A country has a trade deficit of 120 million USD and net invisibles of 90 million USD. Its errors and omissions are −5 million USD, and its overall balance of payments shows a deficit of 15 million USD. Which of the following is correct?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → The capital account balance is 20 million USD, and official reserves fall.
Given:
Trade balance = −120 million USD
Net invisibles = 90 million USD
Errors and omissions = −5 million USD
BoP balance = −15 million USD (a deficit)
The BoP balance = current account balance + capital account balance + errors and omissions. First find the current account balance, then solve for the capital account.
Current account balance = −120 + 90 = −30
−15 = −30 + capital account balance + (−5)
Capital account balance = −15 + 30 + 5 = 20 million USD
A BoP deficit is met by an official reserve sale, so reserves fall.
Option (3) — 10 takes errors and omissions as +5.
NCERT (2026-27):
“6.1.3 Balance of Payments Surplus and Deficit … 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). …” |
