Balance of Payments & Exchange Rate — Numerical Problem Set
Covers: BoP Accounting • Marshall–Lerner • J■Curve • PPP • Interest Parity • Absorption & Monetary Approaches • Reserves
& Capital Flows
Format: Questions first • Full solutions at the end • No MCQs
Part A — Short Numerical Problems
Q1. India’s exports = $250 bn, imports = $300 bn, invisibles surplus = $60 bn. Find the Current Account balance.
Q2. A country has CAD = $30 bn, capital inflows = $20 bn. What happens to official reserves (and by how much)?
Q3. If export elasticity = 0.4 and import elasticity = 0.3, will a devaluation improve the BoP? Explain using
Marshall–Lerner.
Q4. Spot rate = ■80/$, 6■month forward = ■82/$. Calculate the annualised forward premium (%).
Q5. PPP: India inflation = 6%, US = 2%, base ER = ■80/$. Predict the ER after 1 year.
Q6. Reserves at start = $600 bn, CAD = $20 bn, capital account (net) = +$25 bn. What happens to reserves and
what is the new level?
Q7. If CAD/GDP = 3% and GDP = $2,500 bn, compute CAD.
Q8. BoT = –$50 bn, invisibles = +$20 bn, capital account = +$25 bn. Find overall BoP balance.
Q9. After a devaluation, exports rise 10% and imports fall 5%. If export elasticity = 0.7 and import elasticity = 0.5,
check Marshall–Lerner and the BoP direction.
Q10. FDI = $40 bn, portfolio = $15 bn, ECB = $10 bn. Compute net capital account balance.
Q11. BoP surplus = $15 bn. If initial reserves = $600 bn, what is the closing reserves level?
Q12. Export contract = $1,000,000 due in 3 months. Spot = 80, 3■month forward = 82. If fully hedged, what is
rupee inflow? What is the gain over taking spot today?
Q13. Trade deficit = $100 bn, invisibles surplus = $90 bn. Find the current account balance.
Q14. IMF allocates $5 bn of SDRs to a country. Where is it recorded and what is the immediate impact on
reserves?
Q15. The rupee depreciates 10%. Export elasticity = 0.9, import elasticity = 0.4. Will BoP improve?
Q16. CA deficit = $25 bn financed by external borrowing of $10 bn and the rest by reserves. By how much do
reserves change?
Q17. India’s GDP = $3,000 bn and CAD = $90 bn. Compute CAD/GDP (%).
Q18. ER moves from ■75/$ to ■70/$. State whether the rupee appreciated or depreciated and why.
Q19. Interest rates: India = 6%, US = 2%. Spot = 80. Check covered interest parity against a 1■year forward of
83.
Q20. CA deficit = $40 bn, capital account = +$40 bn. What happens to reserves?
Part B — Long Numerical Problems
Q21. Data: Exports = $200 bn; Imports = $260 bn; Invisibles = +$40 bn; FDI = +$25 bn; Portfolio = +$15 bn; Debt
repayment = –$10 bn. (i) Current Account, (ii) Capital Account, (iii) Overall BoP.
Q22. Devaluation by 15%. Export elasticity = 0.6; import elasticity = 0.7. Use Marshall–Lerner to predict BoP
impact.
Q23. Reserves start at $400 bn. CAD = $50 bn; capital inflows = $35 bn. Compute closing reserves.
Q24. Export sale = $2 mn, payment in 3 months. Spot = ■75/$; 3■month forward = ■77/$. If hedged, rupee
inflow? Compare to taking spot today.
Q25. PPP over 2 years: India inflation = 8% p.a., US = 3% p.a. Base ER = ■70/$. Compute projected ER after 2
years.
Q26. Absorption approach: Initial National Income Y■ = 5000, Absorption A = 5200. (i) BoP at Y■; (ii) If Y rises to
5400 with A unchanged, new BoP?
Q27. A country borrows $30 bn from the IMF to finance a current account deficit. Classify the flow and explain the
BoP financing identity.
Q28. Trade balance = –$80 bn; Services = +$50 bn; Investment income = –$10 bn; Transfers = +$5 bn. Compute
the current account balance.
Q29. PPP long■run: Spot = 60; cumulative domestic■foreign inflation gap over 4 years = +20%. Find the
PPP■consistent ER.
Q30. An investor brings $100 mn FDI and later repatriates $20 mn dividends after 3 years. Show where these
appear in the BoP and explain the sign conventions.
Part C — Past■Year Style Numericals
Q31. (ISI■type) Export elasticity = 0.7; import elasticity = 0.5. Under a devaluation, state the BoP outcome using
Marshall–Lerner.
Q32. (CUET■type) GDP = $2,500 bn; CAD = $75 bn. Compute CAD/GDP ratio.
Q33. (UGC NET■style) Reserves fell by $15 bn alongside CAD = $20 bn. Infer the net capital account balance.
Q34. (ISI■type) Spot = 80; 1■year forward quoted = 84. Interest: India 8% p.a., US 3% p.a. Check covered
interest parity numerically.
Q35. (CUET■type) CA = –$30 bn; Capital account = +$25 bn. Quantify reserve change and interpret.
Full Solutions
A1. CA = 250 – 300 + 60 = +10 (surplus).
A2. Gap = 30 – 20 = 10 → reserves fall by 10.
A3. 0.4 + 0.3 = 0.7 < 1 → BoP worsens.
A4. Premium = ((82–80)/80) × 2 × 100 = 5%.
A5. ER ≈ 80 × (1.06/1.02) = 83.14 → depreciation.
A6. Net inflow 5 → reserves rise to 605.
A7. 0.03×2500 = 75.
A8. –50+20+25 = –5 deficit.
A9. 0.7+0.5=1.2>1 → BoP improves.
A10. 40+15+10=65.
A11. 600+15=615.
A12. Hedge = 1,000,000×82=82m vs Spot=80m → gain 2m.
A13. –100+90=–10 deficit.
A14. +5 in reserves (SDRs).
A15. 0.9+0.4=1.3>1 → improves.
A16. 25–10=15 → reserves –15.
A17. 90/3000=3%.
A18. From 75 to 70 → appreciation.
A19. CIP forward ≈ 83.14 ≈ quoted 83 → holds.
A20. –40+40=0 → reserves unchanged.
B21. CA=–20; KA=+30; BoP=+10.
B22. 0.6+0.7=1.3>1 → improves.
B23. Gap=15 → reserves 385.
B24. Spot=150m, Forward=154m → gain 4m.
B25. 70×(1.08²/1.03²)=76.97.
B26. At Y0: 5000–5200=–200; At Y=5400: +200.
B27. IMF credit=KA inflow; finances CAD.
B28. –80+50–10+5=–35.
B29. 60×1.20=72.
B30. +100 in KA; –20 in CA.
C31. 0.7+0.5=1.2>1 → improves.
C32. 75/2500=3%.
C33. –20+KA–15=0 → KA=35.
C34. CIP=83.88 ≈84 → parity holds.
C35. –30+25=–5 → reserves –5.
