5 Marks Each

Question 15 Marks

Give the meaning, types, accounts and factors influencing Balance of Payments.

Answer

$1.$ Meaning of Balance of Payments:

Balance of payment is a true criteria to know any country's clear, real and complete economic condition.
It includes all types of international payment.
Balance of payment means comparison of one country's balance sheet of trade with other countries.
Value of products and services, expense of transportation of means and value of trade capital are registered in it.
Definition:
An accounting statement showing the value of imports and exports of tangible $($visible$)$ and intangible $($invisible$)$ goods during a year is balance of payments.
In other words, balance of payments is a systematic account of the value of transactions in particular period $($one year$)$ of a country with the rest of the world in tangible and intangible goods and services import and export and transfer payments and capital.
It is known as international balance sheet.
The concept of balance of payments is more extensive than trade balance.
Trade balance includes import-export of only tangible goods while balance of payments includes invisible goods and all economic expenses related to services and transportation.
Balance of payment has two sides:

$(1)$ Credit Side:

Income earned in the country from foreign countries is shown.

$(2)$ Debit Side:

All payment made in foreign countries is shown.

$2.$ Types of Balance of Payments:

$\text{TWO}$ types of balance of payments is possible $: (1)$ Balanced $(2)$ Unbalanced.

$(1)$ Balanced:

The sum total of credit and debit entries is equal in balance of payments.

$(2)$ Unbalanced:

Balance of Payments is unbalanced when the value of entries on the credit side is not equal to entries on the debit side.
There is difference in the total of credit side and debit side.
When two situations are possible.

$(1)$ Surplus Balance of Payments:

If the total of credit side is more than the total of debit side, it is called surplus balance of payments.

$(b)$ Deficit Balance of Payments:

In the balance of payments, if the total of debit side is more than the total of credit side it is called deficit balance of payments.
Any country's deficit or surplus or balance is discussed in the context of its balance of payments.
From the view point of accounting, balance of payments is always balanced because deficit or surplus of current account is always maintained through its capital and reserve account.

$3.$ Accounts of Balance of Payments:

There are two accounts of balance of payments :

$(A)$ Current Account $(B)$ Capital Account

$(A)$ Current Account:

In this account for the following entries credit and debit amount are recorded.
It includes tangible items like food grains, garments etc. $($tangible$)$ items import-export of intangible goods/services such as banking, insurance, transportation, communication, investment in foreign countries or income on investments in foreign countries, gifts and presents, economic transactions with foreign countries including war penalty etc.

$(1)$ Value of trade of tangible goods:

Export income of tangible goods is showed on $($credit side$)$ and payment of it is showed on import $($debit side$).$
In short in all the items of import-export are included in trade balance are recorded in balance of payments.
The sum total of this section is called trade balance.
If in the country when import payment of tangible goods is less than export income then balance of trade is called deficit and if the situation is vice versa the balance of trade is called surplus.

$(2)$ Trade value of intangible services:

The income from invisible products/services is recorded on credit side and payments made for import are on debit side.
This includes banking, insurance, transportation, information technology, through which the transactions of exchange have occurred owing to import-export.

$(3)$ Capital Income:

Income from investment in foreign countries such as interest, dividend, income of exchange received as profit is shown on credit side and interest, dividend or profit paid is shown on debit side.
Foreign investment in the country on which payment is made is shown on debit side.

$(4)$ One sided Incomes:

During the year, country has received gifts, compensation, one sided income in form of war, punishment, grant etc.
This income-payment is entered in one sided balance of payments. e.g. During natural disaster grant is received from foreign countries which is not to be repaid there is no liability to repay it even in future so it is entered on income side.
If any country has made payment to any country as penalty of war or gift it is showed on debit side.

$(B)$ Capital Account:

This account record receipts and payments from transactions on assets bound, shares, gold, capital loans etc. and other forms of fixed capital.

$(1)$ Long term investment:

Investment of foreign countries in this country is long term investment.
Income $($credit$)$ is shown on credit side. While investment of this country in foreign countries payment $($debit$)$ is shown on debit side.
Long term investment is in two forms$: (1)\ 0$ Direct Investment $($Equity$)\ (2) $Securities.

$(2)$ Short term fund:

To cope up with nation's short term requirement of exchange the fund received from the foreign countries is shown in the income from capital account and for short term the fund going out from this country is payment $($debit$)$ shown on debit side.

$(3)$ Purchase Sale of Gold:

Government of any country through Federal bank from foreign country or $\text{I.M.F.}$ purchase gold means imports gold and pays in exchange, which is shown on debit side.
Vice versa, if any country sells gold lying in federal bank and receives exchange, is $($credit$)$ shown on credit side.

$4.$ Example:

Balance of Payment
Income $($Credit$)$	Payment $($Debit$)$
Current Account
$(1)$ Export of Product/Service $(a)$ Export of tangible items $(b)$ Export of banking, insurance, transportation etc. intangible services $(c)$ Income on investment in foreign countries $(d)$ Income from gift, compensation, war, punishment, grant etc	$(1)$ Import of product/service $(a)$ Import of tangible goods $(b)$ Import of intangible services like banking insurance transportation etc. $(c)$ Payment on investment of foreign countries $(d)$ Payment made in the form of gift compensation war punishment grant etc.
Capital Account
$(1)$ Long term investment of foreign countries in this country $(a)$ Direct Investment $($Equity$)\ (b)$ Foreign investment in securities of the country $(c)$ Short term fund incoming from foreign countries $(d)$ Sale of gold errors and omissions	$(1)$ Long term investment of this country in foreign countries $(a)$ Direct or equity form $(b)$ Investment in foreign securities by this country $(c)$ Short term found out going to foreign countries $(d)$ Purchase of gold errors and omissions

Comparison of any country's balance of payments surplus or deficit of current account is settled through the transactions of its capital account and overall $($current or capital$)$ balance of payments is always balanced.

$5.$ Factors affecting Balance of Payment:

Factors affecting import, export transfer of capital, transfer of means $($instruments$)$ capital investment, lending affect balance of payments.
Changes occurring in these factors affect balance of payments.
Some of the factors are important as mentioned below.

$(1)$ Degree of import and export is affected when the rate of exchange changes.
$(2)$ Changes in the price of the product exported or imported bring changes and affects balance of payments.

The price of the product/service exported falls in the country's export and income increases.
When the price of the product rises in the country, import increases.

$(3)$ If variety is brought in the trade or quality is improved then export increases.
$(4)$ If the import of certain items is must for a country, variation in their price affects balance of payments.
$(5)$ Level of economic development of the nation affects balance of payments. e.g. In developing countries in the primary stage of development large scale of capital is to be imported for industrialization on the other hand exports do not increase immediately.

As a result balance of payments shows deficit.

$(6)$ Political and legal restrictions on import, also affect balance of payments.
$(7)$ The most significant factor affecting trade is availability of transportation, communication and infrastructural facilities in the country and with high standard of these facilities foreign trade increases.

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Question 25 Marks

State in detail the changes that have occurred in the direction of India's Foreign Trade over years.

Answer

$1.$ Introduction:

In simple words direction of trade means the information of any country, related to other countries of the world with foreign trade.
In other words direction of trade means any nation's business relations with various regions of the world.
For every country following are necessary to establish business relations with other countries.

$(1)$ Country must be capable to produce the things as per the requirements of other countries.

Today economy of China has come up owing to this reason only in foreign countries.

$(2)$ Good political relations are necessary to develop foreign trade.
$(3)$ Government also should encourage foreign trade and its development through political efforts related to trade.
$(4)$ Those associated to trade should have good sales organization and efficient skill for management of its own product. e.g. Today the economy of China has become leader and in the global market by producing goods as per the requirements of various countries of the world.
$(5) $Most important thing is that the production $($output$)$ of export based product should be sufficient enough to export.
$2.$ Changes in the Direction of Foreign Trade of India:
$(1)$ England:

India was ruled over by the British before independence.
It was in the slavery of the British so India's main share in foreign trade was England.
After independence India had mainly traded with England$(U.K.).$
With implementation of planning, day by day trade with England was diminishing. e.g. In $1960/61$ in India out of total import $19\%$ was from England which decreased after $2007$ to less than $2\%.$
In the same way in $1960-61$ of all export of India percentage of England's share was $26.8\%$ which has fall down to below $4\%$ after $2007.$

$(2)\ U.S.A.\ ($America$):$

After independence $USA$ occupied significant place in foreign trade.
This was the initial condition of India just after independence.
We used to import many things from $U.S.A.$ In $1960-61$ the share of import from $U.S.A.$ was $29\%$ which reduced to below 8\% after $2007.$ In the same way share of gross export income to $U.S.A.$ was $16\%$ in $1960-61$ which has reduced to $12.7\%.$
In short, in $1960/ 61\ U.S.A.$ and $U.K.$ were main in India's foreign trade but at present its place is taken by the Asian countries.
It is the most remarkable change in foreign trade direction.

$(3)\ OPEC$ countries $($Organization of Petroleum Countries$):$

$OPEC$ countries means a group of petroleum exporting countries.
Gulf countries are main in this. During India's planning the share of $OPEC$ countries has increased significantly in foreign trade.
Import of mineral oil has remarkably increased in this country.
Its main reason is industrialization and its speedy development.
Production of mineral oil is much loss in our country than its requirement so it is to be import in large quantity.
Our export to these countries is increasing in percentage. e.g. In $1960-61$ the share of these countries in export from our country was $4.1\%$ which has increased after $2007-08$ to more than $16\%.$

$(4)$ Russia:

In the decade of $60$ India's foreign trade with Russia and communist countries of east Europe had significantly increased.
It remained steady in the decade of $70.$
But after $1980$ it has decreased.
Owing to division of $U.S.S.R.$ and Russia being separated country.
Before this we had friendly relations with Russia and many things were imported from Russia.
Significant decrease is observed due to division and economically critical situation.

$(5)$ Developing Countries:

After $1960-61$ other than $OPEC$ countries, in developing countries like.
Africa, Asia and the countries of Latin America foreign trade has increased significantly.
It has decreased with our traditional partners.
In $1960-61$ the contribution of these countries in our gross import was $11.8\%$ which has increased to $32\%$ in $2007-08$ and $59\%$ in $2014/15.$
In the similar period export to developing countries has increased remarkably.
In $1960-61$ the share in export of these countries was $14.8\%$ which increased to $42.6\%$ in $2007-08$ and in 2014-15 the share of Asian countries increased to $50\%.$
After $2007 -08$ the classification showing India's direction of trade and regions has changed.
As per new classification $EXIM$ bank and India's economic survey $2015-16,$ status of $2014-15$ is mentioned below:
Percentage share of India's Import-Export of Various Regions of the World

Sr. No.	Region	India’s Import share in percentage	India’s Export share in percentage
$1$	Asia	$59$	$50$
$2$	Europe	$16$	$18$
$3$	Africa	$8$	$11$
$4$	Latin America	$7$	$5$
$5$	North America	$6$	$14$
$6$	CIS and Baltic Region	$2$	$1$
$7$	Others	$2$	$1$
	Total	$100$	$100$

Conclusion:

$(1)$ As per $2014-15$ Asian Countries hold major share in India's foreign trade.

Their is $59\%$ share in our total import and $50\%$ in our export.
Trade with traditional countries has reduced and increased with the Asian countries.

$(2)$ The European countries hold second rank in India's foreign trade.

They occupy $16\%$ in our total import and $17\%$ share in total export business.

$(3)$ Our business is significant with the African countries.

Our business relations are quite old with these countries.
In the present time its form has changed.
Another thing is that the percentage of export to these countries is higher than import from these countries.

$(4)$ The percentage of export to the countries of North America is higher than import from these countries.
$(5)$ In the countries of Latin America the share of export percentage is less than import.
$(6)$ In our foreign trade the import share of $CIS$ and Baltic region is $2\%$ and export share is nominal $1\%.$

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Question 35 Marks

State in detail the changes that have occurred in the size of India's Foreign Trade over years.

Answer

$1.$ Introduction:

It is necessary to know the changes in the size of import-export, the magnitude of gross foreign trade in the nation's national income, to understand any Nation’s foreign trade.

$2.$ Meaning of size $($magnitude$)$ of foreign trade:

Normally the size of foreign trade means the sum of the total worth of import and export of physical products.
Three things are necessary to be known to know the magnitude of foreign trade.

$(1)$ Total import value and total export value of physical products imported and exported at different period.

This value is not measured at market price but at steady price or in $US \$$ measure because due to increase in import-export quantity the increased value is the increase in the quantum of foreign trade.
Impact on total value due to increase or reduction in price can be removed by measuring at steady price.
Measuring through $U.S.A$ dollar, the rough exchange rate automatically shows up and changes occurred every year is removed.
If value of foreign trade is measured through steady price then only its actual size is known.

$(2)$ Import growth rate and export growth rate in percentage at different time period.
$(3)$ Share of foreign trade in gross national income $($Gross Domestic Product $GDP)$ and its share in global trade.

In any country every year's income from export and payment of import increase in value.
Import growth rate and export growth rate increase and there is increase in the share of foreign trade in national income and at the same time there is increase in the share of global trade in percentage then it can be said that the magnitude of that country in trade has increased.
Contrary to this if the total worth of foreign trade is reduced, there is reduction in its share in national income and share in global trade is decreasing then it is said that the size of that country's foreign trade is reduced.

$3.$ Size of India's Foreign Trade:

Since $1951$ India has adopted the path of planning.

Up to $1980$ after having constructed strong and sturdy base of industrialization specially implementation of liberalization policy of $1991,$ there is a remarkable increase in India's foreign trade $66$ years during the period from $1951$ to $2016$ there is considerable export in India.
Due to higher import rate than export rate in most of the year's balance sheet was deficit.
During planning, share in percentage in national income and global trade has increased.
The following conclusions are derived from the attitudes created after adopting new economic policy of $1991$ pertaining to India’s foreign trade.

$(1)$ In $1991-92$ total worth of India's export was $17.9$ million $\$$ which increased to $33.2$ million $\$$ in $1998-99$ and in $2014-15$ it reached to $310.5$ million $\$.$

In the let century the worth of foreign trade has remarkably increased.

$(2)$ In $1991-92$ total worth was $19.4$ million dollars which increased to $448.0$ million $\$$ in $2014-15.$ Main cause of this happening is to exist in global competition technology, petrol etc.
$(3)$ After $1980$ the base of industrialization was being prepared to maintain big industries, and for developing them import was increased.

More over due to liberalization and with the increasing income import has increased.

$(4)$ During the period between $1991-92$ and $2014-15$ the size of export value and import value has increased.

Import value is higher than the export value.
As a result, balance sheet of the nation has remained deficit.
In $1991-92$ the loss of balance of trade was $1.5$ million dollars which increased in $2014-15$ to $187.5$ million dollars.

$(5)$ In the initial period after independence growth rate of India remained quite low.

Export based size of import was very high.
Export efficiency no longer remained so exports turned lower.

$(6)$ In the $GDP ($Gross Domestic Product$)$ of India according to $USA$ dollars the share of foreign trade has constantly increased.

In $1981$ the share of foreign trade in India's $GDP$ was only $12\%$ which increased in $2014$ to $38.3\%$ from percentage point of view it increased three times.
From $1981$ to $1991$ the share increased only $1.9\%.$
After $1991$ implementation of new policy it started increasing and in $2001$ there was increase of $1.9\%$ share.
After this in the let century percentage in the size of foreign trade has increased to double.
In $2001$ the contribution to India's $GDP$ was $19\%$ which increased up to $38.3\%$ in $2014.$

$(7)$ In the context of India's $GDP$ in the percentage of the share of foreign trade it is to be noted that compared to $2011$ the share in percentage is reduced.

Means the share which was $41.8\%$ in $2011$ is reduced to $38.3\%$ in $2014.$

$(8)$ After $1991$ in the total trade of the world, India‘s share due to implementation of new economic policy has increased.

As per estimation India's share is $2.07\%$ in $2014-15$ in gross world trade.

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Question 45 Marks

Explain the difference between Domestic $($internal$)$ Trade and international

Answer

$1.$ Introduction:

The only basic cause of the emergence of trade is the difference of production cost.
Internal trade emerges when there is difference in the cost of production of a product / service from one region to another.
Obviously difference in price too is found.
There is difference in cost and price of product in every country.
And then emerges inter-national trade.
That is why Fredrick list has very rightly said, "Internal trade is between us, while inter-national trade is between us and them $($foreigners$)$."

$2.$ Meaning of Domestic $($Internal$)$ Trade and Foreign Trade:

Trade means professional or economic activities.
Trade means exchange of products, services, capital, technology, technical knowledge and information, intellectual property etc. with the objective of income or profit.
Normally geographical boundary of a country is determined.
When this type of business activity is Carried out within the boundary of one country it is called internal trade.
Meaning of Foreign $($International$)$ Trade:
Commercial and business activities or exchange of goods carried out crossing the boundaries of the country, with parties of different countries is called Foreign Trade or International Trade.
In other words, trade activity taking place outside the geographical boundary to a country is called international trade.
Example: when Assam tea is sold in Gujarat it is internal trade.
Because seller and purchaser, related to trading activities, both the parties are Indians, Citizens of India, and trade is carried out within the boundary of India.
While Assam tea, sold in Britain is a Foreign Trade.
Because in this trade activity both the concerned parties are from different countries, and this trade is carried out beyond the geographical boundary of the country.

$3.$ 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 know how 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 55 Marks

State in detail the changes that have occurred in the nature of India's Foreign Trade over years.

Answer

$1.$ Introduction: Form of foreign trade means structure of foreign trade.

The form of foreign trade deals with the aspects such as products exported, its share in gross export income, changes occurred during different time period etc. Along with it the products imported, its share in gross import, its payment share in gross import, changes occurred during different time period etc.
All this we study under the title 'Form of foreign trade' or 'Nature of foreign trade'.
In short form of foreign trade mean structure of foreign trade.
In other words India's physical import and export and its structure or types.

$2.$ Structure $($Nature$)$ of India's Exports:

During planning owing to industrialization and efforts there is significant variety in India's export.

Initially in low development phase of planning we used to export traditional items like tea, jute, cotton cloth, manganese etc.
When India started becoming developing nation the share of exporting primary things reduced and increased the share of exporting industrial product.
In India in the decades of $1971$ and $1981$ this concept and attitude is observed with the implementation of new economic policy.
Since $1991$ remarkable change has come in export structure.
The export share of primary things such as tea, coffee, jute, cloth, leather has gone very low and the export share of nontraditional items has increased.
As per the information available from $RBI$ and India's economic survey following changes have occurred during $1961(1960-61)$ and $2014-15$ period.
Share of items in total export of India $($in percentage$)$

Sr. No.	Item	$1961(1960-61)$	$2014-15$
$1.$	Agriculture produce and related export.	$44.2$	$12.3$
$2.$	Raw metals and Mineral	$8.1$	$1.5$
$3$	Produced items	$45.3$	$66.7$
$4.$	Petroleum products	$1.1$	$18.5$
$5.$	Others	$-$	$0.5$

Conclusions: Since $1956$ policy of development through basic industrialization was in force which brought many changes and variety of products were exported in $1961$ and $2014-15$ export structure of India.

$(1)$ Percentage in share of export related to agricultural production and all sectors related to it is reduced.

In $1961-62$ the income from export from primary sector was $44.2\%$ was reduced to $12.3\%$ in $2014-15.$
Following changes in primary items are found as below.

$(a)$ The export share of tea and coffee is reduced to $0.2\%$ from $19.3\%$. once it was $1/5$ share of export in gross export income which has become nominal today.
$(b)$ Today the export of jute has come down to $0.2\%$ from $21\%.$
$(c)$ Joint share export of tea, coffee and jute was $40\%.$ In $2014-15,$ income has come down to $0.4\% (0.2+0.2),$ which is a notable change in the structure of export.
$(d)$ The share of leather export in $1960-61$ was $4.4\%$ was reduced to 0.1\% in 2014-15. In the similar period the share of export of cloth was $10\%$ which is reduced to $2\%.$ Against this the share in export of the items related to readymade garments was $0.1\%$ which is increased to $5.4\%.$
$(2)$ Along with industrial development in the country the export share of all products in $1960-61$ was $45.3\%$ which increased to $66.7\%$ in $2014-15.$

In other words in our total export income the share of produced goods is $2/3$ which is an evidence of nation's industrial progress.

$(3)$ Petrol related products means petroleum products share in export is increased.

In $61$ it was nominal in export income is increased from $1.1\%$ $18.5\%$ in $2014-15.$
The contribution in the let century is reported maximum.
This has been possible by giving permission to private refinery along with public sector.

$(4)$ In $1960-61$ in total export income raw metals and the contribution of minerals was $8.1\%.$

In the same country with an increase of industrialization and rise in internal demand the export reduced from $8.1\%$ to $1.5\%.$

$(5)$ During the period $1961$ and $2014-15$ there is decrease in export income of primary things and increase in the export of petroleum related product and other goods.
$(6)$ After implementation of new economic policy of $1991$ the export share of handicraft items has increased.
$3.$ Nature of India's Import:

Remarkable changes are found in the nature of India's import owing to the progress of industrialization during planning and India being a developing country.
In $1951$ India was among less developed country which in $1980$ has become a developing country and after $2000$ it is taking place in emerging economy.
As a result many changes have come in the structure of import normally in any developing country import share of food grains decrease.
With the rapid development, demand of import increases due to diversification to maintain export and export based industry.
Owing to this the expense of raw material, spare parts, petrol, new technology increase as these things need to be imported.
Due to diversification in development the import of new items is remarkably high.
As per the report of $RBI$ and economic survey of India the information available during $1961$ and $2014-15$ time period following changes have occurred.
Share of India's gross Import of various things $($in percentage$)$

Sr. No.	Items	$1961$	$2014-2015$
$1$	Eatable food grains	$19.1$	$3.9$
$2$	Other things such as raw material produced things, petrol, edible oil, chemicals, chemical fertilizers etc. import in bulk	$47$	$39.8$
$3$	Capital based items-capital imported for export based industry and capital	$31.7$	$9.8$
$4$	Other	$2.2$	$46.5$

Conclusions :

Of total import of India, the import of food grains in $1961$ was $19.1\%$ which is reduced to $3.9\%$ in $2014-15.$
It means that India has become self-sufficient in food grains and other eatables.

Since the $2nd$ plan in India industrialization was emphasized.

$(1)$ In $1961$ import of capital was $31.7\%$ which was reduced $9.8\%$ in $2014-15$ owing strong base of industrialization, increase in rapid development production of capital based items in India.

Import of such thing is reduced.
It is a good sign of industrial policy.

$(2)$ In India along with economic progress diversification has come in the structure of production $($output$)$ evidence of which is in the increase of contribution of other things.

This increase is in significant percentage.
In $1961$ contribution of other things was only $2.2\%$ which has increased to $46.5\%$ in $2014-15$ which is the outcome of economic changes in economy.

$(3)$ Since $1991$ with implementation of new economic policy remarkable changes have come in the structure of India's import.

There is considerable reduction in the import of agro based products and food grains and capital import.

$(4)$ Pearl, diamond, precious stones, Organic and in organic chemicals have remarkable contribution in India's import.

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Question 65 Marks

What do you mean by nature of international trade? Discuss the . circumstances that affect trade, policies and laws governing trade.

Answer

The special features and aspects of trade which gives international trade a unique identity as compared to other activities is referred to as nature of international trade.
The nature of international trade is determined by the circumstances affecting trade, policies and faws governing trade.

These are discussed below.
$1.$ The geographical and occupational mobility of factors of production is lesser in international trade:

Due to social and other reasons, the mobility of labour is lesser in international trade. .
Same is the case with certain type of bulky and huge capital such as machinery.
Also, there are certain policy restrictions on mobility of some other types of capital. Entrepreneurs are also less mobile for the same reasons as labourers but in present times entrepreneurship has become more mobile.
The geographical mobility of land is nil.
Thus, due to the lower or no mobility of factors of production, the size of international trade gets restricted to some extent.

$2.$ Trade in many varieties of goods:

The world produces countless goods and services. Need of each country is different and so the countries come together for trading “out of such a large varieties of goods and services. The need of goods and services are different for people belonging to different living standards.
‘Variety’ that one gets through international trade becomes the base for success and prosperity of international trade.
For example, in countries where there is scarcity of electricity, there will be greater demand for manually operated machines while in countries with abundant supply of electricity there will be greater demand for automatic machines.

$3.$ More challenging in nature:

International trade is more challenging for traders because there occurs large change in the environment, language, culture, customs, preferences, habits, tastes, etc. from country to country.
Traders have to overcome these barriers in order to trade.

$4.$ Diplomatic efforts are needed:

Traders alone cannot set-up and develop international trade.
The government of every nation has to make diplomatic efforts such as hold informal meetings with other nations, organize international trade fairs, etc. so that countries can develop relations among themselves, know about the opportunities and enter into trade.
For example, in order to promote international trade in Gujarat, the state . government organizes the ‘Vibrant Gujarat Summit’. In this summit, representatives of governments and businesses/industries of various countries participate to exchange business information as well as to get an idea about the policies of the state, culture of people, etc.

$5.$ Knowledge and forecast regarding the value of different currencies:

Payments in international trade are to be made in internationally acceptable currencies. Moreover, every trading country has to convert its national currency in internationally acceptable currency such as dollars or pounds.
Traders need to have proper knowledge about the value of various currencies and the changes in their values that take place on a daily basis.
For this the traders have to consult experts who can guide in matters of exchange rates.

$6.$ Joint effort of nations and international organizations:

International trade can develop only with the joint efforts of governments of various countries of the world as well as of international organizations like World Trade Organization.
The countries must have the will to trade. For international trade, the countries will have to make policies that favour trade.
Moreover, the social and cultural groups must be open to trade, the industry – associations must co-operate to enter into trade and enhance trade and so on.

$7.$ Impact of political and social ideologies:

The size and direction of international trade is greatly influenced by the political and social events taking place in the world. For example, trade relations between nations get distributed owing to events like world war, global depression, etc.
On the other hand if world leaders promote international trade then the countries rather than getting involved in wars would start focusing on trade and the world trade would flourish.
The size and direction of a particular nation’s trade is determined much by the ideology of that nation, social structure, historical events, etc.

$8.$ Vast scale:
The scale of international trade is vast as it involves several countries, several varieties of goods, several rules, international organizations, etc.
$9.$ Involves more permissions and taxes:
For international trade the traders need to take several permissions and licenses from their respective countries.

They need to clear procedures regarding tradable goods and quality of goods, clear the custom procedures, fulfill the requirements of international freight and transport procedures, the quality tests for different countries $($food and drug quality tests for different countries are different$),$ etc.
Moreover, the quality standards vary among countries. So, traders need to have information regarding methods of production, packing, taxes, etc. that prevails in different countries.

$10.$ Involves higher degree of competition:

A product may be produced and sold by several countries in the world market and so there is heavy competition among the sellers.
Similarly, a product may be demanded by consumers of several countries and so the degree of competition among buyers is also very high.
Moreover, the risk of creating a market and generating demand for a product is very is high in international trade.
High quality standards have to be maintained, huge promotional expenses as well as costs have to be incurred and greater efforts have to be made to satisfy customers of a foreign country.
Even after putting so many efforts if the producer or trader is not able to achieve a sizeable amount of market share then he may have to incur heavy losses.

Conclusion:
Thus, international trade is multi-faceted, highly dynamic and volatile. It involves support and effort of people and diplomats of various countries. Also, it is very risky and tough. But, on the other hand it opens avenues of trade across the world. For trader, the entire world market opens up and he can make huge profits and span his business at world level

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Question 75 Marks

Write detailed note on Balance of Payments.

Answer

$1.$ Meaning of Balance of Payments:

Balance of payment is a true criteria to know any country's clear, real and complete economic condition.
It includes all types of international payment.
Balance of payment means comparison of one country's balance sheet of trade with other countries.
Value of products and services, expense of transportation of means and value of trade capital are registered in it.
Definition:
An accounting statement showing the value of imports and exports of tangible $($visible$)$ and intangible $($invisible$)$ goods during a year is balance of payments.
In other words, balance of payments is a systematic account of the value of transactions in particular period $($one year$)$ of a country with the rest of the world in tangible and intangible goods and services import and export and transfer payments and capital.
It is known as international balance sheet.
The concept of balance of payments is more extensive than trade balance.
Trade balance includes import-export of only tangible goods while balance of payments includes invisible goods and all economic expenses related to services and transportation.
Balance of payment has two sides:

$(1)$ Credit Side:

Income earned in the country from foreign countries is shown.

$(2)$ Debit Side:

All payment made in foreign countries is shown.

$2.$ Types of Balance of Payments:

$TWO$ types of balance of payments is possible : $(1)$ Balanced $(2)$ Unbalanced.

$(1)$ Balanced:

The sum total of credit and debit entries is equal in balance of payments.

$(2)$ Unbalanced:

Balance of Payments is unbalanced when the value of entries on the credit side is not equal to entries on the debit side.
There is difference in the total of credit side and debit side.
When two situations are possible.

$(1)$ Surplus Balance of Payments:

If the total of credit side is more than the total of debit side, it is called surplus balance of payments.

$(b)$ Deficit Balance of Payments:

In the balance of payments, if the total of debit side is more than the total of credit side it is called deficit balance of payments.
Any country's deficit or surplus or balance is discussed in the context of its balance of payments.
From the view point of accounting, balance of payments is always balanced because deficit or surplus of current account is always maintained through its capital and reserve account.

$3.$ Accounts of Balance of Payments:

There are two accounts of balance of payments :

$(A)$ Current Account $(B)$ Capital Account

$(A)$ Current Account:

In this account for the following entries credit and debit amount are recorded.
It includes tangible items like food grains, garments etc. $($tangible$)$ items import-export of intangible goods/services such as banking, insurance, transportation, communication, investment in foreign countries or income on investments in foreign countries, gifts and presents, economic transactions with foreign countries including war penalty etc.

$(1)$ Value of trade of tangible goods:

Export income of tangible goods is showed on $($credit side$)$ and payment of it is showed on import $($debit side$).$
In short in all the items of import-export are included in trade balance are recorded in balance of payments.
The sum total of this section is called trade balance.
If in the country when import payment of tangible goods is less than export income then balance of trade is called deficit and if the situation is vice versa the balance of trade is called surplus.

$(2)$ Trade value of intangible services:

The income from invisible products/services is recorded on credit side and payments made for import are on debit side.
This includes banking, insurance, transportation, information technology, through which the transactions of exchange have occurred owing to import-export.

$(3)$ Capital Income:

Income from investment in foreign countries such as interest, dividend, income of exchange received as profit is shown on credit side and interest, dividend or profit paid is shown on debit side.
Foreign investment in the country on which payment is made is shown on debit side.

$(4)$ One sided Incomes:

During the year, country has received gifts, compensation, one sided income in form of war, punishment, grant etc.
This income-payment is entered in one sided balance of payments. e.g. During natural disaster grant is received from foreign countries which is not to be repaid there is no liability to repay it even in future so it is entered on income side.
If any country has made payment to any country as penalty of war or gift it is showed on debit side.

$(B)$ Capital Account:

This account record receipts and payments from transactions on assets bound, shares, gold, capital loans etc. and other forms of fixed capital.

$(1)$ Long term investment:

Investment of foreign countries in this country is long term investment.
Income $($credit$)$ is shown on credit side. While investment of this country in foreign countries payment $($debit$)$ is shown on debit side.
Long term investment is in two forms: $(1)$ $0$ Direct Investment $($Equity$)$ $(2)$ Securities.

$(2)$ Short term fund:

To cope up with nation's short term requirement of exchange the fund received from the foreign countries is shown in the income from capital account and for short term the fund going out from this country is payment $($debit$)$ shown on debit side.

$(3)$ Purchase Sale of Gold:

Government of any country through Federal bank from foreign country or $I.M.F.$ purchase gold means imports gold and pays in exchange, which is shown on debit side.
Vice versa, if any country sells gold lying in federal bank and receives exchange, is $($credit$)$ shown on credit side.

$4.$ Example:

Balance of Payment
Income $($Credit$)$	Payment $($Debit$)$
Current Account
$(1)$ Export of Product/Service $(a)$ Export of tangible items $(b)$ Export of banking, insurance, transportation etc. intangible services $(c)$ Income on investment in foreign countries $(d)$ Income from gift, compensation, war, punishment, grant etc	$(1)$ Import of product/service $(a)$ Import of tangible goods $(b)$ Import of intangible services like banking insurance transportation etc. $(c)$ Payment on investment of foreign countries $(d)$ Payment made in the form of gift compensation war punishment grant etc.
Capital Account
$(1)$ Long term investment of foreign countries in this country $(a)$Direct Investment $($Equity$)$ $(b)$ Foreign investment in securities of the country $(c)$ Short term fund incoming from foreign countries $(d)$Sale of gold errors and omissions	$(1)$ Long term investment of this country in foreign countries $(a)$ Direct or equity form $(b)$ Investment in foreign securities by this country $(c)$ Short term found out going to foreign countries $(d)$ Purchase of gold errors and omissions

Comparison of any country's balance of payments surplus or deficit of current account is settled through the transactions of its capital account and overall $($current or capital$)$ balance of payments is always balanced.

$5.$ Factors affecting Balance of Payment:

Factors affecting import, export transfer of capital, transfer of means $($instruments$)$ capital investment, lending affect balance of payments.
Changes occurring in these factors affect balance of payments.
Some of the factors are important as mentioned below.

$(1)$ Degree of import and export is affected when the rate of exchange changes.
$(2)$ Changes in the price of the product exported or imported bring changes and affects balance of payments.

The price of the product/service exported falls in the country's export and income increases.
When the price of the product rises in the country, import increases.

As a result balance of payments shows deficit.

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Question 85 Marks

Discuss the Characteristics $($Nature$)$ of Foreign Trade.

Answer

$1.$ Introduction:

Geographical boundaries of every country are determined. When business activities are done crossing the boundaries of the nation it is called ‘foreign trade’ or ‘international trade’.

Foreign trade is always carried out with the objective of earning income or profit.
Form of international trade means such special features and aspects of trade which gives it a unique identity from other activities.
The nature of international trade is determined by the circumstances affecting trade, policies and laws governing trade.

$2.$ Nature of International $($Foreign$)$ Trade:
$(1)$ Geographical and occupational mobility of resources:

Degree of mobility of labour, capital, and means of production is less in different countries than in one country.
Due to political and social reasons labour is less mobile.
Immigration laws, citizenship, qualifications, language, environment etc. prevents international mobility of labour.
Capital due to its prohibitions and tangible and intangible nature is less mobile.
Mobility of land is zero and of entrepreneurs is less like the mobility of labour.
In the present world with the acceptance of globalization mobility of entrepreneurs has increased considerably. E.g. In industrial development the contribution of entrepreneurs and foreign capital is noteworthy.
In short in internal trade the means of production are more mobile, compare to International trade which distinguishes it from internal trade.

$(2)$ Trade in many varieties of Goods:

In foreign trade products or services are made available according to the demand of different standards of people.
So variety of product / services is observed. e.g. In India Ambassador and Fiat cars were available when there were restrictions on foreign cars.
When foreign trade of car has become free, various cars of Germany, Japan are made available and variety is the base of success and prosperity.
Demand of the product / service depends on the condition of the country e.g. In the country of scarcity of electricity, manually operated machines are in great demand and where electricity is in abundance the demand Will be for complete automated machines.

$(3)$ More Challenging in Nature:

Risk factors are more in foreign trade than internal trade. $80$ foreign trade is more challenging.
In every country climate, language, customs, habits, choice are different and product should be manufactured considering all these factors, to capture market, e.g. China produces goods of weaker quality and sells it at lower price in the country where quality is emphasized.

$(4)$ Diplomatic Efforts:

Only business efforts by business man are not sufficient to establish and developed foreign trade.
Government too should make diplomatic efforts for development of foreign trade.
For development of foreign trade to hold informal meetings related to trade, to organize trade fairs.
Nation has to inform traders to produce products which has global market for foreign trade.
This information can be supplied through informal meeting and trade fairs. e.g. Vibrant Gujarat summit is held every year in Gujarat to promote foreign trade.
Representatives of various countries are invited.
They are made familiar with the policy of the government and favorable business environment in Gujarat.
In every country the natures of political and economic policies are different.
Along with the efforts of business-men the diplomatic efforts are necessary as well as important.

$(5)$ Rates of different currencies and assumption of their value:

Every country has its own currency.
If a product / service is imported from foreign country, payment is to be made in the currency of the concerned country or internationally recognized currency.
Trader has to obtain international currency against local currency.
He should know the rise and fall in currency exchange rate.
Lack of this knowledge sometimes causes great loss.
Sometime expert's advice is sought in this matter for foreign trade.
In short in foreign trade various problems of foreign currency and its exchange rate are being faced.

$(6)$ Joint Effort of Nation and International Organizations:

To develop international trade on global level, government of the nations and world trade organizations have to make joint efforts.
World trade policy is made keeping in view the interest of all nations.
Every country has to remove maximum possible restrictions for the development of foreign trade and encourage it.
Favourable economic policy should be framed. E.g. To develop foreign trade, India adopted the policy of "Globalization, Liberalization and Privatization" in $1991$ and implemented it.
It became the member nation of $W.T.O$ for foreign trade development.
Co-operation of social and culture group is required.
Industries group also should consider public interest and co-operate government in this regard.
They should not be self-centered and looking towards their interest only.

$(7)$ Impact on Political and Social Ideology:

The political and social Ideologies deeply affect the foreign trade of the concerned countries. e.g. Relations with many countries get disturbed due to the world war, and transportation of goods and doing business with other countries become risky and foreign trade gets reduced.
When the leaders of the world make attempts to increase world trade, then risk of the world trade gets reduced and it is promoted for development. e.g. China changed its political ideology, instead of communism, which increased world trade in considerable size.
In the same way after $1991$ regulations foreign trade, policy has been relaxed and implemented as a result of which notable changes have come in size, nature and direction of foreign trade.
In short the nature of any country‘s foreign trade is greatly influenced by political and social ideologies of the country.
The most important is its relations with other countries.

$(8)$ Very Large Scale $($Vast Scale$)$ Trade:

The scale of global trade is very vast because it involves several countries, variety of goods, several rules and many international institutions.
Political changes also influence foreign trade.
In international trade packing also is up to international standard.
As global trade is vast in size it involves high degree of risk too.

$(9)$ More Permissions and Taxes:

Trade process in internal trade is simple and less expensive.
Various licenses are not to be obtained.
While the process of foreign trade is complex and complicated.
Every country, carrying out trade with another country should undergo all legal procedure of the concerned country and pass through many types of quality tests and permissions.
Under foreign trade import excise, import quota, import dimension, import license, export excise etc. regulations are many.
Prior to the starting of trade the traders has to show evidences of the license of the product / service, quality test, certificate, arrangement of transport etc.
Trader should have the knowledge of the manufacturing procedure of various countries, their standard of quality, etc. and then he has to manufacture the product.
Packing should be of international standard of every country.
Regarding food and drugs are different so information in this regard is also essential and accordingly product should be manufactured. Production for export must be made accordingly.

$(10)$ High Degree of Competition and Risk:

One product is manufactured by many countries in the world and sold in the global market.
There is high degree competition among sellers.
In the same way the customer countries of similar product I service are many.
Here there is high degree competition among buyers.
In international trade the degree of risk is quite high.
High quality of product is to be maintained and it requires promotional expense for advertisement.
Even after all these if the traders fail to export goods / services he makes huge loss.
In international trade there is vast difference in circumstances created by man which leads to very high degree of risk.
Political and economic changes occurring in the countries carrying out foreign trade greatly affect international business.

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Question 95 Marks

Explain clearly the Features of Foreign Trade.

Answer

$1.$ Introduction:

Geographical boundaries of every country are determined. When business activities are done crossing the boundaries of the nation it is called ‘foreign trade’ or ‘international trade’.

Foreign trade is always carried out with the objective of earning income or profit.
Form of international trade means such special features and aspects of trade which gives it a unique identity from other activities.
The nature of international trade is determined by the circumstances affecting trade, policies and laws governing trade.

$2.$ Nature of International $($Foreign$)$ Trade:
$(1)$ Geographical and occupational mobility of resources:

Degree of mobility of labour, capital, and means of production is less in different countries than in one country.
Due to political and social reasons labour is less mobile.
Immigration laws, citizenship, qualifications, language, environment etc. prevents international mobility of labour.
Capital due to its prohibitions and tangible and intangible nature is less mobile.
Mobility of land is zero and of entrepreneurs is less like the mobility of labour.
In the present world with the acceptance of globalization mobility of entrepreneurs has increased considerably. E.g. In industrial development the contribution of entrepreneurs and foreign capital is noteworthy.
In short in internal trade the means of production are more mobile, compare to International trade which distinguishes it from internal trade.

$(2)$ Trade in many varieties of Goods:

In foreign trade products or services are made available according to the demand of different standards of people.
So variety of product / services is observed. e.g. In India Ambassador and Fiat cars were available when there were restrictions on foreign cars.
When foreign trade of car has become free, various cars of Germany, Japan are made available and variety is the base of success and prosperity.
Demand of the product / service depends on the condition of the country e.g. In the country of scarcity of electricity, manually operated machines are in great demand and where electricity is in abundance the demand Will be for complete automated machines.

$(3)$ More Challenging in Nature:

Risk factors are more in foreign trade than internal trade. $80$ foreign trade is more challenging.
In every country climate, language, customs, habits, choice are different and product should be manufactured considering all these factors, to capture market, e.g. China produces goods of weaker quality and sells it at lower price in the country where quality is emphasized.

$(4)$ Diplomatic Efforts:

Only business efforts by business man are not sufficient to establish and developed foreign trade.
Government too should make diplomatic efforts for development of foreign trade.
For development of foreign trade to hold informal meetings related to trade, to organize trade fairs.
Nation has to inform traders to produce products which has global market for foreign trade.
This information can be supplied through informal meeting and trade fairs. e.g. Vibrant Gujarat summit is held every year in Gujarat to promote foreign trade.
Representatives of various countries are invited.
They are made familiar with the policy of the government and favorable business environment in Gujarat.
In every country the natures of political and economic policies are different.
Along with the efforts of business-men the diplomatic efforts are necessary as well as important.

$(5)$ Rates of different currencies and assumption of their value:

Every country has its own currency.
If a product / service is imported from foreign country, payment is to be made in the currency of the concerned country or internationally recognized currency.
Trader has to obtain international currency against local currency.
He should know the rise and fall in currency exchange rate.
Lack of this knowledge sometimes causes great loss.
Sometime expert's advice is sought in this matter for foreign trade.
In short in foreign trade various problems of foreign currency and its exchange rate are being faced.

$(6)$ Joint Effort of Nation and International Organizations:

To develop international trade on global level, government of the nations and world trade organizations have to make joint efforts.
World trade policy is made keeping in view the interest of all nations.
Every country has to remove maximum possible restrictions for the development of foreign trade and encourage it.
Favourable economic policy should be framed. E.g. To develop foreign trade, India adopted the policy of "Globalization, Liberalization and Privatization" in $1991$ and implemented it.
It became the member nation of $W.T.O$ for foreign trade development.
Co-operation of social and culture group is required.
Industries group also should consider public interest and co-operate government in this regard.
They should not be self-centered and looking towards their interest only.

$(7)$ Impact on Political and Social Ideology:

The political and social Ideologies deeply affect the foreign trade of the concerned countries. e.g. Relations with many countries get disturbed due to the world war, and transportation of goods and doing business with other countries become risky and foreign trade gets reduced.
When the leaders of the world make attempts to increase world trade, then risk of the world trade gets reduced and it is promoted for development. e.g. China changed its political ideology, instead of communism, which increased world trade in considerable size.
In the same way after $1991$ regulations foreign trade, policy has been relaxed and implemented as a result of which notable changes have come in size, nature and direction of foreign trade.
In short the nature of any country‘s foreign trade is greatly influenced by political and social ideologies of the country.
The most important is its relations with other countries.

$(8)$ Very Large Scale $($Vast Scale$)$ Trade:

The scale of global trade is very vast because it involves several countries, variety of goods, several rules and many international institutions.
Political changes also influence foreign trade.
In international trade packing also is up to international standard.
As global trade is vast in size it involves high degree of risk too.

$(9)$ More Permissions and Taxes:

Trade process in internal trade is simple and less expensive.
Various licenses are not to be obtained.
While the process of foreign trade is complex and complicated.
Every country, carrying out trade with another country should undergo all legal procedure of the concerned country and pass through many types of quality tests and permissions.
Under foreign trade import excise, import quota, import dimension, import license, export excise etc. regulations are many.
Prior to the starting of trade the traders has to show evidences of the license of the product / service, quality test, certificate, arrangement of transport etc.
Trader should have the knowledge of the manufacturing procedure of various countries, their standard of quality, etc. and then he has to manufacture the product.
Packing should be of international standard of every country.
Regarding food and drugs are different so information in this regard is also essential and accordingly product should be manufactured. Production for export must be made accordingly.

$(10)$ High Degree of Competition and Risk:

One product is manufactured by many countries in the world and sold in the global market.
There is high degree competition among sellers.
In the same way the customer countries of similar product I service are many.
Here there is high degree competition among buyers.
In international trade the degree of risk is quite high.
High quality of product is to be maintained and it requires promotional expense for advertisement.
Even after all these if the traders fail to export goods / services he makes huge loss.
In international trade there is vast difference in circumstances created by man which leads to very high degree of risk.
Political and economic changes occurring in the countries carrying out foreign trade greatly affect international business.

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Question 105 Marks

Write a detail note on the 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 $31:60 Rs., \$l=65 Rs.$ 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 115 Marks

Explain the difference between $($Domestic$)$ Internal Trade and $($International$)$ Foreign Trade.

Answer

Form and challenges of foreign trade are different from Internal Trade.

The differences between them are as below.

$(1)$ Size:

The size of foreign trade is bigger than that of internal trade.
Many countries, many products, services, laws, systems are related to it.
Internal trade can be in the form of retail or wholesale business.
Foreign trade is mainly in bulk quantity.

$(2)$ Different currency and mode of payment:

In internal trade, payment is made in the same currency.
Payment is made through bank from one bank to another bank of the country.
This is a simple process.
In foreign trade currency of one's own country is to be converted in to internally accepted currency.
Rates of foreign exchange should be known.
Permission too is to be taken as per the concerned country.
One who is in the business of foreign trade has to obtain letter of credit certificate from his bank.
Problems of foreign currency and foreign exchange sometimes arise in doing so.

$(3)$ Regarding Language, Culture, and Society:

Internal trade is comparatively easy because language, culture and society are the same.
While in foreign trade the language of each country, its culture, and social structure are different.
Business is carried out considering all such factors.
Products are sold according to the life style of the concerned country.
Packing is done according to international standard and international quality should be maintained.

$(4)$ Difference in transportation Expense:

Due to long geographical distance transportation cost in foreign trade is more as compared to internal trade.
Local taxes are less in internal trade.
Compared to this on the boundary of every country higher taxes are paid in foreign trade.

$(5)$ Difference in Degree of competition:

Degree of competition is higher in foreign trade than internal trade.
There may be many producers of the same product but as the factors and technology in one country is the same, or common so the degree of differentiation in product is less.
The producer does not to face much competition.
While under foreign trade due to differentiation in technology the product has to face keen competition in the market and attempt is made to gain more market share. e.g. When there were no foreign cars in India only handful local companies manufactured cars and the degree of competition was not high.
Today imported cars are allowed in India. Various car manufacturing companies attract customers in the market through new models, new advertisement etc.
Keen competition is observed in the market.

$(6)$ Consumer Satisfaction:

Under internal trade it is easier to satisfy consumer than under foreign trade.
It is bit easy to sale the product in the same country where society, education, life-style, selection, values of the people are more or less the same and product is manufactured considering all the above factors.
Under foreign trade the main difference is that in each country these factors differ much.
It is difficult to satisfy them and one has to manufacture the product according to their expectations.
In short under internal trade consumer’s behaviour can be judged while it is difficult to forecast consumer's behaviour in foreign trade.
Risk factor is less in internal trade in comparison to foreign trade.

$(7)$ Difference in Administrative and legal system:

Trader knows government financial policy, fiscal policy, industrial policy and administrative policy of the country as they are similar all over the nation.
So it is easy for traders under internal trade while under foreign trade every country has different tax structure, license policy and economic policy.
Without knowing them fully it is not possible for trader to trade.
It is not easy to get information in this regard.
In short under internal trade measures and weight are similar.
Trader knows legal factors also.
Restriction in internal trade is less.
Trade procedure is less complex and less expensive.
Under foreign trade restrictions on import-export are more complicated and more expensive.

$(8)$ Other:

Under internal trade difference in availability of natural resources is comparatively less as a result difference in production cost also is sinking.
In foreign trade as this difference is more, there is much difference in production cost.
Foreign trade is more sensitive to political changes. Means of production are also not changing very fast.

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