UPSC Prelims 2006 Q16: Indian Economy – External Sector & Balance Of Payments
Assertion (A): ‘Balance of Payments’ represents a better picture of a country’s economic
transactions with the rest of the world than the ‘Balance of Trade’.
Reason (R): ‘Balance of Payments’ takes into account the exchanges of both visible and invisible
items whereas ‘Balance of Trade’ does not.
- (a) Both A and R are true and R is the correct explanation of A
- (b) Both A and R are true but R is not a correct explanation of A
- (c) A is true but R is false
- (d) A is false but R is true
Answer: (a) Both A and R are true and R is the correct explanation of A
Explanation
Balance of Payments versus Balance of Trade
| Concept | What it records |
|---|---|
| Balance of Trade | Only visible items: exports and imports of goods |
| Balance of Payments | Visible and invisible items: goods, services, transfers and capital flows |
Assertion (A): BoP gives a better picture of a country's transactions with the world than BoT. True.
Reason (R): BoP covers both visible and invisible items while BoT does not. True, and it is exactly why BoP is the more complete measure.
Answer: (a) Both A and R are true and R is the correct explanation of A.
Why each option is right or wrong
- (a) CORRECT. Both statements are true, and BoP is better precisely because it includes invisible items too.
- (b) Incorrect. R is not merely true; it directly explains why BoP is the better picture.
- (c) Incorrect. R is true, since BoT covers only visible goods.
- (d) Incorrect. A is true, since BoP is the broader measure.
Key point
Balance of Payments is broader than Balance of Trade because it includes invisible items (services, transfers, capital) along with visible goods.
Remember
BoP includes visible and invisible items; BoT only visible.
Common mistakes
- Treating the two terms as synonyms.
- Forgetting that services and remittances are invisible items.
- Assuming BoT includes capital flows.
Exam tip
BoT = goods only; BoP = goods + services + transfers + capital.
Sources
- NCERT Class XII Macroeconomics — Open Economy Macroeconomics
- Reserve Bank of India — Handbook of Statistics on the Indian Economy (Balance of Payments)