question_answer

(a) Explain the impact of rise in exchange rate on national income.

(b) Explain the concept of 'deficit' in balance of payments.

 

Answer:

(a) If the exchange rate of a country falls with respect to other country then its exports becomes cheap while imports become expensive. For example: If exchange rate was\[US\$1=INR\text{}60\], and if the exchange rate decreased to \[US\$1=INR\text{}70\], then businesses that are selling their products in the US will receive more money. So, if my product was priced at \[US\$5\], I was receiving 5*60 = INR 300, now the exchange rate depreciated to INR 70, so for the same priced product in the US that is priced at \[US\$5\], I will be receiving 5*70 = INR 350. Similarly, for imports, as the exchange rate depreciated to INR 70 and if I want to purchase a Smartphone worth \[US\$200\]; earlier I was paying 200*60 = INR 12,000. Now I will pay, 200*70 = INR 14,000.

Exactly opposite will happen when exchange rate will appreciate. For example: when \[US\$\text{}1=INR\text{}60\] will become\[US\$1=INR\text{}50\].

(b) The deficit in the Balance of Payment (BOP) is governed by the balance of autonomous transactions in the BOP. The BOP would show a deficit if the autonomous receipts are lesser than the autonomous payments. As autonomous receipts implies a receipt of foreign exchange and autonomous payment implies a payment of foreign exchange, so, it can be said that BOP would show a deficit when the foreign exchange receipts are less than foreign exchange payment which also means that the BOP deficit would reflect depletion of foreign exchange reserves of the country.