024MCQ· 1mImportance★★★★★

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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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A nation can have a current account surplus even when its trade balance is negative, because the surplus from invisible items (services, transfers, income) can more than offset the visible trade deficit.

Let’s place this in the real world of international economics. The Balance of Payments is a record of all transactions between a country’s residents and the rest of the world. It has two main parts: the Current Account and the Capital Account. The Current Account itself is split into two broad categories — the visible trade (goods, also called merchandise) and the invisible trade (services, transfers like remittances, and investment income).

When we talk about Balance of Trade, we are referring only to the visible part — exports minus imports of goods. If imports exceed exports, we have an unfavourable or deficit Balance of Trade. That is what the Assertion states: an unfavourable Balance of Trade exists.

Now, the Current Account is wider than just the trade balance. It is:

Current Account Balance = Balance of Trade + Net Invisibles

So even if the Balance of Trade is negative, the Current Account could still be positive if the net invisible receipts are large enough. For example, India often runs a trade deficit (importing more oil, gold, machinery than it exports) but has a large surplus from software services exports and remittances from Indians abroad. In many years, this invisible surplus has been big enough to turn the overall Current Account into surplus.

Note

The term “invisible” here does not mean hidden — it refers to non-physical items: services (IT, tourism, banking), income (profits, dividends, interest), and unilateral transfers (gifts, remittances, foreign aid).

The Reason says: “Net invisible receipts of a nation can exceed the Net visible receipts.” This is a factual statement — it is possible for the surplus from invisibles to be larger than the deficit from visibles. That is exactly the condition under which the Assertion becomes true. …

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