The balance of trade of a country includes which of the following?
- A.Only exports and imports of goods
- B.Exports and imports of goods and services
- C.All current and capital account transactions
- D.Only foreign investment flows
Correct answer
Explanation
The correct answer is A, only exports and imports of goods. The balance of trade, also called the merchandise or visible balance, is the difference between the value of goods exported and goods imported; nothing else enters it. Option B is wrong because once services are added the figure becomes the balance on goods and services, a step towards the current account but not the balance of trade. Option C is wrong because the current and capital accounts together make up the whole balance of payments, of which the balance of trade is only one component. Option D is wrong because foreign investment, whether direct or portfolio, belongs to the capital account and never to the trade balance. This is the single most common confusion in the chapter, so fix the ladder in order: balance of trade, then current account, then balance of payments.
Read the full article: Balance of Payments and Foreign Trade: Key Concepts
Practice Questions
View allThe Balance of Payment Account of an economy is related to the ________.
- A.agriculture sector
- B.external sector
- C.government sector
- D.private sector
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The balance of payments is the statement that records every economic transaction between the residents of a country and the rest of the world in a given period, which is precisely what the external sector of an economy means; it covers merchandise trade, services, income, transfers and capital flows.
Read the full explanation →Which of the following is NOT a Trade Barrier?
- A.Subsidies
- B.Embargo
- C.Export Security
- D.Tariff Barriers
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Export security is not a recognised category of trade barrier; it is not a device that restricts the movement of goods across a border.
Read the full explanation →What are the two main forms of protection used to shield domestic industries from foreign competition in an inward looking trade strategy?
- A.Tariffs and subsidies
- B.Quotas and subsidies
- C.Tariffs and price controls
- D.Tariffs and quotas
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An inward-looking trade strategy, better known as import substitution, was the policy India followed from the Second Five Year Plan until 1991, and it rested on two instruments.
Read the full explanation →What is an indicator of self-reliance?
- A.Increase in imports of the goods which could be produced in the country.
- B.Avoiding imports of the goods which could be produced in the country.
- C.Increase in exports of the goods which could not be produced in the country.
- D.Avoiding exports of the goods which could be produced in the country.
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Self-reliance, the goal set out in India's early plans, means building the capacity to produce at home what the country would otherwise have to buy abroad, so the true indicator is that imports of such goods are avoided.
Read the full explanation →In which year did India adopt full convertibility of the rupee on the current account?
- A.1991
- B.1994
- C.1997
- D.2000
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In August 1994 India accepted the obligations of Article VIII of the International Monetary Fund and made the rupee fully convertible on the current account, so that foreign exchange for trade, travel, education and remittances could be obtained freely at the market rate.
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