GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

GSEB Gujarat Board Textbook Solutions Class 12 Economics Chapter 9 Foreign Trade Textbook Exercise Important Questions and Answers, Notes Pdf.

Gujarat Board Textbook Solutions Class 12 Economics Chapter 9 Foreign Trade

GSEB Class 12 Economics Foreign Trade Text Book Questions and Answers

1. Choose the correct option for the following questions :

Question 1.
What happens owing to trade?
(A) The mobility of factors of production decline
(B) The number of industries decline
(C) Production process slows down
(D) Diversification in production occurs
Answer:
(D) Diversification in production occurs

Question 2.
Which factor of production is least mobile in international trade?
(A) Capital
(B) Labour
(C) Entrepreneurship
(D) Land
Answer:
(D) Land

Question 3.
Which significant change has occurred in India’s foreign trade after 2005?
(A) The size of trade has increased and India’s rank in world trade has risen
(B) The size of trade has increased but India’s rank in world has fallen
(C) India’s balance of payments has continuously recorded a deficit
(D) The share of traditional exports in trade has increased.
Answer:
(A) The size of trade has increased and India’s rank in world trade has risen

Question 4.
Which countries can be included in the list of India’s traditional trade partners?
(A) England and Russia
(B) Japan and China
(C) Countries of Central Asia
(D) Australia
Answer:
(A) England and Russia

Question 5.
What is balance of trade?
(A) Balance of current account
(B) Balance of capital account
(C) Balance of merchandise (visible) trade
(D) Balance of service (invisible) trade
Answer:
(C) Balance of merchandise (visible) trade

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 6.
What is meant by devaluation of rupee?
(A) Government announces increased price of $1 in terms of rupees
(B) A market situation which increases the price of $1 in terms of rupees
(C) Government announce decrease in the price of $1 in terms of rupees
(D) A market situation which decreases the price of $1 in terms of rupees
Answer:
(C) Government announce decrease in the price of $1 in terms of rupees

2. Answer the following questions in one line :

Question 1.
What is meant by international trade?
Answer:
The activity of exchanging goods, services, technology etc. by a country from outside the geographical boundary is called international trade.

Question 2.
What is meant by size of international trade?
Answer:
Size of foreign trade means, the total value and volume of merchandise imports and exports.

Question 3.
What is meant by nature of international trade?
Answer:
Nature of imports and exports means composition of trade, that is, the types/ items of merchandise imports and exports of a country.

Question 4.
What is meant by direction of international trade?
Answer:
Direction of foreign trade means the trade relations of a nation with various countries in different regions of the world.

Question 5.
What is meant by exchange rate?
Answer:
The rate at which the currency of one . country can be converted into currency of another country is called exchange rate. It is the price of a foreign currency in terms of domestic currency.

3. Answer the following questions in brief :

Question 1.
Give an understanding of balance of trade.
Answer:
Trade in merchandise goods (tangible goods):

  • The difference in values of imports and exports of a country is known as balance of trade.
  • When a country’s import exceeds its export it is called negative balance of trade. If a country’s export exceeds its imports it is called positive balance of trade.

Balance of trade in Balance of payment:

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

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 2.
Explain the term ‘size of international trade’.
Answer:

  • The total value and volume of merchandise (goods) and services that a country imports and exports is known as size of foreign trade or say size of international trade.
  • Every successive year, if the payments made towards imports and revenues generated from exports rise as well as the percentage of trade value rises in national income and the share of a country’s trade in world trade rises , then it can be concluded that the size the county’s foreign trade has increased.

Question 3.
Give an understanding of balance of payments.
Answer:
Balance of Payments:
An accounting statement that shows the value of imports and exports of tangible (visible) and intangible (invisible) goods during a year is called Balance of Payments (BoP).

  • Tangible or visible goods means goods which have a physical existence i.e. they can be touched and seen. Intangible or invisible goods means services such as software development, banking, logistics, etc.
  • Balance of Payments has a credit entry and a debit entry. All receipts by the home country from foreigners are recorded in the credit entry side and all payments by the home country to foreigners are recorded in the debit entry side.

Types of Balance of Payments:
Balance of Payments can be either:

  1. Balanced or
  2. Unbalanced.

1. Balanced Balance of Payment:
When the value of entries on credit side equals that on the debit side, Balance of Payments is said to be balanced.

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

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

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

4. Give answers to the point for the following questions :

Question 1.
State the present condition of world trade.
Answer:

  • Historian Agnus – Maddison in the World Trade Report, 2013 states that since the mid-1800s, the world’s population has grown roughly 6 times, world production has grown 60 times, and world trade has grown over 140 times.
  • According to this report, phenomenal reduction in transport and communication costs is the driving force behind today’s global trading system on such a huge scale.
  • The report also says that strong relations between nations have also boosted world trade.
  • In the last 30 years, world merchandise and commercial services trade have increased by about 7 percent per year on average.
  • Between 1980 and 2011, developing economies could raise their share in world exports from 34% to 47% and their share in world imports from 29% to 42%. Asia is playing an increasing role in world trade.
  • Since decades the world trade has grown nearly twice as compared to world production. This clearly states that world trade is rising quite fast. This also reflects that international supply chains and logistics are playing a very important role in delivering goods across the world at a much faster rate.

Average annual growth of world trade during different time periods

Time period Growth in world trade
1950-1973 7.88%
1973-1985 3.65%
1985-1996 6.55%
1996-2000 6.89%
2000-2011 5.00%
2015-2016 2.8%

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 2.
Elucidate the differences between the balance of trade and balance of payments.
Answer:
GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade 1

Question 3.
Write a note on exchange rate.
Answer:
Exchange rate:

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

Example:

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

Impact of exchange rate:
Rise or fall in exchange rate has a major impact on our import and export trade.

Impact on import:
When the exchange rate rises for India, the value of Indian rupee (₹) falls. So, India has to pay more rupees to purchase foreign goods i.e. importing becomes costlier. As a result, the demand for imported goods decline.

Impact on export:
In terms of export, when the exchange rate rises for India, India can export more quantity of goods in lesser amounts. This boosts export trade.

  • For example, if earlier by spending US $ 1, a foreign trader could purchase goods worth ₹ 60, then now he can buy goods worth ₹ 65. Hence, export ₹ from India tend to rise.
  • The reverse happens when exchange rate for India falls.

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 4.
Explain reasons for trade in short.
Answer:
Reasons for international trade:
1. Different countries are endowed with different factors:

  • Different countries are endowed or say blessed with different factors of production in different proportions.
  • All the countries do not have all the necessary factors of production to meet their demands. Hence, the countries trade with other.countries for resources, factors of production and technology to fulfill their requirements.

2. Cost of production:

  • Since the factors of production and resources are distributed unequally in the world, the cost of production of goods and services also varies in different countries.
  • For example, if a factor of production is scarce in a country, the cost of production for some goods or services may be more. In such situation the country will procure those goods from other countries.

3. Technological progress:

  • All countries do not achieve the same level of technological progress. Some countries have expertise in some type of technology while others possess greater ability in another type of technology.
  • The difference in technologies becomes a reason for entering into international trade for purchasing or selling goods or services that require specific technological expertise.

4. Division of labour and specialization:

  • Availability of labour, their productivity and skills varies from country to country. Moreover, entrepreneurial skills and efficiency also varies from person to person.
  • So, some countries will have better man-management and production skills Where as some may have lesser.
  • This difference wiH give rise to trade between countries for producing and selling goods and services.
  • The country whose labour has lesser skills will purchase goods/services from countries which possess specialization.

Question 5.
Specify the difference between current account and capital account of balance of payments.
Answer:

Basis of comparison Current Account Capital Account
Meaning An account which records the export and import of merchandise and unilateral transfers done during the year by a nation are known as Current Account. An account which records the trading of foreign assets and liabilities during the year by a country is known as Capital Account.
Reflects It reflects net income of the country. It reflects net change in the ownership of national assets.
Components Trade in goods and services, investment income, unrequited transfers. It includes Foreign Direct Investment, portfolio investment, government loans, etc.

5. Answer the following questions in detail :

Question 1.
State in detail the changes that have occurred in the nature of India’s foreign trade over years.
Answer:

  • Direction of foreign trade means the relations of a nation with various countries of the world.
  • In order to develop trade relation with other countries ¡n various directions a country needs to fulfill following requirements:
  • The country should have capability to undertake production of large variety of goods.
  • Develop good political and diplomatic relations with many countries.
  • Readiness to undertake several diplomatic engagements with other nations.
  • Ability and technology for setting up proper sales facilities and trade mechanisms.
  • Produce surplus quantities which can be exported.

(A) Pattern (direction) of import:
1. Our trade relations with England developed quite strong after the British started ruling India. This tradition continued even after independence. In 1960-61, 19% of our total merchandise imports were from England. However, the situation changed 2007 wherein India imported less than 2% things from England. ‘

2. After independence, we were quite dependent on America for our imports. In 1960-61, our imports from USA constituted 29% of our total merchandise imports. This fell to less than 8% after 2007.

3. With time, Indian industries started developing. So, we were in heavy need of petroleum based products. As a result, our merchandise imports from OPEC i.e. Organization of Petroleum Exporting Countries increased.

4. India had friendly relations with Russia and our imports from Russia were high after independence. This declined since 1980s after the economic crisis in Russia.

5. Over, time our trade with traditional partners started declining gradually and started increasing with other developing countries, especially with developing countries of East Asia, Central Asia and Africa. •

6. Our imports from other developing countries were about 11.8% of our total merchandise imports in 1960-61. This increased to 32% in 2007-08 and further to 59% in 2014-15.

(B) Pattern (direction) of export:
1. In the same pattern in 1960-61, India’s exports to England constituted 26.8% of the total merchandise exports which reduced to as low as 4% after 2007-08.

2. During the same period, India’s exports to USA declined from 16% of the total merchandise exports to 12.7% and that to Russia from 4.5% to 0.6%.

3. Contrary of this, our merchandise exports to OPEC constituted 4.1% of our total merchandise exports in 1960-61 which gradually increased over years. After 2007-08 it increased to over 16% and during the same period merchandise exports to developing countries increased from 14.8% to 42.6% of the total merchandise exports.

4. From our total merchandise exports, those to Asian countries were countries were almost 50% in 2014-15.

5. Thus, India has made several successful attempts to diversify her trade with different countries that too in different directions.

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 2.
Explain the difference between domestic (internal) trade and international trade.
Answer:
The nature of international trade is quite different from that of domestic trade and it involves several hurdles and challenges.

The basic differences between the two forms of trade are summarized
below:
1. Based on the scale:
The scale of international trade is much larger than that of domestic trade as it involves more countries, more variety of goods, more procedures, more and stricter rules, etc.

2. Based on currencies and modes of payment:

  • In domestic trade, financial transactions take place only in domestic currency and payment is transferred from one bank to another in the same country.
  • On the other hand, international trade involves several currencies and exchange rates. It also involves converting the currency at a determined exchange rate into an internationally acceptable currency.
  • Payment is also to be made in internationally acceptable currency.
  • Moreover, in international trade, the procedures are more rigorous and they involve several permissions, clearances and duties. Buyers have to obtain letter of credit from their respective banks for assurance of payment to sellers.

3. Based on language, culture and society:
‘Transactions in domestic trade take place within a familiar social, cultural and language set-up whereas in international trade these are very different.

Hence traders have to be more careful so that they do not fall into ‘ controversies or hurt sentiments and even to avoid legal offences.

4. Based on transport cost:

  • The transport cost in international trade is much higher than the transport cost in domestic trade.
  • Moreover, taxes are to be paid for each country that the goods cross. This is not the case in domestic trade and so international trade is costlier.

5. Based on degree of competition:

  • Although in domestic market there are many producers but the nature of factors of production and technology in a country are more or less same. Hence, the producers cannot produce goods with a very wide range and distinction.
  • In international trade, producers/traders use products and processes of their own countries which are quite different from one another. As a result, we can see a wide range of products that too quite different from each other.
  • The producers of various countries compete against each other in international market.
  • For example, when the production and sale of foreign cars was not allowed in India, the competition among Indian car manufacturers was not very high as compared to today. Today, various manufactures belonging to several countries compete with Indian companies in terms of their car models, finishing, features, price, etc.
  • Foreign car makers make continuous efforts to increase their share in the Indian car market.
  • Thus, there is lesser competition in domestic trade as compared to international trade.

6. Based on consumer satisfaction:

  • It is not very difficult to satisfy consumers in domestic market because the trader is more or less aware about the social set-up, level of awareness and education, information, preferences, values, tolerance level, etc. of the people. Moreover, these conditions are quite similar within the country.
  • ‘This helps the producer to produce as per the demand of consumers and meet their expectations.
  • In international trade, these aspects are different in different countries of the world. Hence, it is quite difficult to predict requirements of customers at international level and satisfy them.

7. Based on administrative and legal systems:

  • In domestic’trade, the traders very well know the administrative and legal systems and procedures and so they face relatively lesser difficulties in undertaking trading activity.
  • In case of international trade all these things are quite different. These things create several problems for the traders to trade.
  • It is almost impossible for a trader to trade without understanding the tax system, the system of obtaining licenses’, permissions as well as the-legal systems of various countries of the world. Moreover, all these processes are quite expensive too.

Question 3.
State in detail the changes that have occurred in the size of India’s foreign trade over years.
Answer:
Size of India’s foreign trade:
1. The total value and volume of merchandise (goods) and services that a country imports and exports is known as size of foreign trade.

2. Every successive year if the payments made towards imports and revenues generated from exports rise as well as the percentage of trade value rises in national income and the share of a country’s trade in world trade rises then it can be concluded that the size the county’s foreign trade has increased.

3. Between the period 1951 and 2016, the size of India’s imports and exports, their percentage share in national income as well as their share in world trade has increased. However, the down side is that the size and growth rate of imports has been higher than that of exports in most years.

4. It is very important to note that if the value of imports or exports rises in successive years just because prices have increased then such a rise in value does not signify an increase in size of trade.

5. Size of trade is said to increase only if the value increases due to increase in volume of imports and exports.

6. Hence, the value of a country’s imports and exports is measured at constant prices or in US dollars. When value of imports and exports is measured in US dollars, the changes in prices of import goods and exports goods in successive years are adjusted in the exchange rate mechanism and thus we can obtain size of trade in real terms.

India’s foreign trade after 1991 (in million US $)
GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade 2
Source: Economic Survey of India, 2015-16

  • The difference in values of imports and exports of a country is known as balance of trade.
  • When a country’s import exceeds its export it is called negative balance of trade.
  • As can be seen in table, although India’s foreign trade has increased over years but India’s exports have never exceeded its imports. Hence, our balance of trade has always remained negative.

Reason for negative balance of trade:

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

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 4.
State in detail the changes that have occurred in the direction India’s foreign trade over years.
Answer:
Composition (nature) of India’s merchandise imports and exports:
Composition of trade means the items that India imports and exports. In 1951, India was a less developed economy. It progressed to become a developing economy by 1980. After 2000, it progressed still further to gain identity of a fast-developing and emerging economy.
(I) Foreign trade around the decade of 1950-60:
A less developed economy imports things quite frequently that too in high volume in all the sectors.

  • Between 1950 and 1960, India’s agriculture sector was quite weak and so ‘ it imported food grain quite frequently. During that period it also imported machines and spare parts, capital assets, technological know-how, etc. in very high quantity.
  • In terms of exports, the less developed economies like India mainly exports goods belonging to agriculture or say primary sector. So, in the past, India mainly exported tea, coffee, jute, mineral ore, and minerals, etc. It did not export industrial goods in much quantity.

(II) Foreign trade around the decade of 1970-80:

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

(III) Foreign trade after 1991:
(A) Change in import structure:
1. After 1991, the nature of trade changed significantly in India. The import of food grains and other agricultural goods and capital goods declined.

2. The share of traditional exports like tea, coffee, jute etc. in total exports declined while that of industrial goods and non-traditional items increased. For example, India started exporting software.
In 1961, the share of food imports in India’s total merchandise imports was 19.1% which declined to just 3.9% in 2014-15. This shows that India attained self-reliance in producing grains and other food items.

3. As India developed, it started generating more more capital and capital intensive goods. So, India’s import of such items decreased significantly. In 1960-61, the share of capital intensive goods in India’s merchandise imports was as high as 31.7% which declined to 9.8% in 2014-15.

4. In 1960-61, the import of new items was only 2.2% of the total merchandise. This increased to 46.5% in 2014-15. This shows that as India developed in a variety of sectors it needed more and more new types of items and so India’s imports of new types of items increased.

(B) Change in export structure:
1. As India developed, the nature of export also changed.

2. In 1960-61, the primary sector export consisted of 44.2% of total export. It reduced to as low as 12.3% in 2014-15. In this, the share of tea and coffee exports declined from 19.3% to 0.2% and that of jute export declined from 21% to 0.2%.

3. Similarly, the share of leather products in exports declined from 4.4% in 1960-61 to 1.3%in 2014-15 and that of cloth declined from 10% to 2%.

4. In terms of exports, the less developed economies like India mainly exports goods belonging to agriculture or say primary sector. So, in the past, India mainly exported tea, coffee, jute, mineral ore, and minerals, etc. It did not export industrial goods in much quantity.

5. Against this, the export of readymade garments increased from 0.1% in 1960-61 to 5.4% in 2014-15.

6. The share of manufactured goods in total merchandize exports was 45.3% which increased to 66.7% in 2014-15.

7.In 1960-61, India exported only 1.1% of petroleum products. This increased to 18.5% in 1914-15.

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

Question 5.
Give the meaning, types, accounts and factors influencing balance of payments.
Answer:
Balance of Payments:
An accounting statement that shows the value of imports and exports of tangible (visible) and intangible (invisible) goods during a year is called Balance of Payments (BoP).

  • Tangible or visible goods means goods which have a physical existence i.e. they can be touched and seen. Intangible or invisible goods means services such as software development, banking, logistics, etc.
  • Balance of Payments has a credit entry and a debit entry. All receipts by the home country from foreigners are recorded in the credit entry side and all payments by the home country to foreigners are recorded in the debit entry side.

Types of Balance of Payments:
Balance of Payments can be either

  1. Balanced or
  2. Unbalanced.

1. Balanced Balance of Payment:
When the value of entries on the credit side equals that on the debit side, Balance of Payments is said to be balanced.

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

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

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

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

  1. Current account and
  2. Capital account

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

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

2. Trade in services (intangible things):

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

II. Capital Account:

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

Factors influencing Balance of Payments:

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

Some of these factors are:

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

GSEB Class 12 Economics Foreign Trade Additional Important Questions and Answers

Short Answer Type Questions

Question 1.
What is meant by balance of payments?
Answer:
An accounting statement that shows the value of imports and exports of tangible (visible) and intangible (invisible) goods during a year is called Balance of Payments (BoP).

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 2.
Define trade.
Answer:
Trade means a commercial/business activity which involves exchange of goods, services, resources, capital, technology, know-how, intellectual property, etc. In other words, trade is an activity in which suqh goods are exchanged for earning profit.

Question 3.
What is meant by nature of imports/ exports?
Answer:
Nature of imports/exports means composition of trade, that is, the types/ items of merchandise imports and exports.

Question 4.
What is balance of trade?
Answer:
Sum total of value of merchandise imports and merchandise exports in the statement of trade accounts of a country during a year.

Question 5.
What is meaning of traditional exports?
Answer:
The items of exports which dominated the total exports of a country for a long period of time and export items produced by the traditional industries of a country are called traditional exports.

Question 6.
What is developmental imports?
Answer:
Import of goods like capital, technology etc. by a developing country to give a boost to her development process are called developmental imports.

Question 7.
What is maintenance import?
Answer:
Imports of spare parts, know-how, intermediate goods, petrol, energy goods which are made in order to maintain and sustain the process of industrialization and development undertaken by developing countries are called maintenance imports.

Question 8.
List down the reasons of occurrence of international trade.
Answer:

  1. Difference in factor endowments in various countries,
  2. Cost of production,
  3. Technological progress, and
  4. Division of labour and specialization.

Question 9.
Why does a country import goods or services?
Answer:
When domestic cost of production is higher, it becomes cheaper and easier to import such goods from other country.

Question 10.
Give five instances of nature of international trade.
Answer:

  1. The geographical and occupational mobility of factors of production is lesser in international trade,
  2. Trade in many varieties of goods,
  3. Requirements of diplomatic efforts,
  4. Impact of political and social ideologies, and
  5. Involves more permissions and taxes.

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 11.
Why does international trade becomes more challenging for traders?
Answer:
International trade becomes more challenging for traders due to the difference of environment, language, culture, customs, preferences, habits, tastes etc. present in different countries.

Question 12.
What step has the Gujarat government taken to promote international trade?
Answer:
Gujarat government organizes ‘Vibrant Gujarat Summit’ to promote international trade.

Question 13.
Mention four points that form basis of differences between domestic trade and international trade.
Answer:

  1. They have different currencies and modes of payment,
  2. Difference of languages, culture and society,
  3. Large difference in transportation cost,
  4. Based on degree of competition.

Question 14.
How much has the world trade grown since the mid-1800s?
Answer:
Over 140-fold since mid-1800s.

Question 15.
How much was India’s total trade in world trade in 2014-15?
Answer:
India’s total trade was 2.07% in world trade in 2014-15.

Question 16.
How is the value of imports and exports measured?
Answer:
At constant prices or US dollars.

Question 17.
In which year did India’s economy progressed from a less developed economy to a developing economy?
Answer:
1980.

Question 18.
What did India import in the decade 1950-1960?
Answer:
India’s import were high in the decade 1950-1960. There was frequent imports of food grains, and developmental imports like machines, capital, technology, know-how, spare parts were also high.

Question 19.
What was the share of manufactured goods in total merchandise exports in the year 2014-15?
Answer:
66.7%

Question 20.
How much was the exports of petrol products in total merchandise exports in 1960-61?
Answer:
1.1%

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 21.
List down the different directions required for a country to develop trade relations with different countries.
Answer:

  1. Capability to undertake production of large variety of goods,
  2. Good political and diplomatic relations with many countries,
  3. Readiness to undertake several diplomatic engagements with other nations,
  4. Ability and technology for setting up proper sales facilities, and
  5. greater proportions of exportable surplus.

Question 22.
Which country was India more dependent on for imports after independence (in year 1960-61)?
Answer:
USA

Question 23.
How much was India’s export to England in 1960-61?
Answer:
26.8%.

Question 24.
Mention the types of Balance of Payments.
Answer:

  1. Balanced Balance of Payment and
  2. Unbalanced Balance of Payment]

Question 25.
When is Balance of Payments said to be balanced?
Answer:
When the entries on the credit side equals to that on the debit side.

Question 26.
When is a deficit seen in the balance of payments?
Answer:
If payments are more than the receipts.

Question 27.
What happens in balance of payments payments?
Answer:
Surplus is said to be present in balance if the receipts are more than the of payments.

Question 28.
Which are the two accounts in balance of payments?
Answer:

  1. Current account and
  2. capital account

Question 29.
What is recorded in current account of balance of payments?
Answer:
The current account records the credit and debit entries for:

  1. Trade in merchandise goods (tangible goods) and
  2. Trade in invisibles or services.

Question 30.
Where in balance of payments, the receipts and payments of fixed capital recorded?
Answer:
The receipts and payments of fixed capital are recorded in capital account of balance of payments.

Question 31.
Mention the factors that affect balance of payments.
Answer:

  1. Exchange rate,
  2. Prices of tradable goods in home country and foreign countries,
  3. Variety and quality of tradable goods,
  4. Inevitable imports,
  5. Level of economic development of the country,
  6. Level of economic development of the country, legal restrictions on trade and
  7. Trade supporting facilities and infrastructure.

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 32.
What does rise in exchange rate for India mean?
Answer:
A rise in exchange rate for India means that the value of Indian currency has declined in the international market.

Question 33.
What happens if the exchange rate rises in India and value of rupee falls?
Answer:
If the exchange rate rises for India and value of rupee falls, the demand for imports by India tends to decline and India’s exports tend to rise

Question 34.
How much is the share of Asia in India’s merchandise imports for the year 2014-15?
Answer:
59%

Question 35.
How much was the share of Europe in India’s merchandise imports and exports in the year 2014-15.
Answer:
Europe’s share in India’s merchandise imports was 16% and in merchandise exports was 18% in the year 2014-15.

Question 36.
Which products does OPEG trade?
Answer:
OPEC (Organization of Petroleum Exporting Countries) trade Petrol products to various countries.

Question 37.
How much was India’s import from other developing countries like East Asia, Central Asia and Africa in the year 2007-08?
Answer:
32%

Question 38.
What was the share of leather products in merchandise exports in the year 1960-61?
Answer:
4.4%

Question 39.
Give an overview of rise in exports readymade garments over the years.
Answer:
The export of readymade garments , increased from 0.1% in 1960-61 to 5.4% in 2014-15.

Question 40.
What was the share of capital intensive goods in India’s merchandise imports in the year 2014-15?
Answer:
9.8%

Long Answer Type Questions

Question 1.
Define trade, domestic trade and foreign trade.
Answer:

  • A commercial/business activity which involves exchange of goods, services, resources, capital, technology, know-how, intellectual property, etc. with the motive of profit is called trade.
  • Trade which takes place within the geographical boundary of a nation is called internal trade or domestic trade and that takes place outside the geographical boundary of a country is called international trade or foreign trade.

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 2.
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.

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 3.
Discuss India’s share in world trade.
Answer:

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

Share of India’s exports in the world exports

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

Source: EXIM Bank

Question 4.
What does India’s rising imports and rising exports mean?
Answer:

  • Rising imports is a sign that India is developing and so it is demanding more and more goods.
  • Rising exports means India is able to produce exportable surplus of desirable quality and sell it at competitive prices in the world market.
  • Size, Nature and Direction of India’s Foreign Trade

Question 5.
Why is it important to know the size, composition and direction of the county’s foreign trade?
Answer:
Understanding the size, composition and direction of the county’s foreign trade is necessary to know:

  • The trends and development of trade
  • The efforts that a country puts to promote her trade in international market
  • The relation of a country with other countries
  • The quality of domestic production done to match international standards
  • The competitiveness of domestic products in international market, etc.

Question 6.
With the help of data give an idea about India’s balance of trade since 1991.
Answer:
The following data table shows India’s foreign trade in 1991-92,1998-99 and 2014-15.
India’s foreign trade after 1991 (in million US $)

1991-92 1998-99 2014-15
Goods exported 17.9 33.2 310.5
Goods imported 19.4 42.4 448.0
Balance of trade -1.5 -9.2 -187.5

Source: Economic Survey of India, 2015-16

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

Question 7.
India’s balance of trade has always remained negative. Explain.
Answer:
Reason for negative balance of trade:

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

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 8.
How was the trend of our foreign trade in and around the decade of 1950-60?
Answer:
Foreign trade around the decade of 1950-60:

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

Import-Export of various items in 1960-61

No. Item Share of import
1. Food grains 19.1%
2. Capital intensive goods 31.7%
3. New items Two
No. Item Share of export
1. Items of primary sector 44.2% (Tea and coffee: 19.3%, Jute: 21%)
2. Leather products 4.4%
3. Cloth 10%
4. Readymade garments 0.1%
5. Manufactured goods . 45.3%
6. Petroleum products 1.1%

Question 9.
Give an idea about India’s foreign trade around the decade of 1970-80.
Answer:
Foreign trade around the decade of 1970-80:

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

Question 10.
Discuss in detail the change in import-export structure after 1991 .
Answer:
(A) Change in import structure:

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

(B) Change in export structure:

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

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

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 11.
Compare the import and export structure of 1960-61 with that of 2014-15. Comparison of Import-Export of various items in 1960-61 and 2014-15
Answer:

No. Item Share of import in 1960-61 Share of import in 2014-15
1. Food arains 19.1% 3.9%
2. Capital intensive goods 31.7% 9.8%
3. New items 2.2% 46.5%
No. Item Share of export in 1960-61 Share of export in 2014-15
1. Items of primary sector 44.2%(Tea and coffee: 19.3%, Jute: 21%) 12.3% (Tea and coffee: 0.2%,. Jute: 0.2%)
2. Leather products 4.4% 1.3%
3. Cloth 10% 2%
4. Reaavmaoe aarments 0.1% 5.4%
5. Manufactured aoods 45.3%        , 66.7%
6. Petroleum products 1.1% 18.5%

Question 12.
How has our pattern of import changed over years?
Answer:
(A) Pattern (direction) of import:

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

Question 13.
How has our pattern of export changed over years?
Answer:
Pattern (direction) of export:

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

Question 14.
What is Unbalanced Balance of Payments? State its types.
Answer:
Unbalanced Balance of Payment:
When the /aiuS wf entries on the credit side is not equal to entries on the debit side, Balance of Payments is said to be unbalanced.

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

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

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 15.
What is surplus and deficit Balance of Payments?
OR
State the types of Unbalanced Balance of Payments and explain them:
Answer:
Unbalanced Balance of Payment:
When the /aiuS wf entries on the credit side is not equal to entries on the debit side, Balance of Payments is said to be unbalanced.

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

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

Question 16.
State the types of accounts made under Balance of Payments.
Answer:
Balance of Payments (BoP) consists of two accounts.
They are:

  1. Current account and
  2. Capital account

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

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

(b) Trade in services (intangible things):

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

2. Capital Account:

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

Question 17.
Discuss the components of Current Account of Balance of Payments.
Answer:
Current Account: The current account records the credit and debit entries for :
1. Trade in merchandise goods (tangible goods):

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

2. Trade in services (intangible things):

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

Question 18.
What do you mean by factors that affect the Balance of Payments? Enlist the factors.
Answer:
Factors influencing Balance of Payments:

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

Some of these factors are:

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

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 19.
Prepare a hypothetical account for the Balance of Payment.
Answer:
GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade 3
GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade 4

Question 20.
Why would a person or a country need foreign currency? Also, state the need of currency conversion.
Answer:
Need of foreign currency:
Currency of each country is different. For example, India’s currency is Rupee (₹), America’s currency is US Dollar ($), England’s currency is pound (£), and so on.

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

Currency conversion:

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

Question 21.
What is exchange rate? Explain with the help of an example.
Answer:
Exchange rate:

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

Example:

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

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 22.
How does rise and fall in exchange rate affects import and export trade of India?
Answer:
Impact of exchange rate:
Rise or fall in exchange rate has a major impact on our import and export trade.

Impact on import:
When the exchange rate rises for India, the value of Indian rupee (₹) falls. So, India has to pay more rupees to purchase foreign goods i.e. importing becomes costlier. As a result, the demand for imported goods decline.

Impact on export:

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

Question 23.
Plot percentage share of trade in India’s GDP since 1981 on a line diagram.
Answer:
Percentage Share of Trade in India’s GDP (Gross Domestic Product)

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

Source: World Trade Report, 2015

Percentage share of Trade in India’s GDP
GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade 5

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

Question 24.
State the share of various regions of the world in India’s merchandise import along with a diagram.
Answer:
Share of various regions of the world in India’s merchandise imports (Financial Year: 2014-15)

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

Source: EXIM Bank and Economic Survey of India, 2015-16
GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade 6

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 25.
State the share of various regions of the world in India’s merchandise export along with a diagram.
Answer:

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

Source: EXIM Bank and Economic Survey of India, 2015-16
GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade 7

Multiple Choice Questions

Question 1.
Which of the following is not involved as a commercial activity of trade?
(A) Exchange of technology
(B) Exchange of services
(C) Exchange of capital
(D) Exchange of students for education programme
Answer:
(D) Exchange of students for education programme

Question 2.
Which of the following is organized by Gujarat government as a meet of representatives of government and businesses?
(A) ‘Aavo Gujarat’
(B) Vibrant Gujarat
(C) Gujarat Fellowship Program
(D) Digital Gujarat
Answer:
(B) Vibrant Gujarat

Question 3.
What has to be obtained by the buyer from the banks for assurance of ^ payments to the seller?
(A) Letter of credit
(B) Insurance certificate
(C) Letter of instruction
(D) Bills of exchange
Answer:
(A) Letter of credit

Question 4.
According to world trade report- 2013, how much has the world trade grown from the mid-1800s?
(A) 6-fold
(B) 60-fold
(C) 120-fold
(D) 140-fold
Answer:
(D) 140-fold

Question 5.
Which historians’’research has been stated in world trade report – 2013?
(A) Alexander Hamilton
(B) Rena Molho
(C) Agnus-Maddison
(D) Ronald Coase
Answer:
(C) Agnus-Maddison

Question 6.
How much has the world merchandise and commercial services trade increased in the last 30 years?
(A) 5% per year
(B) 7% per year
(C) 10% per year
(D) 15% per year
Answer:
(B) 7% per year

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 7.
What is the driving force behind today’s global trading system?
(A) Decrease in transport and communication services
(B) Increase in IT industry
(C) Increase in commuting of people from one country to another
(D) Decrease of resources in developing countries
Answer:
(A) Decrease in transport and communication services

Question 8.
What is the share of developing economies in world exports in the year 2011?
(A) 34%
(B) 50%
(C) 47%
(D) 65%
Answer:
(C) 47%

Question 9.
What was the share of world imports of developing economies in the year 1980?
(A) 42%
(B) 54%
(C) 32%
(D) 29%
Answer:
(D) 29%

Question 10.
What was the average annual growth of world trade during 2015- 2016?
(A) 5%
(B) 2.8%
(C) 6.55%
(D) 3.65%
Answer:
(B) 2.8%

Question 11.
What was the share of India in total trade in world trade in 2015?
(A) 2.07%
(B) 1.7%
(C) 1.6%
(D) 0.9%
Answer:
(A) 2.07%

Question 12.
What was the rank of India in terms of share of exports to world exports in the year 2005?
(A) 29th
(B) 19th
(C) 10th
(D) 20th
Answer:
(A) 29th

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 13.
What was the size of merchandise exports to India’s foreign trade in 1998- 99?
(A) 33.2 million $
(B) 17.9 million $
(C) 42.4 million $
(D) 310.5 million $
Answer:
(A) 33.2 million $

Question 14.
What was the balance of trade of India in the year 2014 – 2015?
(A) -1.5 million $
(B) -9.2 million $
(C) -183 million $
(D) -137.5 million $
Answer:
(D) -137.5 million $

Question 15.
What was the percentage share of India’s trade in GDP in the year 2014?
(A) 35%
(B) 41.8%
(C) 38.3%
(D) 40%
Answer:
(C) 38.3%

Question 16.
What was the share of food imports in India’s total merchandise imports in the year 1961?
(A) 20.8%
(B) 15.4%
(C) 19.1%
(D) 3.9%
Answer:
(C) 19.1%

Question 17.
What was the share of capital intensive goods in India’s merchandise imports in 2014-15?
(A) 31.7%
(B) 19.1%
(C) 3.9%
(D) 9.8%
Answer:
(D) 9.8%

Question 18.
In which year, was the share of novel goods 46.5% of total merchandise imports?
(A) 2013-14
(B) 2014-15
(C) 2011-12
(D) 2000-01
Answer:
(B) 2014-15

Question 19.
What was the share of jute in total merchandise exports in the year 1960-61?
(A) 21%
(B) 12.3%
(C) 10%
(D) 19.3%
Answer:
(A) 21%

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 20.
Which of the following is a requirement for a country in order to develop trade relations with countries?
(A) Capability to undertake production of large variety of goods
(B) Good political and diplomatic relations with many countries
(C) Readiness to undertake several diplomatic engagements with other nations
(D) All of these
Answer:
(D) All of these

Question 21.
Which country was India most dependent on for imports after independence?
(A) England
(B) USA
(C) Central Asia
(D) Europe
Answer:
(B) USA

Question 22.
In which decade did Russia face economic crisis?
(A) 1960s
(B) 1970s
(C) 1980s
(D) 1990s
Answer:
(C) 1980s

Question 23.
Which country had 50% of share in 2014 – 15 of total merchandise exports of India?
(A) USA
(B) Asian countries
(C) England
(D) Central Africa
Answer:
(B) Asian countries

Question 24.
What is known as a systematic account of value of transactions of a country with the rest of the world in goods and services, transfer payments and capital?
(A) Exchange rate
(B) Balance of Payments
(C) Balance of trade
(D) Export account
Answer:
(B) Balance of Payments

Question 25.
Which system states that a balance of payment always balances?
(A) Single entry book keeping system
(B) Double entry book keeping system
(C) Accrual account system
(D) Both (a) and (b)
Answer:
(B) Double entry book keeping system

Question 26.
What was the market share of Latin America in India’s merchandise exports in the year 2015?
(A) 50%
(B) 11%
(C) 18%
(D) 6%
Answer:
(B) 11%

Question 27.
Which of the following is said to happen in balance of payments, if the receipts are more than the payments?
(A) Deficit
(B) Debit
(C) Credit
(D) Surplus
Answer:
(D) Surplus

Question 28.
Which of the following is not a factor that influences Balance of Payments?
(A) Exchange rate
(B) Inevitable imports
(C) Political development of the nation
(D) Prices of tradable good in home country and foreign country
Answer:
(C) Political development of the nation

GSEB Solutions Class 12 Economics Chapter 9 Foreign Trade

Question 29.
What is the share of Baltic regions in the India’s merchandise imports in the year 2014-15?
(A) 5%
(B) 11%
(C) 1%
(D) 6%
Answer:
(C) 1%

Question 30.
What was India’s exports to England after 2007-08?
(A) 12.7%
(B) 4.8%
(C) 4%
(D) 16%
Answer:
(C) 4%

Question 31.
What does rise in exchange rate for India mean?
(A) Value of Indian currency declines in international market
(B) Value of India currency rises in international market
(C) Demand of imports tend to increase
(D) None of these
Answer:
(A) Value of Indian currency declines in international market

Question 32.
Balance of Payments has how many accounts?
(A) One
(B) Two
(C) Three
(D) Four
Answer:
(B) Two

Question 33.
In which of the following countries, did India’s export increase till 2014?
(A) England
(B) USA
(C) Russia
(D) OPEC countries
Answer:
(D) OPEC countries

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