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Question

65. ‘Consider the following actions which the Government can take:
1. Devaluing the domestic currency.
2. Reduction in the export subsidy.
3. Adopting suitable policies which attract greater FDI and more funds from FIIs.
Which of the above action/actions can help in reducing the current account deficit?
  1. Only 1 and 2
  2. Only 3
  3. Only 2 and 3
  4. Only 1 and 3


Solution

The correct option is D Only 1 and 3
Current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the goods and services it exports. The current account also includes net income, such as interest and dividends, as well as transfers, such as foreign aid, though these components make up only a small percentage of the current account when compared to exports and imports. The current account is essentially a calculation of a country’s foreign transactions and, along with the capital account, is a component of a country’s balance of payment.
Government can reduce substantial current account deficit by increasing exports or by decreasing imports which can be through import restrictions, quotas, or duties or by subsidizing exports. Manipulating of exchange rate for cheaper exports tends to increase balance of payments through devaluing of domestic currency. Further current account deficit can be lowered by promoting investor friendly environment. In capital account, capital inflows results from instruments and maturity which includes foreign investment, loans and banking capital.

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