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Open Economy Macroeconomics — Economics STD 12 Humanities & Commerce — Question

Rajasthan BoardEnglish MediumSTD 12 Humanities & CommerceEconomicsOpen Economy Macroeconomics6 Marks
Question
  1. Define “Trade surplus”. How is it different from “Current account surplus”?
  2. “Indian Rupee (₹) plunged to all time low of ₹ 74.48 against the US Dollar ($)”. -The Economic Times
In the light of the above report, discuss the impact of the situation on Indian Imports.
✓

Answer

  1. Trade surplus refers to the situation when exports of goods and services exceeds the import of goods and services.
Exports of Goods and Services > Imports of Goods and Service ⇒ Current Account Surplus
Trade surplus is different from "Current Account Surplus". This is because current account is the account which maintains the records of imports and exports of goods and services as well as the record of unilateral transfers.
Current Account Balance = Balance of Visible Trade + Balance of Invisible Trade + Balance of Unilateral Transfers
  1. Indian Rupee is depreciating against the US Dollar since it is given that "Indian Rupee (₹) plunged to all time low of ₹ 74.48 against the US Dollar ($)". A high exchange rate makes the imports more expensive. Consequently, a rise in the exchange rate implies a reduction in the demand for imports and vice-versa.
When imports falls, net exports (Exports-Imports) of a country rises. The given figure explains this process as follows:
Suppose the initial equilibrium income is given by Ye that corresponds to a trade balance equal to Ytb. With the rise in the net export demand, the aggregate demand curve DD shifts upwards to DD' such that the new equilibrium is established at point E' and the equilibrium income rises to Y'.
In the lower panel due to the fall in the imports, the net export rises and the net export curve shifts upwards from NX to NX'. At the new level of income, the net exports is represented by the vertical distance AE' which are necessarily positive (because the total demand curve DD' lies above the aggregate demand curve AD).
Thus, with a fall in the imports, there is a trade surplus. This trade surplus is represented in the lower panel by the vertical length DF.

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