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(d) (i) is true but (ii) is false.

International trade is regulated at present by WTO.

(d) Import and export of visible items only

(c) Stimulating exports

(d) All of above

(c) Both visible and invisible items

(a) SDR – Special Drawing Rights

(c) Balanced balance of Trade

Imports of India may be divided into Three parts.

(a) Transactions of goods are recorded.

(b) Services account

(c) The purchase of bonds or stock issued by a textile company overseas

(d) Both (a) and (b)

Types BOP Disequilibrium: There are three main types of BOP Disequilibrium, which are discussed below.

1. Cyclical Disequilibrium, 

2. Secular Disequilibrium, 

3. Structural Disequilibrium.

1. Cyclical Disequilibrium: Cyclical disequilibrium occurs because of two reasons. First, two countries may be passing through different phases of business cycle. Secondly, the elasticities of demand may differ between countries.

2. Secular Disequilibrium: The secular or long-run disequilibrium in BOP occurs because of long – run and deep seated changes in an economy as it advances from one stage of growth to another. In the initial stages of development, domestic investment exceeds domestic savings and imports exceed exports, as it happens in India since 1951.

3. Structural Disequilibrium: Structural changes in the economy may also cause balance of payments disequilibrium. Such structural changes include development of alternative sources of supply, development of better substitutes, exhaustion of productive resources or changes in transport routes and costs.

(d) Terms of trade

The WTO was setup in the year 1995.

Classical Theory of International Trade:

1. The classical theory explains the phenomenon of international trade on the basis of labour theory of value. 

2. It presents a one factor (labour) model. 

3. It attributes the differences in the comparative costs to differences in the productive efficiency of workers in the two countries.

Modern Theory of International Trade:

1. The modem theory explains the phenomenon of international trade on the basis of general theory of value. 

2. It presents a multi – factor (labour and capital) model. 

3. It attributes the differences in comparative costs to the differences in factor endowments in the two countries.

(b) Flexible exchange rate

(b) Both (i) and (ii) are true

(c) e – Nominal exchange rate is flexible

(a) Both (i) and (ii) are false

Determinants of Exchange Rates: Exchange rates are determined by numerous factors and they are related to the trading relationship between two countries.

Factors determining Exchange Rate:

1. Differentials in Inflation 

2. Differential in Interest Rates 

3. Current Account Deficits 

4. Public Debt 

5. Terms of Trade 

6. Political and Economic Stability 

7. Recession 

8. Speculation

1. Differentials in Inflation:

1. Inflation and exchange rates are inversely related. 

2. A country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies.

2. Differentials in Interest Rates:

1. There is a high degree of correlation between interest rates, inflation and exchange rates.

2. Central banks can influence over both inflation and exchange rates by manipulating interest rates. 

3. Higher interest rates attract foreign capital and cause the exchange rate to rise and vice versa.

3. Current Account Deficits:

1. A deficit in the current account implies excess of payments over receipts. 

2. The country resorts to borrowing capital from foreign sources to make up the deficit. 

3. Excess demand for foreign currency lowers a country’s exchange rate.

4. Public Debt:

1. Large public debts are driving out foreign investors, because it leads to inflation. 

2. As a result, exchange rate will be lower.

5. Terms of Trade:

1. A country’s terms of trade also determines the exchange rate. 

2. If the price of a country’s exports rises by a greater rate than that of its imports, its terms ‘ of trade will improve. 

3. Favorable terms of trade imply greater demand for the country’s exports and thus BoP becomes favorable.

6. Political and Economic Stability: If a nation’s political climate is stable and economic performance is good, its currency value will be appreciated by attracting more foreign capital.

7. Recession:

1. Interest rates are low during the recession phase. 

2. This will decrease inflow of foreign capital. 

3. As a result, a currency will be depreciated against other currencies, thereby lowering the exchange rate.

8. Speculation:

1. If a country’s currency value is expected to rise, investors will demand more of that currency in order to make a profit in the near future. 

2. This results in appreciation of the exchange rate. 

3. Beside the above determinants, relative dominance in the global politics and the power to announce economic sanctions over other countries also determine exchange rates.

(d) Income Terms of Trade – Adam smith

(c) Factor endowment theory – Ohlin and Ricardo

International Trade refers to the trade or exchange of goods and services between two or more countries. In other words, it is a trade among different countries or trade across political boundaries. It is also called as ‘external trade’ or ‘foreign trade’ or ‘inter-regional trade’.

(a) FDI – Foreign Direct Investment

(c) A (ii) B (iv) C (i) D (iii)

(d) All of these

(b) Direct investment

(b) A (ii) B (iii) C (iv) D (i)

(b) Import Incentives

1. Trade is one of the powerful forces of economic integration. 

2. The term ‘trade’ means exchange of goods, wares or merchandise among people.

Terms of Trade:

1. The gains from international trade depend upon the terms of trade which refers to the ratio of export prices to import prices. 

2. It is the rate at which the goods of one country are exchanged for goods of another country’. 

3. It is expressed as the relation between export prices and import prices. 

4. Terms of trade improves when average price of exports is higher than average price of imports.

(c) Tourism Development

(d) REER – Real Effective Exchange Rate

Balance of Trade:

1. Balance of Trade refers to the total value of a country’s exports of commodities and total value of imports of commodities. 

2. Only export and import of commodities are included in the statement of Balance of Trade of a country. 

3. The Balance of Trade between the values of goods exchanged between two countries. 

4. Balance of Trade is a merchandise items or visible items only.

Balance of Payments:

1. Balance of payments is a systematic record of a country’s economic and financial transactions with the rest of the world over a period of time. 

2. The principal items shown on the credit side are exports of goods and services, transfer receipts in the form of gift, etc. 

3. The Balance of payments between the values of goods and services changed between two countries. 

4. Balance of payments is a both visible and non – visible items.

Components of BOPs: The credit and debit items are shown vertically in the BOP account of a country. Horizontally, they are divided into three categories, i.e.

1. The current account, 

2. The capital account and 

3. The official settlements account or official reserve assets account.

1. The Current Account: It includes all international trade transactions of goods and services, international service transactions (i.e. tourism, transportation and royalty fees) and international unilateral transfers (i.e. gifts and foreign aid).

2. The Capital Account: Financial transactions consisting of direct investment and purchases of interest-bearing financial instruments, non-interest bearing demand deposits and gold fall under the capital account.

3. The Official Reserve Assets Account: Official reserve transactions consist of movements of international reserves by governments and dfficial agencies to accommodate imbalances arising from the current and capital accounts.

The official reserve assets of a country include its gold stock, holdings of its convertible foreign currencies and Special Drawing Rights (SDRs) and its net position in the International Monetary Fund (IMF).

Balance of payment (BOP) Account Chart

Credit (Receipts) – Debit (Payments) = Balance [Deficit (-), Surplus (+)]

Deficit if Debit > Credit

(c) ‘A’ is true but ‘R’ is false

(d) Adam Smith – Theory of Absolute cost advantage

(d) Public people

(a) Sales expansion

(d) Factor Endowment

Flexible Exchange Rates: Under the flexible exchange rate (also known as floating exchange rate) system, exchange rates are freely determined in an open market by market forces of demand and supply

Internal Trade:

1. Trade takes place between different individuals and firms within the same nation. 

2. Labour and capital move freely from one region to another. 

3. There will be free flow of goods and services since there are no restrictions. 

4. There is only one common currency. 

5. The physical and geographical conditions of a country are more or less similar. 

6. Trade and financial regulations are more or less the same.

International Trade:

1. Trade takes place between different individuals and firms in different countries. 

2. Labour and capital do not move easily from one nation to another. 

3. Goods and services do not easily move from one country to another since there are a number of restrictions like tariff and quota. 

4. There are different currencies. 

5. There are differences in physical and geographical conditions of the two countries. 

6. Trade and financial regulations such as interest rate, trade laws differ between countries.

7. Differences are pronounced in political affiliations, habits and customs of the people and government policies

Terms of Trade related to the Interchange between Productive Resources:

1. The Single Factoral Terms of Trade: Viner has devised another concept called “the single factoral terms of trade” as an improvement upon the commodity terms of trade. It represents the ratio of export – price index to the import – price index adjusted for changes in the productivity of a country’s factors in the production of exports. Symbolically, it can be stated as

T_f = (P_x / P_m ) F_x

Where, T_f stands for single factoral terms of trade index. F_x stands for productivity in exports (which is measured as the index of cost in terms of quantity of factors of production used per unit of export).

2. Double Factoral Terms of Trade: Viner constructed another index called “Double factoral terms of Trade”. It is expressed as

T_ff = (P_x / P_m )(F_x / F_m )

which takes into account the productivity in country’s exports, as well as the productivity of foreign factors. Here, F represents import index (which is measured as the index of cost in terms of quantity of factors of production employed per unit of imports).

1. Net Barter Terms of Trade: This type was developed by Taussig in 1927.The ratio between the prices of exports and of imports is called the “net barter terms of trade’. It is named by Viner as the ‘commodity terms of trade’.

It is expressed as:

T_n = (P x /P_m ) × 100

Where,

Tn = Net Barter Terms of Trade 

P_x = Index number of export prices 

P_m = Index number of import prices

This is used to measure the gain from international trade. If ‘Tn’ is greater than 100, then it is a favourable terms of trade which will mean that for a rupee of export, more of imports can be received by a country.

2. Gross Barter Terms of Trade: This was developed by Taussig in 1927 as an improvement over the net terms of trade. It is an index of relationship between total physical quantity of imports and the total physical quantity of exports.

T = (Q_m /Q_x ) × 100

Where, 

Q_m = Index of import quantities 

Q_x = Index of export quantities

If for a given quantity of export, more quantity of import can be consumed by a country, then one can say that terms of trade are favourable.

(a) A (ii) B (i) C (iii) D (iv)

(d) Agriculture

(c) Foreign exchange

To promote Exchange stability is one of the aims of IMF.