Question

Read the following transactions made by Country X in a year:

• Foreign residents working in Country X send 3,00,000 euros to thier families abroad.
• Country X purchases computer software worth 5,00,000 euros from other nations.
• Country X receives 1,00,000 euros as an aid for flood relief from neighbouring nations.

If Country X adopts revaluation, it will worsen the situation of balance of payments. Defend or refute the statement with a reason.

Answer 1

Defend from the transactions given Country X’s current‑account position is a deficit of 700,000 (credits: aid 100,000; debits: remittances 300,000 + software imports 500,000 = 800,000, so 100,000 − 800,000 = −700,000). Unilateral transfers and imports are current‑account items. Revaluation (= an official upward change in the domestic currency’s value) makes domestic goods and services more expensive to foreigners and imports cheaper for domestic residents, so it tends to reduce export receipts and raise import demand; by the standard policy logic the opposite move (depreciation) is recommended to correct a current‑account deficit, which implies revaluation/appreciation would aggravate a deficit. Therefore, adopting revaluation would likely worsen Country X’s balance of payments situation.