UPPSC-UPPCS Mains- Answer writing practice #55

UPPSC/UPPCS Mains- Answer writing practice

What do you understand of balance of payment(BOP)? What factors can lead to balance of payment(BOP) crises? (200w)

भुगतान संतुलन (BOP) से आप क्या समझते हैं? कौन से कारक बीओपी संकट पैदा कर सकते हैं?

Model Answer

The balance of payments (BoP) of a country summarizes all transactions that a country’s individuals,
companies and government bodies complete with individuals, companies and government bodies
outside the country. These transactions consist of import and exports of goods, services and capital as
well as transfer payments such as foreign aid and remittances.

The BOP is composed of three sub-accounts:
· The current account consists of revenue obtained through merchandise trade, services, income
receipts, and one-way transfers.
· The capital account includes transfers of financial assets such as debt payments and transfers of
titles to assets.
· The financial account records trade in stocks, bonds, commodities, and real estate.

The factors that give rise to adverse BoP:
1. Economic Factors
· Higher levels of imports than exports resulting in a deficit in the BOP account.
· When there is inflation in the domestic economy, foreign goods become relatively cheaper as
compared to domestic goods, which increases imports.
· Cyclical fluctuations, like recession or depression.
· Fall in demand for country’s goods in the foreign markets leads to fall in exports, thereby adversely
affecting the BoP.
· Import of Services from other countries.

2.Political Factors
· Political instability may lead to large capital outflows and reduce the inflow of foreign funds.

3.Social Factors:
· An unfavourable change for the domestic goods leads to a deficit in the BoP.
· High population growth in poor countries adversely affects their BOP because it increases the needs
of the countries for imports and decreases their capacity to export.

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