The balance of payments of a country shows the following (million USD):
| Item | Value |
|---|---|
| Exports of goods | 300 |
| Imports of goods | 380 |
| Net non-factor services | 60 |
| Net income | −10 |
| Net transfers | 20 |
| Capital account balance | 25 |
| Errors and omissions | −5 |
Which of the following is correct?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → The current account deficit is 10 million USD, and official reserves rise by 10 million USD.
The current account is the trade balance plus net invisibles (services, income and transfers). The overall balance adds the capital account and errors and omissions. A surplus in the overall balance is the rise in official reserves.
Given:
Exports 300
Imports 380
Net invisibles: 60 − 10 + 20
Capital account +25
Errors and omissions −5 (million USD)
\( \displaystyle \text{Trade balance} = 300 - 380 = -80 \)
\( \displaystyle \text{Current account} = -80 + 70 = -10 \)
\( \displaystyle \text{Overall balance} = -10 + 25 - 5 = +10 \)
The current account deficit is 10 million USD, and reserves rise by 10 million USD.
Option (1) — 80 is only the trade deficit.
Option (2) — 15 forgets the errors and omissions.
NCERT (2026-27): “Balance on Current Account … Balance of Trade (BOT) is the difference between the value of exports and value of imports of goods of a country in a given period of time. …” “6.1.3 Balance of Payments Surplus and Deficit The essence of international payments is that just like an individual who spends more than her income must finance the difference by selling assets or by borrowing, a country that has a deficit in its current account (spending more than it receives from sales to the rest of the world) must finance it by selling assets or by borrowing abroad. Thus, any current account deficit must be financed by a capital account surplus, that is, a net capital inflow. Current account + Capital account ≡ 0” “In this case, in which a country is said to be in balance of payments equilibrium, the current account deficit is financed entirely by international lending without any reserve movements. Alternatively, the country could use its reserves of foreign exchange in order to balance any deficit in its balance of payments. The reserve bank sells foreign exchange when there is a deficit. This is called official reserve sale. The decrease (increase) in official reserves is called the overall balance of payments deficit (surplus). The basic premise is that the monetary authorities are the ultimate financiers of any deficit in the balance of payments (or the recipients of any surplus). …” “Errors and Omissions It is difficult to record all international transactions accurately. Thus, we have a third element of BoP (apart from the current and capital accounts) called errors and omissions which reflects this. …” |