3 Marks Each

Question 13 Marks

Specify the difference between Current Account and Capital Account of Balance of Payments.

Answer

Sr. No.	Point Of Difference	Current Account of Balance of Payment	Capital Account of Balance of Payment.
$1.$	Definition	Sum total of trade in merchandise goods of current account is called Current Account of Balance of payment.	Total of capital account and current account is called Capital Account of Balance of Payments.
$2.$	Income	In this account income received from the trade of tangible and intangible goods is recorded.	In capital account income and payment of capital in economic is recorded.
$3.$	Exhibits	Current account exhibits net income of the country.	Capital account shows changes of ownership of capital of the country.
$4.$	Relation	Normally current accounts is related to income expenditure of cash $($tangible$)$ and intangible goods.	Capital accounts is related entirely to instruments of capital and their utilization.

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Question 23 Marks

Explain reasons for Trade in short.

Answer

Reasons for International / Foreign Trade:

Various principles of international trade mentioned in economies shows different causes for trade.
Yet two conditions are to be obeyed for emergence of Foreign Trade between any two countries.

$(i)$ There should be sizeable difference in the production cost of the product / service of two countries.

When Production cost of a thing is higher than the other country, then the product is imported but expenses for import are added and if its cost is low then only trade of that product is carried on.
It should be cheaper than its production cost at domestic level.

$(ii)$ Business activity between two countries is carried out only when both the countries agree that the objective of international trade is to earn profit.

Following causes are mentioned in economics for the emergence of foreign trade.

$(1)$ Difference in factors availed in countries:

In every country the means of production and supply available are different.
Human wants are plenty, unlimited and full of variety.
Each country is not availed all necessary means of production.
Hence countries trade in resources, factors of production and technology to fulfil their requirements.
As a result foreign trade emerges. E.g. In India crude oil is in short supply as compared to its need for industrial development so we import it from other countries.

$(2)$ Cost of production:

Owing to differences in availability of factors of production, resource etc. the cost of production also differs.
This difference is due to plenty or scarcity of factors which determines the cost of production. e.g. In a country like America there is abundance of capital, and in a country like India, there is plenty of human work force.
The cost of capital based product is low in America and cost of labour based product is low in India.
In these circumstances it is cheaper for America to import labour based product from India and for India it is cheaper to import capital based product from America.
This would be cheaper as well as profitable.
This creates foreign trade between two countries.

$(3)$ Technological Progress:

International trade emerges because in all countries the level of technology is not the same.
Some countries are expert and efficient in some technology while other country is expert in another type of technology.
Efficiency of the product manufactured in each country is different which has result in trade among many countries regarding product / service.
Owing to efficiency of the product certain products are manufactured in specific countries only.
Sometimes necessary things are to be imported or to manufacture certain products in the country resources and technologies are imported which creates foreign trade.

$(4)$ Division of Labour and Specialization:

Available labour, means of its planning and efficiency are different in each country.
So division of labour and specialization is possible.
The country manufactures the product on large scale in which it is more efficient.
It specializes in that product too. It exports such products to foreign countries and imports the products in which it is not much efficient. e.g. Today Gulf countries produce crude oil on large scale.
It has the benefit of division of labour and specialization.
It exports crude oil to other countries and imports the products which they are not efficient to produce.
Developing countries with availability of raw material and favorable market, desire to produce in their own country, but they are lacking in technicality and efficiency.
They import expertise and technical knowhow from other countries.

$(5)$ Others:

Different countries are having favourable means of production.
Products manufactured by them are traded in the market and emerges foreign trade.

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Question 33 Marks

Write a note on Exchange Rate.

Answer

$1.$ Introduction:

When any country is carrying out international economic transactions, the problem of exchange rate arises because the currency of each country is different.
When an Indian tourist visits a foreign country and purchases goods, tourist has to obtain the currency of the concerned country.
He has to convert the currency.
Likewise the importer of India imports goods from foreign country will have to make payment in that particularly currency of the country.
He has to make payment of the product/service of the currency of the concern country.
All these things show why foreign exchange is required.
Normally tourists or traders have to get the currency of their country converted in to foreign international accepted currency.
This conversion is done through bank or legally recognized traders at specific rates.
This rate or currency conversion rate is known as exchange rate.
In short when product or service is exchanged the question of exchange rate arises.
Exchange between two currencies is not carried out till the rate of exchange between two currencies is fixed.

$2.$ Concept of Exchange Rate:

Exchange rate is known as the rate of which the currency of one country is converted in to the currency of another country.
In other words exchange rate means the price of the currency of one country expressed in the price of the currency of another country.
For a particular country exchange rate is the price of one unit of a foreign currency.
Example:
Indian citizen has to pay $Rs.60$ to buy $1\$$ here exchange rate is $\$1 = Rs.60$ means to buy $\$1$ he has to pay $Rs.60.$
Currency rate is a price. As the price of the product is fixed considering its demand and supply likewise exchange rate is one type of price of currency.
Demand of exchange determines the price of currency.

$3.$ Effect of variation in currency exchange rate:

Variation in currency exchange rate affects the values of the currency of the country.
If in context of Indian rupee the exchange rate of dollar in international market falls.
Suppose exchange rate is $\$1 = Rs.60$ is the existing rate and instead it reaches to $\$1 = Rs.65$ then a person could buy $1\$$ for $Rs.60,$ now he has to pay $Rs.65$ to buy $\$1,$ which means the value of dollar rises and the value of rupee falls.
Vice versa, if the exchange rate falls for India, then the value of rupee in international market rises. Suppose exchange rate instead of $1\$ = Rs.60, 1\$ = Rs.55,$ earlier to get $\$1$ the importer had to pay $Rs.60$ now he has to pay $Rs. 55$ to get $\$1.$
It means that the value of rupee has increased.
In these circumstances the value of dollar $($foreign currency$)$ falls and the value of rupee rises.

$(1)$ Effect on Export:

If the exchange rate of foreign currency rises, then export increases e.g. Instead of $\$1 = 60 Rs., \$1 = 65 Rs.$ happens then Indian goods becomes cheaper which leads to increase in export.
Earlier a foreigner could buy $60$ units of f $1$ against $\$1,$ now he can buy $65$ units.
When the reverse happens and exchange rate for India falls and our export becomes costlier it falls.
There is direct relation between exchange rate and export.

$(2)$ Effect on Import:

Exchange rate has relation with import.
When exchange rate goes high import is costlier.
So import decreases. E.g. Instead of $\$1=60 Rs., \$1=65 Rs.$ Earlier to buy $1$ unit $1$ $60$ was paid now $Rs. 65$ will be paid and import will be costlier.
As a result there will be fall in demand and import will decrease.

$(3)$ Effect on Price:

Internal price of a country is greatly affected by variation in exchange rate.
Varying rate of exchange affects import-export and indirectly it affects the prices of products in local market. E.g. In India, petroleum is imported in bulk.
If the exchange rate raises then indirectly its prices rise and petroleum based product/service is affected owing to higher production cost.

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Question 43 Marks

Elucidate the difference between Balance of Trade and Balance of Payment.

Answer

Sr. No.	Points of Difference	Balance of Trade	Balance of Payment
$1$	Meaning	Scientific and systematic record of imports and exports of tangible $($visible$)$ goods during a year means balance of trade.	An accounting statement showing the value of imports and exports of tangible $($visible$)$ and intangible $($invisible$)$ goods during a year means balance of payments.
$2$	Detail	Grain, cloth etc. $($visible$)$ things are included.	It includes visible things such as grain, cloth and intangible items like banking insurance transportation services, capital, income, flow of capital, purchase and sale of gold etc.
$3$	Concept	Concept of balance of trade is narrow.	Concept of balance of payments is extensive.
$4$	Form$($nature$)$	There are $3$ types of balance of trade. deficit, surplus and balanced	There are $3$ types of balance of payment. Deficit, surplus and balanced.
$5$	Accounts	There are no accounts in balance of trade.	There are two types of accounts in balance of payments $(1)$ current account $(2)$ capital account
$6$	Economic picture	It does not represent complete picture of nation's economic condition. Though balance of trade is unfavorable country can be prosperous how ever poor she may be. E.g.in the period between two world wars trade balance of Britain was deficit yet through the export of intangible services it earned and became prosperous.	Favorable or unfavorable balance of payment exhibit nation's economic condition with clarity and completeness and reality because it includes all types of international payment. From the balance of payment nation's economic prosperity is known.
$7$	Others	From the point of view of accounting balance of trade may be deficit, surplus or balanced.	From the view point of accounting balance of payments is always balanced because deficit or surplus of current account is balanced through capital account.

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Question 53 Marks

State the present condition of World Trade

Answer

As per world trade report of $2013$ the following concepts are observed.
$(1)$ The population of the world has increased by six times since the middle of the $18th$ century.

Production of the world is increased by $60$ times and foreign trade has increased by $140$ times.

$(2)$ Transportation expenses and communication expenses have remarkably reduced and diplomatic relations are developed between the regions so trade has increased.
$(3)$ In the last $30$ years in service sector trade average $7\%$ increase is recorded every year.
$(4)$ In last some decades world trade growth rate has doubled than world production growth rate.

World trade growth rate during different time period is as mentioned below.

Time Duration	Growth Rate of Trade
$1950-1973$	$7.88\%$
$1973-1985$	$3.65\%$
$1985-1996$	$6.55\%$
$1996-2000$	$6.89\%$
$2000-2011$	$5.00\%$

Conclusion:

From $1950$ to $2011, 60$ years of trade growth rate is given above.

$(1)$ From $1950-1973$ growth rate of trade is the highest in percentage.
$(2)$ During the entire period from $1973-85$ the growth rate of trade was minimum.
$(3)$ From $1985-2000$ period the tendency was of trade growth but from $2000-2011$ the growth rate of trade growth but from $2000-2011$ the growth rate of trade reduced to $5.00\%$ was $2.8\%$ which in $2015-16.$

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Question 63 Marks

State the share of various regions of the world in India’s merchandise export along with a diagram.

Answer

Region	$\%$ share in India’s merchandise imports
Asia	$59$
Europe	$16$
North America	$06$
Africa	$08$
Latin America	$07$
CIS and Baltic Regions	$02$
Others	$02$
Total	$100$

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Question 73 Marks

State the share of various regions of the world in India’s merchandise import along with a diagram.

Answer

Share of various regions of the world in India’s merchandise imports $($Financial Year: $2014-15)$

Region	$\%$ share in India’s merchandise imports
Asia	$59$
Europe	$16$
North America	$06$
Africa	$08$
Latin America	$07$
CIS and Baltic Regions	$02$
Others	$02$
Total	$100$

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Question 83 Marks

Plot percentage share of trade in India’s $GDP$ since $1981$ on a line diagram.

Answer

Percentage Share of Trade in India’s $GDP\ ($Gross Domestic Product$)$

Year	Percentage Share of Trade in India’s $GDP\ ($Measured in $US\ \$)$
$1981$	$12\%$
$1991$	$13.9\%$
$2001$	$19\%$
$2011$	$41.8\%$
$2014$	$38.3\%$

Source: World Trade Report, $2015$
Analysis: From the data and line chart we can see that the contribution of trade in India’s $GDP$ has constantly increased since $1981.$ The only fall witnessed was in year $2014$

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Question 93 Marks

How does rise and fall in exchange rate affects import and export trade of India?

Answer

Impact of exchange rate:
Rise or fall in exchange rate has a major impact on our import and export trade.Impact on import:
When the exchange rate rises for India, the value of Indian rupee $(₹)$ falls. So, India has to pay more rupees to purchase foreign goods i.e. importing becomes costlier. As a result, the demand for imported goods decline.
Impact on export:

In terms of export, when the exchange rate rises for India, India can export more quantity of goods in lesser amount. This boosts export trade.
For example, if earlier by spending $US\ \$\ 1,$ a foreign trader could purchase goods worth $₹\ 60,$ then now he can buy goods worth $₹\ 65.$ Hence, export $₹$ from India tend to rise.
The reverse happens when exchange rate for India falls.

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Question 103 Marks

What is exchange rate? Explain with the help of an example.

Answer

Exchange rate:

“The rate at which the currency of one country can be converted into currency of another country is called exchange rate”.
“Exchange rate is the price of a foreign currency in terms of domestic currency”.

Example:

Suppose, exchange rate of $US\ \$\ 1 = ₹\ 60.$ This means that in order to buy $1\ US$ dollar, an Indian will have to pay $₹ 60.$ This also means that if an American comes to India, his $1$ dollar will fetch him $60$ rupees.
A rise in the exchange rate for India means that the value of Indian currency has declined in the international market.
This means that India will have to pay more Indian rupees to buy one unit of foreign currency. This also means that the foreign currency has become expensive and hence value of Indian rupees has fallen.
Suppose, the exchange rate is $US\ \$\ 1 = ₹\ 60.$
When exchange rate rises for India, $US\ \$\ 1 = ₹\ 65.$ When exchange rate falls for India, $US\ \$\ 1 = ₹\ 57.$
It should be noted that in reality, the actual analysis of rise or fall in the value of a currency, the time gap between the rise or fall in value of the currency, prices of goods iri the various countries, etc. are taken into consideration for deciding the exchange rate.

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Question 113 Marks

Why would a person or a country need foreign currency? Also, state the need of currency conversion.

Answer

Need of foreign currency:
Currency of each country is different. For example, India’s currency is Rupee $(₹),$ America’s currency is US Dollar $(\$),$ England’s currency is pound $(£),$ and so on.

When a foreigner comes to India, he cannot make payment in dollars or pounds to purchase products or services from our traders. He will have to make payment in Indian currency only.
Similarly, when an Indian importer imports goods from a foreign country he will have to make payment to that country either in the currency of that country or in an internationally acceptable currency.
To fulfill such types of transactions individuals and a country needs foreign currency.

Currency conversion:

Foreign tourists or people involved in import/export will need to convert the currency they have either into currency of the country with which they wish ’ to transact or into internationally acceptable currency.
Therefore, such tourists or traders approach banks or officially registered currency traders to convert their domestic currency into a foreign or internationally acceptable currency.
Such conversion of currency done at a specific rate and at a specific time is known as the exchange rate.
Exchange rate is the price of a foreign currency in terms of domestic currency. In other words, it is the units of home currency required to buy one unit of a foreign currency.

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Question 123 Marks

Prepare a hypothetical account for the Balance of Payment.

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Question 133 Marks

What do you mean by factors that affect the Balance of Payments? Enlist the factors.

Answer

Factors influencing Balance of Payments:

Factors influencing balance of payments means those factors that affect imports, exports, movement of capital, movement of factors of production, investment, lending, etc. in a nation are called factors influencing Balance of Payments.
Deficit or surplus in the Balance of Payments can arise due to such factors.
The impact of such factors usually depends upon the level of economic development of a country.

Some of these factors are:

Exchange rate
Prices of tradable goods in home country and in foreign countries
Variety and quality of tradable goods
Inevitable imports
Level of economic development of the country
Legal restrictions on trade
Trade supporting facilities and infrastructure like transport, communication, etc.

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Question 143 Marks

Discuss the components of Current Account of Balance of Payments.

Answer

Current Account: The current account records the credit and debit entries for :
$1.$ Trade in merchandise goods $($tangible goods$):$

Receipts obtained by exporting items are recorded as credit entry $($i.e. a $’+’$ entry$).$ Payments made for items imported are recorded as debit entry $($i.e. a entry$).$
The sum total on this section of current account $($i.e. the sum of credit $’+’$ entry and debitentry; or say the difference of import and export$)$ is called • the balance of trade or simply trade balance.
If the payments for merchandise imports $($i.e.entries$)$ are greater than the receipts from merchandise exports $($i.e. entries$)$ then there is a deficit in the balance of trade. The vice versa situation is called surplus on the balance of trade.

$2.$ Trade in services $($intangible things$):$

The incomes from invisibles are recorded on credit side and payments on debit side.
This includes banking, insurance, transportation, etc. through which transactions of import and export have occurred.
Current Account Balance $=$ Trade Balance $+$ Income Balance $+$ Net Unilateral transfer.

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Question 153 Marks

State the types of accounts made under Balance of Payments.

Answer

Balance of Payments $(BoP)$ consists of two accounts.
They are:

Current account and
Capital account

$1.$ Current Account: The current account records the credit and debit entries for :
$(a)$ Trade in merchandise goods $($tangible goods$):$

Receipts obtained by exporting items are recorded as credit entry $($i.e. a $’+’$ entry$).$ Payments made for items imported are recorded as debit entry $($i.e. a entry$).$
The sum total on this section of current account $($i.e. the sum of credit $‘+’$ entry and debitentry; or say the difference of import and export$)$ is called the balance of trade or simply trade balance.
If the payments for merchandise imports $($i.e.entries$)$ are greater than the receipts from merchandise exports $($i.e. entries$)$ then there is a deficit in the balance of trade. The vice versa situation is called surplus on the balance of trade.

$(b)$ Trade in services $($intangible things$):$

The incomes from invisibles are recorded on credit side and payments on debit side.
This includes banking, insurance, transportation, etc. through which transactions of import and export have occurred.
Current Account Balance $=$ Trade Balance $+$ Income Balance $+$ Net Unilateral transfer.

$2.$ Capital Account:

Capital account records receipts and payments from transactions on assets such as assets like stocks, gold, capital loans, etc. and other forms of fixed capital.
The total of Current Account and Capital Account is called the Balance of Payments.

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Question 163 Marks

What is surplus and deficit Balance of Payments?
OR
State the types of Unbalanced Balance of Payments and explain them:

Answer

Unbalanced Balance of Payment:
When the /aiuS wf entries on the credit side is not equal to entries on the debit side, Balance of Payments is said to be unbalanced.

An unbalanced Balance of Payments can be further classified as follows:

Deficit Balance of Payments:
In the statement of Balance of Payments, if payments are more than receipts i.e. the value of credit side entries is lesser than the values of debit side entries, then there is a deficit in the Balance of Payments.
Surplus Balance of Payments:
- In the statement of Balance of Payments, if receipts are more than payments i.e. the value of credit side entries is greater than the value of debit side entries, then there is a surplus in the Balance of Payments.
- According to the double-entry book keeping system, a balance of payments always balances. However, in reality there can be a deficit or a surplus in the balance of payments.

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Question 173 Marks

What is Unbalanced Balance of Payments? State its types.

Answer

Unbalanced Balance of Payment:
When the /aiuS wf entries on the credit side is not equal to entries on the debit side, Balance of Payments is said to be unbalanced.
An unbalanced Balance of Payments can be further classified as follows:
Deficit Balance of Payments:
In the statement of Balance of Payments, if payments are more than receipts i.e. the value of credit side entries is lesser than the values of debit side entries, then there is a deficit in the Balance of Payments. In the statement of Balance of Payments, if receipts are more than payments i.e. the value of credit side entries is greater than the value of debit side entries, then there is a surplus in the Balance of Payments.
According to the double entry book keeping system, a balance of payments always balances. However, in reality there can be a deficit or a surplus in the balance of payments.

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Question 183 Marks

How has our pattern of export changed over years?

Answer

Pattern $($direction$)$ of export:
In the same pattern in $1960-61,$ India’s exports to England constituted $26.8\%$ of the total merchandise exports which reduced to as low as $4\%$ after $2007-08.$
During the same period, India’s exports to $USA$ declined from $16\%$ of the total merchandise exports to $12.7\%$ and that to Russia from $4.5\%$ to $0.6\%.$
Contrary of this, our merchandise exports to $OPEC$ constituted $4.1\%$ of our total merchandise exports in $1960-61$ which gradually increased over years. After $2007-08$ it increased to over $16\%$ and during the same period merchandise exports to developing countries increased from $14.8\%$ to $42.6\%$ of the total merchandise exports. ‘ ‘
From our total merchandise exports, those to Asian countries were countries were almost $50\%$ in $2014-15.$
Thus, India has made several successful attempts to diversify her trade with different countries that too in different directions.

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Question 193 Marks

How has our pattern of import changed over years?

Answer

$(A)$ Pattern $($direction$)$ of import:
Our trade relations with England developed quite strong after the British started ruling India. This tradition continued even after independence. In $1960-61, 19\%$ of our total merchandise imports were from England. However, the situation changed $2007$ wherein India imported less than $2\%$ things from England. After independence, we were quite dependent on America for our imports. In $1960-61,$ our imports from $USA$ constituted $29\%$ of our total merchandise imports. This fell to less than $8\%$ after $2007.$
With time, Indian industries started developing. So, we were in heavy need of petroleum-based products. As a result, our merchandise imports from $OPEC$ i.e. Organization of Petroleum Exporting Countries increased.
India had friendly relations with Russia and our imports from Russia were high after independence. This declined since 1980s after the economic crisis in Russia.
Over, time our trade with traditional partners started declining gradually and started increasing with other developing countries, especially with developing countries of East Asia, Central Asia and Africa.
Our imports from other developing countries were about $11.8\%$ of our total merchandise imports in $1960-61.$ This increased to $32\%$ in $2007-08$ and further to $59\%$ in $2014-15.$

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Question 203 Marks

Compare the import and export structure of $1960-61$ with that of $2014-15.$ Comparison of Import-Export of various items in $1960-61$ and $2014-15$

Answer

No. Item	Share of import in $1960-61$	Share of import in $2014-15$
$1.$ Food arains	$19.1\%$	$3.9\%$
$2.$ Capital intensive goods	$31.7\%$	$9.8\%$
$3.$ New items	$2.2\%$	$46.5\%$

No. Item	Share of export in $1960-61$	Share of export in $2014-15$
$1.$ Items of primary sector	$44.2\%($Tea and coffee: $19.3\%,$ Jute: $21\%)$	$12.3\% ($Tea and coffee: $0.2\%,.$ Jute: $0.2\%)$
$2.$ Leather products	$4.4\%$	$1.3\%$
$3.$ Cloth	$10\%$	$2\%$
$4.$ Reaavmaoe aarments	$0.1\%$	$5.4\%$
$5.$ Manufactured aoods	$45.3\% ,$	$66.7\%$
$6.$ Petroleum products	$1.1\%$	$18.5\%$

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Question 213 Marks

Discuss in detail the change in import-export structure after $1991 .$

Answer

$(A)$ Change in import structure:

After $1991,$ the nature of trade changed significantly in India. The import of food grains and other agricultural goods and capital goods declined.
The share of traditional exports like tea, coffee, jute etc. in total exports declined while that of industrial goods and non-traditional items increased. For example, India started exporting software.
In $1961,$ the share of food imports in India’s total merchandise imports was $19.1\%$ which declined to just $3.9\%$ in $2014-15.$ This shows that India attained self-reliance in producing grains and other food items.
As India developed, it started generating more more capital and capital intensive goods. So, India’s import of such items decreased significantly. In $1960-61,$ the share of capital intensive goods in India’s merchandise imports was as high as $31.7\%$ which declined to $9.8\%$ in $2014-15.$
In $1960-61,$ the import of new items was only $2.2\%$ of the total merchandise. This increased to $46.5\%$ in $2014-15.$ This shows that as India developed in a variety of sectors it needed more and more new types of items and so India’s imports of new types of items increased.

$(B)$ Change in export structure:

As India developed, the nature of export also changed.
In $1960-61,$ the primary sector export consisted of $44.2\%$ of total export. It reduced to as low as $12.3\%$ in $2014-15.$ In this, the share of tea and coffee exports declined from $19.3\%$ to $0.2\%$ and that of jute export declined from $21\%$ to $0.2\%.$
Similarly, the share of leather products in exports declined from $4.4\%$ in $1960-61$ to $1.3\%$ in $2014-15$ and that of cloth declined from $10\%$ to $2\%.$
Against this, the export of readymade garments increased from $0.1\%$ in $1960-61$ to $5.4\%$ in $2014-15.$
The share of manufactured goods in total merchandise exports was $45.3\%$ which increased to $66.7\%$ in $2014-15.$
In $1960-61,$ India exported only $1.1\%$ of petroleum products. This increased to $18.5\%$ in $1914-15.$

Conclusion:
There is a considerable change in the foreign trade pattern since independence. India has developed significantly in all these years and hence both the volume and pattern of import and export trade have also significantly changed.

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Question 223 Marks

Give an idea about India’s foreign trade around the decade of $1970-80.$

Answer

Foreign trade around the decade of $1970-80:$
When a country starts developing, the proportion import of food grains tends to fall. The share of primary sector goods in total exports tends to fall and that of industrial goods tends to rise. India saw such trends in the decades of $1970$ and $1980.$
When the country further develops its export trade increases. To maintain and increase the export i.e. to keep on producing items of export the country’s import for raw material, technology, spare parts, petroleum, etc. increases. These imports are necessary for the industries that produce goods for export. So, as India developed its export as well as import also increased

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Question 233 Marks

How was the trend of our foreign trade in and around the decade of $1950-60?$

Answer

Foreign trade around the decade of $1950-60:$
A less developed economy imports things at a very high rate and in high volume in all the sectors. Between $1950 $ and $1960,$ India’s agriculture sector was quite weak and so it imported food grain quite frequently. During that period it also imported machines and spare parts, capital assets, technological know-how, etc. in very high quantity. In terms of exports, the less developed economies like India mainly exports goods belonging to agriculture or say primary sector. So, in the past, India mainly exported tea, coffee, jute, mineral ore, and minerals, etc. It did not export industrial goods in much quantity. Import-Export of various items in $1960-61$

No. Item	Share of import
$1.$ Food grains	$19.1\%$
$2.$ Capital intensive goods	$31.7\%$
$3.$ New items	Two

No. Item	Share of export
$1.$ Items of primary sector	$4.4\%$
$3.$ Cloth	$10\%$
$4.$ Readymade garments	$0.1\%$
$5.$ Manufactured goods	$. 45.3\%$
$6.$ Petroleum products	$1.1\%$

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Question 243 Marks

India’s balance of trade has always remained negative. Explain.

Answer

Reason for negative balance of trade:

In the initial years of independence, India was an underdeveloped country. So, it imported more and exported less. This resulted, in negative balance of trade.
After $1980,$ India started developing more. So, people started demanding more goods from the industries. Hence, it became necessary to import more and more goods to sustain, maintain and expand the large industries established in India.
Moreover, the industries could barely meet the domestic demands so there was no surplus production that could be exported. So, again our balance of ‘ trade remained negative.
After $1991,$ India’s exports increased significantly. To sustain in international competition, Indian industries started importing technology, petroleum, etc. in large quantity. Again our exports remained high compared to imports.
Hence, since indepehdence our balance of trade has always remained negative.

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Question 253 Marks

With the help of data give an idea about India’s balance of trade since $1991.$

Answer

The following data table shows India’s foreign trade in $1991-92,1998-99$ and $2014-15.$ India’s foreign trade after $1991 ($in million $US\ \$)$

Goods exported

$17.9$

$33.2$

$19.4$

$42.4$

$-1.5$

$-9.2$

$-187.5$

As can be seen in table, although India’s foreign trade has increased over years but India’s exports have never exceeded its imports. Hence, our balance of trade has always remained negative.

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Question 263 Marks

Why is it important to know the size, composition and direction of the county’s foreign trade?

Answer

Understanding the size, composition and direction of the county’s foreign trade is necessary to know:

The trends and development of trade

The efforts that a country puts to promote her trade in international market

The relation of a country with other countries

The quality of domestic production done to match international standards

The competitiveness of domestic products in international market, etc.

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Question 273 Marks

What does India’s rising imports and rising exports mean?

Answer

Rising imports is a sign that India is developing and so it is demanding more and more goods.

Rising exports means India is able to produce exportable surplus of desirable quality and sell it at competitive prices in the world market.

Size, Nature and Direction of India’s Foreign Trade

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Question 283 Marks

Discuss India’s share in world trade.

Answer

If we look at the growth of world trade then wq can see that India’s share in the world trade has remained low.
However, in present times India is playing an important role as a developing nation in determining the direction of world trade.
India’s exports have grown significantly. Moreover, rise in exports are also playing an important role in increasing our $GDP.$
The down side is that even though India’s exports are rising significantly, our imports are still higher than our exports. Imports also constitute a greater percentage of $GDP$ than exports.
Rising imports is a sign that India is developing and so it is demanding more and more goods.
Rising exports means India is able to produce exportable surplus of desirable , quality and sell it at competitive prices in the world market.
Share of India’s total trade in world trade in $2014-15.$ was about $2.07\%$ at $19th$ rank.

Share of India’s exports in the world exports

Financial Year	Share in global merchandise exports	Rank
$2005$	$0.9$	$29th$
$2010$	$1.5$	$19th$
$2012$	$1.6$	$19th$
$2013$	$1.7$	$19th$
$2014$	$1.7$	$19th$

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Question 293 Marks

Define trade, domestic trade and foreign trade.

Answer

A commercial/business activity which involves exchange of goods, services, resources, capital, technology, know-how, intellectual property, etc. with the motive of profit is called trade.

Trade which takes place within the geographical boundary of a nation is called internal trade or domestic trade and that takes place outside the geographical boundary of a country is called international trade or foreign trade.

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Question 303 Marks

Explain with examples the difference between following four terms: $(1)$ Fall in market value of rupee. $(2)$ Devaluation of rupee.
$(3)$ Rise in market value of rupee. $(4)$ Over valuation of rupee.

Answer

$(1)$ Decrease in market value of rupee $($Fall in market value of rupee$):$

Suppose there is less supply of foreign currency, dollar in the market than its demand, owing to shortage currency exchange rate between dollar and rupee rises.
It is called fall in the market value of rupee. E.g. $l\$=Rs.60$ is the exchange rate in the market.
Due to any reason import payment is higher than export income and demand of dollar in the market rises and there is shortage of dollar and rises exchange rate to $1\$=Rs.65$ it is said that market value of rupee has fallen $($decreased$).$
Earlier $\$1$ was obtained against $Rs.60$ now to get $\$1\ Rs.65$ are paid.
Market value of rupee has fallen $($decreased$).$

$(2)$ Devaluation of rupee:

When the government of any country declares fall of its currency in context to other currency is called devaluation.
This is done by authorized government of the country. e.g. instead of $l\$=60\ Rs.$ government authorized exchange rate is $l\$=65\ Rs.$ Compared to dollar the value of rupee is falling.
So it is called devaluation of rupee.

$(3)$ Rise $($increase$)$ in market value of rupee:

Suppose in the market the supply of dollar is higher than its demand, and dollar is in abundance, the exchange rate will go down.
The market value of rupee has increased. e.g. exchange rate $\$=60Rs.$ prevails in the market, owing to some reasons demand of dollar declines $($decreases$)$ export income is higher than import payment means dollar is in abundance, then exchange rate decrease to $1\$=55\ Rs,$ if this happens it is called market value of rupee has increased.
Earlier $\$1$ was obtained against $65\ Rs$ now $\$1$ is obtained against $55\ Rs.$

$(4)$ Over valuation of Rupee:

When the government of a country declares increase in the value of its currency in context of other currencies is called over valuation.
This is done by authorized government e.g. when exchange rate is $l\$=60Rs.$ but government is authorized and declares $1\$=55\ Rs.$
It is called over valuation of rupee.
In short it is over value when government declares the payment of $133$ in rupee cheaper and owing to the market factors less rupees are paid against $1\$.$
This market condition shows increase in market value of rupee.

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Question 313 Marks

Explain with imaginary example the concept of Balance of Payments.

Answer

Balance of payment
Income $($credit$)$ in Rs. Expenditure $($debit$)$ in Rs. Balance
Current A/c
Export of goods. Balance of trade Export of services Income on capital	$500\ 1000\ 800$	Import of goods. Balance of trade Import of services Payment of capital	$700\ 1200\ 1000$	$-200\ -200\ -200$
One sided income	$700$	One sided payment	$600$	$+100$
Sub Total	$3000$		$3500$
Balance of current Account				$-500$
Capital Account
Long term debt Short term debit Sale of Gold	$500\ 1000\ 500$	Long term Lending Short term Lending Purchase of Gold	$300\ 800\ 390$
Sub Total	$2000$		$1490$
		Error in calculation	$10$
Total Credit			$5000$
Balance of Payment				$0$

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Question 323 Marks

Explain reasons of Foreign trade.

Answer

1. Difference in Factor Endowments: Countries have different natural resources.
2. Cost of Production: Some countries can produce goods more cheaply due to technology or labor.
3. Variety/Specialization: Trade allows consumers to access goods not produced locally.

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Question 333 Marks

Explain any three reasons for international trade.

Answer

1. Difference in Factor Endowments: Different countries have different natural resources.
2. Cost of Production: Countries trade to get goods that are cheaper to import than to produce.
3. Technological Progress: Countries with advanced tech export specialized goods.

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Question 343 Marks

Explain the difference between domestic (Internal) trade and international trade.

Answer

1. Currencies: Domestic trade uses one currency; International trade involves multiple currencies.
2. Mobility of Factors: Factors are more mobile within a country than across borders.
3. Legal Systems: Domestic trade follows one set of laws; International trade involves laws of different nations and international treaties.

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Question 353 Marks

State the present condition of world trade.

Answer

The present world trade is characterized by:
1. Increasing share of developing nations like China and India.
2. Growth in trade of services (software, BPO) alongside goods.
3. Formation of trade blocs (EU, ASEAN).
4. Role of WTO in promoting free trade and reducing tariffs. Global trade volume has increased significantly but faces challenges from protectionist policies.

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Question 363 Marks

Explain any three factors affecting the nature of international trade.

Answer

1. Legal Systems: Different countries have different laws regarding trade, contracts, and dispute resolution.
2. Currencies and Exchange Rates: Trade involves multiple currencies, and fluctuations in exchange rates affect the profitability of trade.
3. Language and Culture: Differences in language and consumer preferences require businesses to adapt their products and marketing.

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Economics 3 Marks Each

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