26.Foreign Trade and Foreign Investments

Question 1

What is foreign trade?

Answer 1

Foreign trade refers to the exchange of goods or services between different countries.

Question 2

Who facilitates international trade?

Answer 2

Banks authorized to deal in international currency facilitate international trade, not the Reserve Bank of India (RBI).

Question 3

How are export payments handled?

Answer 3

In the case of exports, the bank receives payment in foreign currency, which is then converted into Rupees for use in India.

Question 4

How are import payments made?

Answer 4

For import purposes, payment needs to be made in foreign currency, which is provided by the banks.

Question 5

Who maintains the transaction records of international trade?

Answer 5

The Reserve Bank of India (RBI) maintains the transaction records of international trade, which is referred to as the Balance of Payments.

Question 6

What is the impact of imports on foreign currency?

Answer 6

Imports result in an outflow of foreign currency.

Question 7

What is the impact of exports on foreign currency?

Answer 7

Exports lead to an inflow of foreign currency.

Question 8

What is the role of the dollar in international trade?

Answer 8

The dollar is the intervention currency and serves as the benchmark for all official transactions in international trade.

Question 9

How is trade data presented in India?

Answer 9

In India, trade data is provided in terms of both the Rupee and the Dollar.

Question 10

What does the balance of payments (BoP) summarize?

Answer 10

The balance of payments summarizes all transactions between a country’s residents, companies, and government bodies with individuals, companies, and government bodies outside the country.

Question 11

What types of transactions are included in the balance of payments?

Answer 11

The balance of payments includes transactions related to imports and exports of goods, services, and capital, as well as transfer payments such as foreign aid and remittances.

Question 12

What are the two sets of accounts in the balance of payments?

Answer 12

The two sets of accounts in the balance of payments are the Current Account and the Capital Account.

Question 13

What are the components of the current account?

Answer 13

The current account can be further divided into the balance of trade (exports minus imports) and the balance of invisibles (transactions related to services, income, and transfers).

Question 14

Who prepares the balance of payments?

Answer 14

The balance of payments is prepared by the central bank of a country, such as the Reserve Bank of India in the case of India.

Question 15

What does the current account record?

Answer 15

The current account records day-to-day transactions in the economy, including trade in goods and services and transfer payments.

Question 16

What are the components of trade in goods in the current account?

Answer 16

The components of trade in goods are exports and imports of goods.

Question 17

What does trade in services include in the current account?

Answer 17

Trade in services includes factor income and non-factor income transactions.

Question 18

What are transfer payments in the current account?

Answer 18

Transfer payments are receipts received by residents of a country without having to provide any goods or services in return. This includes gifts, remittances, and grants.

Question 19

What are the two components of the current account?

Answer 19

The two components of the current account are the balance of trade (trade in goods) and the balance of invisibles (trade in services and transfer payments).

Question 20

What is the meaning of a deficit in the current account?

Answer 20

A deficit in the current account occurs when a country imports more than it exports, resulting in an outflow of foreign reserves.

Question 21

What is the meaning of a surplus in the current account?

Answer 21

A surplus in the current account occurs when a country exports more than it imports.

Question 22

What is the balance of current account equal to?

Answer 22

The balance of current account is equal to the balance of trade plus the balance of invisibles.

Question 23

What is the Balance of Trade or Trade Balance?

Answer 23

The Balance of Trade or Trade Balance is the balance of dollars after meeting the import and export of goods.

Question 24

What does the Balance of Invisibles represent?

Answer 24

The Balance of Invisibles represents the balance of dollars after the export and import of services, primary income, and secondary income.

Question 25

What is the Balance of Current Account?

Answer 25

The Balance of Current Account is the overall balance of trade and invisibles, indicating the net flow of funds in the economy.

Question 26

What is the trend of India’s Balance of Trade in recent years?

Answer 26

India’s Balance of Trade has been adverse (negative) since independence.

Question 27

What is the trend of India’s Balance of Invisibles in recent years?

Answer 27

India’s Balance of Invisibles has shown a positive trend in recent years, indicating a surplus in services and other income transactions.

Question 28

What was India’s Balance of Trade in the year 2018-19?

Answer 28

India’s Balance of Trade in 2018-19 was a deficit of $180.28 billion.

Question 29

What was India’s Balance of Invisibles in the year 2019-20?

Answer 29

India’s Balance of Invisibles in 2019-20 was a surplus of $132.85 billion.

Question 30

What was the Balance of Current Account in the year 2020-21?

Answer 30

The Balance of Current Account in 2020-21 was a surplus of $24 billion.

Question 31

What was the trend in India’s Balance of Trade in the year 2021-22?

Answer 31

In the year 2021-22, India’s Balance of Trade worsened, with a deficit of $189.46 billion.

Question 32

What was the trend in India’s Balance of Invisibles in the year 2020-21?

Answer 32

In the year 2020-21, India’s Balance of Invisibles showed a positive trend, with a surplus of $126.07 billion.

Question 33

What is a hard currency?

Answer 33

A hard currency is a currency that is in high demand globally and is trusted by every economy. Examples include the US dollar.

Question 34

What is a soft currency?

Answer 34

A soft currency is an unstable form of currency that is non-convertible, highly sensitive to fluctuations, and/or depreciates against other currencies

Question 35

What are examples of hard currencies?

Answer 35

Examples of hard currencies include the US dollar, Euro, British pound, and Japanese yen.

Question 36

What are characteristics of soft currencies?

Answer 36

Characteristics of soft currencies include instability, non-convertibility, high sensitivity to fluctuations, and depreciation against other currencies.

Question 37

What is the twin deficit?

Answer 37

The twin deficit refers to the combination of the fiscal deficit and the current account deficit in an economy.

Question 38

Which accounts are included in the twin deficit?

Answer 38

The twin deficit includes the fiscal deficit and the current account deficit.

Question 39

What are economies called when they have both a fiscal deficit and a current account deficit?

Answer 39

Economies that have both a fiscal deficit and a current account deficit are often referred to as having a ‘twin deficit’.

Question 40

Which deficit is considered more sensitive between the current account deficit and fiscal deficit?

Answer 40

The current account deficit (CAD) is considered more sensitive because it requires foreign currency, whereas the fiscal deficit can be met through printing new currency, although it may lead to inflationary pressures.

Question 41

How is the twin deficit calculated?

Answer 41

The twin deficit is calculated by adding the fiscal deficit and the current account deficit.

Question 42

What does the twin deficit represent?

Answer 42

The twin deficit represents the combined imbalance in the fiscal and current account balances of an economy.

Question 43

Why are the fiscal deficit and current account deficit considered a necessary evil?

Answer 43

The fiscal deficit and current account deficit are considered a necessary evil because they are both challenging to manage, but the current account deficit is more sensitive as it requires foreign currency, while the fiscal deficit can be addressed by printing new currency, which may lead to inflationary pressures.

Question 44

What is the Current Account Deficit (CAD)?

Answer 44

The Current Account Deficit (CAD) is the shortfall between the money received from selling products to other countries and the money spent on buying goods and services from other nations.

Question 45

How is the Current Account Deficit calculated?

Answer 45

The Current Account Deficit is calculated by subtracting the value of goods and services exported from the value of goods and services imported.

Question 46

What does it mean if a country has a Current Account Deficit?

Answer 46

If the value of goods and services imported by a country exceeds the value of those exported, the country is said to have a Current Account Deficit.

Question 47

What is the significance of the Current Account Deficit?

Answer 47

The Current Account Deficit indicates that a country is spending more on imports than it is earning from exports, which can have implications for its economic health and foreign exchange reserves.

Question 48

What are the factors that contribute to the Current Account Deficit?

Answer 48

Factors that contribute to the Current Account Deficit include a high level of imports, a low level of exports, trade imbalances, and reliance on foreign goods and services.

Question 49

How does the Current Account Deficit affect a country’s economy?

Answer 49

A persistent Current Account Deficit can put pressure on a country’s foreign exchange reserves, affect its currency value, and impact its overall economic stability.

Question 50

What measures can a country take to address the Current Account Deficit?

Answer 50

To address the Current Account Deficit, a country can promote exports, reduce imports, attract foreign investments, encourage domestic production, and implement policies to improve competitiveness in international trade.

Question 51

How does the Current Account Deficit impact the exchange rate?

Answer 51

A large Current Account Deficit can put downward pressure on a country’s currency value as it reflects a higher demand for foreign currency to pay for imports.

Question 52

What are the consequences of a persistent Current Account Deficit?

Answer 52

Consequences of a persistent Current Account Deficit may include a depletion of foreign exchange reserves, increased reliance on foreign borrowing, and vulnerability to external economic shocks.

Question 53

Can a Current Account Deficit be beneficial for a country?

Answer 53

In certain cases, a moderate and temporary Current Account Deficit can be beneficial as it allows a country to import necessary goods and services and promote economic growth. However, a large and persistent deficit can have negative consequences.