Question 1: Define exports.
answer : Exports are the sale of goods and services by a country to other countries in the world.
Question 2: Define imports.
answer : Imports are goods or services purchased by a domestic country from other countries in the world.
Q.3 What is the balance of payments of the transaction?
answer : Equity of payments is the systematic description of all types of economic transactions between one country and another over a given period of time.
Question 4: Write down two characteristics of equality of payments
answer : Two characteristics of transaction payment equity are
(i) There is a fixed period for such calculations.
(ii) Equity of payments is a systematic interpretation of the economic transactions of one country with other countries in the world.
Question 5: What is a free economy?
answer: A free economy is an economy that trades goods, services and financial assets with other countries.
Question 6: What are the categories of equality of payments for transactions?
answer : Transaction equity is divided into two categories:
(i) Current Account
(ii) Capita Account
Question 7: What are the two issues of current accounting of transaction balance of payments?
answer : There are two issues in the current accounting of transaction balance of payments
(1) Trade Account
(2) Invisible Account
Q8: What is market linkage?
answer: Consumers and firms have the opportunity to choose between a variety of domestic and foreign products. This is market linkage.
Q9: What is financial market linkage?
answer : Investors have the opportunity to choose between domestic and foreign assets. This creates financial market linkages.
Q.10 What is the current account of the balance of payments?
answer : Current accounts include all types of imports and exports in the form of goods and services as well as transfer payments or transfer payments.
Q.11 What is the calculation of equity capital?
answer : The capital account consists of transactions in financial assets in the form of short-term and long-term debt and private and government investment. The capital account also includes the account of government reserve assets. Therefore, capital includes international purchases and sales of all types of assets.
Q.12 What are the items included in the current accounts?
answer : Payment accounts include goods, invisible trade or services and transfer payments or transfers.
Q.13 What are the items included in the calculation of capital?
answer : The items included in the capital account are
(1) Private non-bank loans
(2) Bank loans
(3) Government loans or funds
(4) Others.
Q.14 Which transactions are carried out as capital?
answer: There are two types of capital transactions, private and government.
Question 15: What is invisible trade?
answer: Invisible trade includes income from components of production and income from imported components. Income from the components of production may mean interest, profits or profits on domestic assets abroad minus income received by foreigners from assets in India, etc.
Shipping, banking, insurance, tourism, software services etc. are included in the income.
Q.16 What is meant by transfer payment?
answer : Transfers are income that the residents of a country receive freely and in exchange for which no value is paid now or in the future.
Question 17: Give two examples of transfer payments.
answer : Two examples of transfer payments are gifts, donations.
Question 18: What does trade equality mean?
answer : The difference between exports and imports is called the trade balance.
Question 19: What is free economy?
answer : A free economy is an economic system that is linked to international financial trade.
Q.20 What is the account of foreign trade transactions?
answer : Foreign trade accounts are systematic statements of economic transactions between one country and other countries over a period of time.
Question 23: Give examples of two types of visual objects.
answer : Two examples of visuals are —
(i) Rice
(ii) I know
Question 24: Give examples of two types of non-government transfers.
answer : Examples of two types of unofficial transfer grants are
(i) Gifts
(ii) Donation
Question 25: Give examples of two types of government transfers।
answer : Examples of two types of government transfers are (i) donations made by foreign governments and
(ii) Contributions from the UN or WHO
Question 26: What is trade parity?
answer : The difference between exports and imports is called trade balance.
Q.27 What is meant by a balance of transaction equity?
answer : A balance of transactions is an equilibrium between a country's total debt and total debt.
Q.28 What is done in case of current account deficit?
answer : When a country has a current account deficit, it has to sell assets or borrow from abroad to cover the deficit. This means that there is an inflow of capital in the form of capital to cover the deficit in the current account.
Question 29: 'What is meant by equality?
answer: Errors and errors in the structure of transaction statements are the third component of transaction statements or equity of payments. This is called 'maintaining equality. Its characteristic is that it demonstrates our inability to properly record international transactions.
Question 30: State the formula of trade equality.
answer : The balance of trade refers to the difference between the exports and imports of visible goods in a country at a given time, ie BOT (Balance of trade) = Vx-Vm
where Vx = value of exports
Vm = value of imports
If the monetary value of a country’s exports exceeds the monetary value of its imports, then the trade balance goes in favor of that country.
Q.31 What is meant by favorable trade balance?
answer : When the total value of goods exported by a country exceeds the total value of goods imported by the country, the balance of trade is said to be favorable to that country. This is also known as the balance of trade savings.
Q.32 What is meant by adverse trade balance?
answer : When the total value of goods exported by a country is less than the total value of goods imported by the country, the balance of trade is said to be unfavorable to that country. This is also called the trade balance deficit.
Q.33 What is meant by a balance of trade balance?
answer : There is an equilibrium equilibrium of trade when the total value of goods exported by a country equals the total value of goods imported by the country. This is also called the balance of trade.
Q.34 What is currency devaluation?
answer : When the exchange rate is increased by social action in a relaxed exchange rate system, it is called currency devaluation.
Q.35 What is meant by imbalance of payments in a transaction?
answer : Whenever a country's foreign trade debt exceeds its debt or its debt exceeds its debt, there is an imbalance in the settlement of transactions.
Question 36: What is meant by favorable transaction equilibrium?
answer: When a country's debt exceeds its debt, the balance of payments goes in favor of the country because in this case
The country is able to earn savings from foreign trade.
Q.37 What is meant by unfavorable transaction balance?
answer : When a country's foreign trade debt exceeds its debt, it is called an adverse trade balance. Such adverse transaction balances are also known as transaction settlement deficits.
Q.38 In which year did India devalue the rupee?
answer: 1966. The
Question 39: Name one advantage of free economy.
A: In a free economy, consumers can enjoy both domestically produced and foreign produced goods.
Q.40 What are the sources of demand for fertilizers in a closed economy?
answer : In a closed economy, there is demand for household goods
(i) Enjoyment (C)
(ii) Government expenditure (G)
(iii) Domestic Investment (1)
ie Y= C+I+G
Question 41: State the equation of imbalance of payments of transactions.
answer: the transaction balance of payments equation
B+R-P Here B = Transaction balance of payments R = Earnings derived from abroad P = Debt payable to foreigners.
Q.42 What factors determine the demand for imports?
answer : Import demand depends on the following factors:
(i) Household Income (Y)
(ii) Real exchange rate
Q.43 What are the other types of balance of payments transactions?
answer : There are two types of transaction balance of payments. Such types are:
(1) Optimal transaction equilibrium
(2) Adverse transaction balance
Question 44: What is meant by autonomous transaction?
Answer: Independent transactions are when a country conducts international economic transactions without any relationship to the equilibrium of payments of its foreign transactions. For example, transactions for the sole purpose of making a profit.
Q.45 What is a manager transaction?
answer: Managerial transactions are transactions in which a country's international economic transactions are related to the balance of payments of the country's foreign transactions. Suppose India's statement of transactions or balance of payments shows a deficit of $500 million. India will then seek that amount as a loan. This amount of debt, however, is due to deficits arising from separate transactions. So, it is- Manager transaction.
Q.46 What is the natural imbalance of foreign trade transactions?
answer : Natural imbalances are when there is an imbalance in trade transactions due to some natural disasters. For example, when a country's production and exports decline due to drought, floods, etc., there is an imbalance in the country's foreign trade transactions.
Q.47 What is meant by the trade cycle balance of foreign trade transactions?
answer : In a country's economy on the path of rise, increase in production increases exports and creates trade imbalances and when the country is in recession, exports decrease and the country's foreign trade imbalance arises - the trade cycle imbalance in foreign trade They say.
Q.48 What is the long-run imbalance of foreign trade transactions?
answer : When a country’s economy moves from one level of development to another
There is a long-term imbalance in the country's foreign trade.
Q.49 What is the organizational imbalance in foreign trade transactions?
answer : Organizational imbalances are when organizational changes in the economies of a country and abroad cause changes in the demand and supply of imports and exports of a country and create imbalances in foreign trade transactions.
Question 50: What is the momentary imbalance in foreign trade transactions?
answer : Sometimes the imbalance in a country's foreign trade is temporary. Especially when a country goes to war, the country's exports decline and imports increase, creating a temporary imbalance in the country's foreign trade.
Question 51: Name two reasons for the imbalance in a country's foreign trade.
answer : There are two reasons for the imbalance in a country's foreign trade
(1) Ups and downs in the trade cycle are the main causes of imbalances in foreign trade transactions of developed countries.
(2) Development efforts of underdeveloped and developing countries also create imbalances in foreign trade transactions.
Q.52 Can the imbalance of foreign trade turnover persist in the long run? Give reasons.
answer : The imbalance in the trade transactions of a country cannot last for a long time. This is because in the long run, it is impossible for a country to conduct foreign trade without a balance between the prices of imports and exports. In the long run, a country's foreign trade balance is automatically influenced by certain forces.
Expenditure. (2) Foreign exchange required to purchase a unit of domestic currency
Question 53: Name two participants in the foreign exchange market
answer : Two participants in the forex market are
(1) Commercial banks
(2) Foreign exchange brokers
Q.54 What are the types of exchange rates and what are they?
answer : There are two types of exchange rates. There are two types of these
(1) The amount of domestic or domestic currency with one unit of foreign currency.
Q.55 What is 'purchasing power parity'?
answer : Purchasing power parity means that the real exchange rate is equal to one. When goods are measured in the same currency in two countries, they cost the same in both countries.
Q.56 What is flow?
answer : The quantity of a variable that is measured over a period of time is called a flow.
Q.57 What is Sambhar?
answer : Variables are those whose quantities are measured at a given time point.
Q.58 Which services are included in the current account of the statement of transactions?
answer : The services included in the current accounts of the statement of transactions are
(1) Banking, insurance, institutional, transportation, etc. services
(2) Services provided to tourists
(3) Services rendered to students
(4) Diplomatic and military expenditures
(5) Capital service works
Q.59 What is meant by private direct investment?
answer : Private direct investment is domestic citizens or businesses
Investments from abroad by institutions or by citizens or private institutions of foreign countries
Investment in the domestic economy must be understood.
Q.60 What is meant by private equity investment?
answer : Investment in private shares is an investment in foreign shares by a domestic citizen or institution or an investment in domestic shares by a foreign citizen or institution.
Q.61 What is international liquidity?
answer : International liquidity means international medium of exchange. An international liquidity account is the United States dollar English pound sterling, gold or any currency used as a medium of exchange in international trade.
Question 62: What is import substitution?
answer : When goods imported from abroad are produced domestically, it is called import substitution.
Q.63 Which transactions are carried out as capital?
answer: There are two types of transactions in terms of capital
(1) Private and
(2) Government
Sample Question Answer No. 5:
Question 1: Define market linkages, financial market linkages and market linkages of components of production in the context of a free economy.
answer : International trade gives consumers and firms the opportunity to choose between a variety of domestic and foreign products It is market linkages.
Investors have the opportunity to choose between domestic and foreign assets, creating financial market linkages.
Where the companies will set up their manufacturing plants according to their choice
and workers can decide where to work. This is the market linkage of the components of production.
Question 2: Write a note on currency devaluation.
answer : Every country has two values of currency. an intrinsic value and an extrinsic value or foreign value. Devaluation is when the foreign value of a country's currency depreciates and that value is recognized by the government. For example $ 1=55 Rs. However, the exchange rate changes when the Reserve Bank depreciates the foreign exchange rate of the Indian currency on behalf of the Central Government. Suppose the new exchange rate of dollar and rupee after depreciation is $ 1=Rs. This new exchange rate implies a devaluation of the rupee because now $ 1 can only be received for 55 rupees instead of 45 rupees.
Devaluation increases a country's exports and decreases its imports. As a result, the deficit in international trade will decline to zero unless other conditions change. However, if consumer tastes abroad change, if the foreign currency also depreciates, if domestic production does not increase, the devaluation will result in very little or no increase in exports and decrease in imports.
Question 3: Differentiate between a closed economy and an open economy.
answer : whose economic situation has no relationship with the international economy
No, that financial system is a closed economy. Such an economic system is called a non-trade state. On the other hand, a financial system that is connected to the international financial system is an open financial system. It is the international trading financial system.
In a closed economy, the same currency serves as the medium of exchange within the country. However, in a free economy, there is foreign trade and therefore foreign currency is needed.
In a closed economy, the International Monetary Fund, World Bank, etc. are not needed, but in an open economy, the World Bank, International Monetary Fund, etc. exert influence.
Q.4 What are the characteristics of payment of international trade transactions?
answer : The characteristics of settlement of international trade transactions are:
(1) Equity of payments is a systematic account of the economic transactions of one country with other countries in the world.
(2) There is a fixed period of time for such calculations. The payment transaction account is usually an annual account.
(3) Transaction settlement accounts include all types of accounts. This means that all types of international transaction accounts like current and capital accounts are included in such accounts.
(4) Transaction payments include both debts and liabilities of a country's international trade.
(5) The calculation of balance of payments of transactions is a bilateral accounting method because it includes both debts and liabilities and these debts and liabilities are always equal to each other.
Question 5: Explain the two main accounts of the statement of foreign exchange.
answer: The Statement of Foreign Transactions has two accounts: (i) Current Account and (ii) Capital Account.
(i) Running hitch: Current accounts include all types of imports and exports in goods and services as well as transfer payments or transfer payments. Commodities include imports and exports of visible commodities like rice and wheat. Intangible services include income from components of production and income from non-components. Again, transfer payments between residents and non-residents of a country are included. Transfer payments can be government or private. Payment of government transfers – such as donations from foreign governments, cash assistance, contributions from the UN or WHO, etc. The gifts, donations, etc. are non-governmental transfers.
(ii) Capital Accounts: The capital account consists of transactions in financial assets in the form of short-term and long-term debt and private and government investment. In addition, the account of government reserve assets is also included in the capital account. Therefore, capital accounts include international purchases and sales of all types of assets. It shows international flows of credit and investment and presents changes in foreign assets and liabilities of the country.
Q.6 What are the other types of transaction equity imbalances? Give an overview.
answer : An imbalance of transaction equity occurs when a country's total debt and total debt are not balanced. Such imbalances can be of two types. deficit or surplus
If the country's total debt exceeds its total debt, a transaction equity deficit arises. In such a situation, the balance of transactions becomes unfavorable for the country. If there is a deficit in the balance of payments, a country can cover it by borrowing from foreign reserves and the International Monetary Fund or by selling gold.
On the other hand, if the country's total debt exceeds its total debt, there is a saving in the balance of payments. Such conditions are favorable for the country. Savings in equilibrium of payments increase foreign reserves. The country can also buy gold.
Question 7: Write down the differences between equality of trade and equality of payments.
answer : The differences between equilibrium of trade and equilibrium of payments are as follows:
Question 8: Analyze the difference between standalone and managerial transactions and statements of foreign transactions.
answer : Independent transactions or over-the-line transactions are when a country conducts international economic transactions without any relationship to the statement of foreign transactions or the equilibrium of payments. For example, transactions for the sole purpose of making a profit. If a country's foreign trade standalone receipts are greater (less) than its standalone supply, its balance of payments (BOP) is called savings (deficit).
The manager, on the other hand, is determined by the individual issues of the transaction or the actual outcome of the transactions. Managerial transactions occur as a consequence of a country’s statement of international transactions. Suppose India's statement of transactions or balance of payments shows a deficit of $500 million. Then India will have to seek that amount of loan. This amount of debt, however, is due to deficits arising from separate transactions. so it is the manager transaction. Therefore, whether there is a foreign exchange deficit or a saving can be determined by managerial transactions. These managerial transactions eliminate deficits or savings to balance the transaction statement.
Q.9 Why should there always be a balance of payments for transactions?
answer : A country's balance of payments includes all of its foreign trade liabilities. The weight of commercial transactions formed under the dual hedging system must always be equal on a debt and liability basis in terms of equity. This means that there can be no savings or deficits in terms of equality of trade payment transactions from the point of view of accounting methods. In such accounts, the liabilities section includes the accounts of foreign exchange earned by the country from various sources during a given period and the liabilities section includes the repayment of various debts from the country's foreign exchange reserves during that period. According to the dual accounting system, there should always be a reconciliation between such debts and liabilities.
Q.10 How does trade cycle imbalance arise in foreign trade transactions?
answer : The trade cycle also causes an imbalance in foreign trade transactions. When a country is on the path of growth, the income of the people of the country increases. If the elasticity of demand for the country’s imports is greater than the elasticity of its exports, then the value of the country’s imports decreases, and in such a case, an increase in output leads to an imbalance of trade transactions by increasing exports. However, in such a situation, the trade imbalance goes in favor of the country. On the other hand, when a country's exports decline during a recession, there is also an imbalance in the country's foreign trade. However, the imbalance of foreign trade goes against the country.
Question 11: How does organizational imbalance lead to imbalance in foreign trade transactions?
answer : Organizational imbalances are when organizational changes in the economies of the country and abroad cause changes in the demand and supply of imports and exports of a country, causing imbalances in the transactions of foreign trade. For example, suppose with the production of a synthetic substance in other countries of the world as an alternative to cotton
Cotton exports have declined. In such circumstances, if India's imports remain unchanged, it is natural that there will be an imbalance in its foreign trade transactions. Changes in the organizational system of commodity production in different countries of the world, changes in the income of the people, changes in the demand for imports and exports, etc. can also cause imbalances in the foreign trade transactions of a country. Such imbalances fall under organizational imbalances.
Q12: What is trade balance? Explain its different types.
answer : Trade balance refers to the difference between a country's exports and imports of tangible goods at a given time. i.e. BOT= Vx-Vm where Vx= value of goods exported Vm= value of imported goods The types of trade equity can be explained as follows.
(1) Favorable trade balance: When the value of goods exported by a country exceeds the total value of goods imported by the country, the balance of trade is said to be favorable to that country. This is also known as the balance of trade savings.
(2) Adverse trade balance: When the total value of goods exported by a country is less than the total value of goods imported by the country, the balance of trade is said to be unfavorable to the country. It is also known as the trade parity deficit.
(3) Equilibrium of Trade: Equilibrium of trade exists when the total value of goods exported by a country equals the total value of goods imported by the country. This is also called the balance of trade.
Question 13: • Explain two causes of imbalance in foreign trade transactions.
answer : There are two reasons for the imbalance in a country's foreign trade
(1) The ups and downs of the trade cycle are the main cause of imbalances in the foreign trade transactions of developed countries. When such a country's economy is on the path of growth, the quantity and value of its exports exceeds the quantity and value of its imports and the imbalance in the foreign trade transactions of the country goes in favor of the country. On the other hand, the collapse of the economy helps to decrease the volume of exports and the contraction of exports creates an unfavorable imbalance for the country in the transactions of foreign trade.
(2) Developing countries undertake large scale investment schemes for development. Such investment schemes create deficits in the foreign trade transactions of developing countries. Such countries import large amounts of capital, raw materials, technology, etc. for the implementation of development schemes. This leads to an increase in the country's imports over exports and an increase in the foreign trade deficit.
Q.14 How is the imbalance of trade transactions in the gold standard resolved?
answer : In countries with the gold standard, trade imbalances are automatically eliminated. If a country has a foreign trade deficit while the gold standard is in circulation, the demand for foreign currency to pay for the country's imports increases and the demand for the currency abroad decreases and the foreign exchange rate of the country crosses the high gold point. At the same time, it is profitable for the country to pay for imports in gold. There are no restrictions on the export and import of gold in the gold standard. and the supply of domestic currency must decline as gold is exported from the country to pay off foreign debts. And in a country where gold imports increase due to export trade savings, the money supply must increase. In such circumstances, the country faces a trade deficit, decline in commodity prices and savings
Commodity prices rise in the country where it occurs. This is because gold exports reduce the money supply in a country facing a trade deficit and reduce the price of exports in a country where gold imports increase and the value of exports in a saving country increases. Thus, the foreign exchange rate increases on the basis of the balance between exports and imports. Thus, foreign trade transactions are balanced on the basis of balance between exports and imports.
Question 15: How does a country's monetary policy correct the imbalance in foreign trade?
answer : The main reason for a country's trade deficit is an increase in imports and a decrease in exports. In such circumstances, a country may adopt an expensive monetary policy. Expensive monetary policy raises bank rates and contracts the supply of credit. As the supply of credit contracts, the supply of money falls. and the prices of all commodities, including exports, decline. In such a situation, imports become more expensive than exports and this leads to an increase in exports and a decrease in imports.
Deflation does not change the exchange rate of a country's currency. Such measures change the prices of domestic commodities and fuel the growth of a country's exports. However, export growth through monetary contraction is not appropriate for underdeveloped countries. In such an economy, development requires an increase in the money supply.
Question 16: How does currency devaluation eliminate foreign trade imbalances?
answer : When a country continuously faces a deficit in the balance of foreign trade, the country may take measures to devalue the domestic currency with the permission of the International Monetary Fund. Depreciation of the exchange rate of the domestic currency helps to overcome the foreign trade deficit by increasing a country's exports and contracting its imports. External depreciation of the currency reduces the value of the country's exports in terms of foreign currency
Fuels growth. In other words, after a depreciation, a country's exports become cheaper for foreigners and this increases their imports from that country. On the other hand, a country that depreciates its currency increases the value of imports in terms of its domestic currency and this reduces the amount of imports to the country. Thus, the government depreciation of a country's currency increases the country's exports and helps to reduce the country's foreign trade deficit by reducing imports.
Question 17: On which conditions does the removal of foreign trade deficit depend on a depreciation of the external value of a country's currency?
answer : The extent to which a depreciation of a country's currency will succeed in closing its foreign trade deficit depends on several conditions. Such conditions are
(1) The elasticity of demand for exported goods of the country depreciating the domestic currency must be greater than one. This is because if the demand for exports is less than unity (almost inelastic), then the demand for the country's exports abroad does not increase despite the decline in their prices. In such a situation, the country cannot increase its exports and earnings.
(2) The elasticity of supply in the importing country of the depreciating country must also be greater than unity. If the elasticity of supply of imports is less than unity, the importing country can reduce its price to maintain the previous amount of exports.
(3) The trade rate of a country which depreciates its foreign currency should not go against that country. When trade rates are adverse, a country cannot enjoy any benefit by depreciating the external value of its currency. For a country's trade rate to favor the country, the elasticity of demand for its imports and exports must be greater than the elasticity of supply.
(4) When a country increases exports by depreciating its currency and
Other countries should not depreciate the exchange rate of their domestic currencies when they try to reduce imports. This is because such a system deprives all countries of the benefits of currency exchange rate depreciation.
Question 18: What are the disadvantages of depreciation of currency in meeting the foreign trade deficit?
answer: Depreciation of the currency to cover the foreign trade deficit
There are several disadvantages. First, the depreciation of a country's currency is a symbol of its economic weakness because economically weak countries take measures to depreciate the exchange rate of their currency when they see no other way to strengthen their economies. Secondly, a depreciation of a country's currency increases the rate of inflation in the domestic economy. Rising import prices fuel price increases by increasing production costs for industries that use imported equipment. On the other hand, the increase in exports of the country also leads to an increase in domestic prices due to shortage of commodities for the consumption of the people of the country. Thirdly, the burden of such debt of the countries that collect foreign debt increases as they have to pay higher interest on foreign currency in the value of their domestic currency. In addition, it takes a long time for the benefits of currency depreciation to become apparent in the economy of the country. This is because consumers react to changes in export and import prices after a depreciation of a country's external value only after a considerable period of time.
Question 19: How does export development help in overcoming the imbalance in a country's foreign trade?
answer : In order to correct the imbalance in a country's foreign trade, the government must implement export growth schemes to develop the country's export sector. To achieve such objectives, various incentives should be provided to export industries to increase production and exporters to increase exports. Such facilities include supply of raw materials and other inputs to export manufacturers,
Facilities like procurement of imported materials required for production and tax exemptions should be provided. The country's exporters should also be provided with easy export credit, tax exempt market facilities etc. Along with the various measures taken to increase exports, the government should also give priority to implementing import reflection measures. Such measures help the country to achieve self-reliance and also reduce imports permanently. This allows a country to find a permanent solution to its foreign trade transaction deficit.
Sample Question Answer No. 10:
Q1: What is the structure of the transaction payment equity? explain.
answer : Balance of transactions in international trade refers to the systematic accounting of all types of transactions between one country and another over a given period of time. The specific period here is usually one year.
There are two accounts of equity of payments—
(1) Current Account and (Current Account)
(2) Capital Account
(1) Current Account: Current accounts include all types of imports and exports of goods and services as well as transfer payments. The current accounts include the following transactions.
(a) Goods: Includes import and export of tangible goods like rice and wheat.
(b) Invisible trade: This invisible trade includes income from components of production and income from imported components. Income from the components of production may mean interest, profits or profits on domestic assets abroad minus income received by foreigners from assets in India, etc. Ships, banks, insurance,
Non-commodity income includes tourism, software services, etc.
(c) Transfer Payments: Transfer payments are income received freely by the residents of a country in exchange for which no value is paid now or in the future. Such transfers may be private. such as gifts, donations. Or it may be government. For example, donations, cash assistance or grants from foreign governments.
Capital Account Capital Account consists of the transactions of financial assets in the form of short-term and long-term debt and private and government investment. In addition, the accounts of government reserve assets are also included in the capital account. Therefore, capital includes international purchases and sales of all types of assets. Shows international flows of debt and investment and presents changes in foreign assets and liabilities of the country. Long-term capital transactions with a term of more than one year (Ma- turing Period) covers the movement of international capital. Therefore, it includes direct investment such as setting up of foreign manufacturing groups, portfolio investment such as purchase of foreign shares and international loans. Short-term international capital transactions, on the other hand, last for less than one year.
Question 2: Define trade equality. Differentiate between equality of trade and equality of payments?
answer : Trade equity refers to the difference between the exports and imports of visible goods in a country at a given time. That is,
BOT= V-Vm
V = Value of exported goods X.
V = value of imports m
If the monetary value of a country’s exports exceeds the monetary value of its imports, then the trade balance goes in favor of that country.
Types of BOT Types of Trade Balance
(a) Favorable balance of trade: When the total value of goods exported by a country exceeds the total value of goods imported by the country, the balance of trade is said to be favorable to that country. This is also known as the balance of trade savings.
(b) Unfavorable balance of trade: When the total value of goods exported by a country is less than the total value of goods imported by the country, the balance of trade is said to be unfavorable to that country. It is also known as the trade parity deficit.
(c) Equilibrium in balance of pay- ment): There is an equilibrium equilibrium of trade when the total value of goods exported by a country equals the total value of goods imported by the country. It is also known as equitable trade equity.
Now let us know the difference between trade balance and payment.
Question 3: Explain the different types of foreign trade transactions.
answer : Imbalances in a country's foreign trade can be caused by various factors. Such causes are also known as types of disequilibrium. of factors or types of foreign trade imbalances below
(1) Natural causes or natural imbalances: Natural imbalances are when there is an imbalance in trade transactions due to certain natural disasters. For example, when a country's production and exports decline due to floods, droughts, etc., there is an imbalance in the country's foreign trade transactions.
(2) Trade cycle imbalance: The trade cycle also causes imbalance in foreign trade transactions. When a country is on the path of growth, the income of the people of the country increases. If the country’s demand for its imports is more than the elastic then the value of the country’s imports decreases and in such cases the increase in production increases the exports causing trade imbalances. However, in such a situation, the trade imbalance goes in favor of the country. On the other hand, when a country's exports decline during a recession, it also creates an imbalance in the country's foreign trade. However, the imbalance of foreign trade goes against the country.
(3) Long-term imbalance: When an economy moves from one stage of development to another, a long-term imbalance of foreign trade transactions arises in the country. The country's population growth, excessive investment and massive changes in technology create such imbalances.
(4) Organizational Imbalance: Organizational imbalance is when organizational changes in the economies of the country and abroad cause changes in the demand and supply of imports and exports of a country and create imbalances in foreign trade transactions. For example, suppose India's exports of cotton decline as a synthetic product is produced in other countries of the world as an alternative to cotton. In such circumstances, if India's imports remain unchanged, it is natural that there will be an imbalance in its foreign trade transactions. Changes in the organizational system of commodity production in different countries of the world, changes in people's incomes, tastes, etc. can also cause changes in the demand for imports and exports and cause imbalances in a country's foreign trade transactions. Such imbalances include organizational imbalances.
(5) Transient imbalances: Sometimes the imbalance in a country's foreign trade is temporary. Especially when a country goes to war, the country's exports decrease and its imports increase, causing a temporary imbalance in the country's foreign trade.
(6) Fundamental imbalance: When an economy is continuously one
When a country faces a prolonged foreign trade deficit, the International Monetary Fund considers it to be experiencing a fundamental imbalance. The reasons for such an imbalance are profound. The concept of fundamental imbalance is used to explain the almost continuous deficit in foreign trade transactions of underdeveloped and developing countries due to the effects of certain long-term factors.
Question 4: Explain the reasons for the imbalance in foreign trade transactions.
answer : The following factors cause an imbalance in a country's trade.
(1) The ups and downs of the trade cycle are the main cause of imbalances in the foreign trade transactions of developed countries. On the way to boom in such an economy, the quantity and value of exports exceeds the quantity and value of imports. In such a situation, the imbalance of the country's foreign trade turnover goes in favor of the country. On the other hand, the country's economy collapses and exports decline and the imbalance in foreign trade created by the contraction of exports goes against the country.
(2) Large scale investment schemes are adopted for development in developing and underdeveloped countries. Such investment schemes create deficits in the foreign trade transactions of developing countries. Such countries import large amounts of capital, raw materials, technology, etc. for the implementation of development schemes. As a result, the country's imports exceeded its exports and the foreign trade deficit widened. Exports also declined as newly established industries used previously exported raw materials. The foreign trade deficit increases.
(3) Development efforts of underdeveloped and developing countries create imbalances in foreign trade transactions. In such countries, increased development expenditure increases the income of the people and increases the demand for imported goods. It creates a deficit in foreign trade. In addition, the consumption tendency of the people in underdeveloped countries is very high. Under such circumstances, the demand for commodities increases at a very high rate as the increase in capital investment increases the income of the people. Commodity prices also rise. The country's imports exceed its exports and the country faces a deficit in foreign trade.
(4) Developed countries like underdeveloped and developing countries have adopted plans to increase the production of essential commodities like food grains. Fruits The demand for food grains exported from underdeveloped and developing countries has declined in developed countries. The difference in the earnings elasticity of demand for primary commodities and industrial commodities is another factor in the foreign trade deficit of underdeveloped countries
because. Increased production of synthetic substitutes for exports from underdeveloped countries has also reduced the volume of exports of such countries and increased the deficit in foreign trade turnover.
(5) High population growth in underdeveloped countries has increased imports and decreased exports. In such circumstances, it is natural for a country's foreign trade deficit to increase. Population growth contributes to the growth of a country's GDP. However, in underdeveloped countries, it is not possible to increase production due to various constraints. Due to the low population growth rate in developed countries, such countries have been able to increase exports to underdeveloped countries and save on foreign trade transactions.
(6) Import restrictions enforced by developed countries are another cause of imbalance in foreign trade transactions of underdeveloped and developing countries. Despite the foreign trade surplus of developed countries like the United States, the country imposes restrictions on imports from developing countries like India. As a result, India has failed to increase its exports and earnings and faces a deficit in foreign trade turnover.
(7) The international credit and investment system is also a major cause of foreign trade surpluses and deficits. Excessive foreign debt moves the balance of trade of the country against the country and the balance of trade of the lending country goes in its favour. Such countries also face foreign trade deficits due to inadequate investment by developed countries in underdeveloped countries.
Question 5: Briefly discuss the various ways to remedy the inequality of commercial transaction quotes.
answer: A country can take the following measures to overcome imbalances in foreign trade transactions:
(1) Monetary Policy: A country can adopt an expensive monetary policy to correct its trade deficit by reducing imports and increasing exports. Expensive monetary policy raises bank rates and contracts the supply of credit. As the supply of credit in the economy contracts, the money supply decreases and the prices of all commodities, including export commodities, fall. In such a situation, imports become more expensive than exports and this leads to an increase in exports and a decrease in imports. Deflationary measures change the prices of domestic commodities and fuel a country's export growth. However, export growth through monetary contraction is not appropriate for underdeveloped countries.
(2) Depreciation of the domestic currency: The exchange rate of a country's currency can be reduced as a way to correct its foreign trade deficit. A contraction in the exchange rate of the domestic currency causes a decline in the price of exports and an increase in the price of imports. In such circumstances, a country's increase in exports and contraction in imports helps to reduce the country's foreign trade deficit. However, in order for a country to correct its unfavorable trade balance through depreciation of the foreign currency, the country's demand for imports and foreign demand for its exports need to be resilient. If the country's demand for imports and exports is inelastic, then the exchange rate of the domestic currency fails to decrease the country's imports and increase its exports.
(3) Depreciation : When a country almost continuously faces a deficit in its balance of foreign trade, the country may take measures to devalue the domestic currency, permitted by international monetary policy. Depreciation of the exchange rate of the domestic currency helps a country to increase its exports and contract its imports to close the foreign trade deficit. On the other hand, a country that depreciates foreign exchange increases the value of imports in terms of its domestic currency and this reduces the amount of imports to the country. Thus the currency of the country
Government foreign exchange reductions increase the country's exports and help reduce the country's foreign trade deficit by reducing imports.
(4) Foreign exchange controls: Exchange control is when the central bank of a country imposes controls on the use of foreign exchange earned by a country. According to this system, the foreign exchange earned by the country's exporters has to be deposited with the central bank and the central bank allows such foreign exchange to be used only for necessary imports. This makes it possible to control the amount of imports and such measures help in reducing the foreign trade deficit of a country.
(5) Fiscal policy: Fiscal policy can also help a country take measures to reduce its foreign trade deficit. The government can take measures to increase exports and reduce imports by imposing tariffs on imports and concessions on exports in the budget formulated by the government. Such measures help to reduce the foreign trade deficit by reducing imports and increasing exports.
(6) Quantification and imposition of duties on imports: Import quota system is an excellent way to fill the foreign trade deficit by reducing imports. In such a system, the government provides for the import of a certain amount of goods. In countries where demand for imported goods is inelastic, import control through import quantification is more effective. Measures can also be taken to reduce imports by imposing high tariffs on imported goods. It helps in increasing the amount of revenue of the government. However, if a country's demand for imports is inelastic, tariffs cannot reduce imports. In such circumstances, import quantification is more effective in reducing imports.
(9) Export Development: The government is developing the country's export sector to increase exports
must be implemented. To achieve this objective, various incentives should be provided to export industries to increase production and exporters to increase exports. Such facilities include supply of raw materials and other inputs, procurement of imported inputs required for production and tax exemptions to export manufacturers. All exporters of the country must also be provided with export subsidiary tax exemptions, market facilities etc. The government should implement import planning measures to increase exports. This can make a country self-sufficient and reduce imports permanently. In this way, a country can find a permanent solution to its foreign trade deficit.
