Which of the following best describes the term 'import cover', sometimes seen in the news?
- A.It is the ratio of value of imports to the Gross Domestic Product of a country
- B.It is the total value of imports of a country in a year
- C.It is the ratio between the value of exports and that of imports between two countries
- D.It is the number of months of imports that could be paid for by a country's international reserves
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Explanation
The correct answer is D, It is the number of months of imports that could be paid for by a country's international reserves. Import cover is the number of months of imports a country could pay for with its foreign exchange reserves.
It is worked out by dividing a country's total international reserves by its average monthly import bill. The figure shows how long a country could keep buying essential goods such as oil if its export earnings and capital inflows suddenly stopped, so it is a key measure of external safety. As a rule of thumb, at least three months of cover is seen as the minimum. India's reserves fell to about three weeks of imports in the 1991 balance of payments crisis.
A is wrong: the ratio of imports to GDP measures openness to imports, not import cover.
B is wrong: the total import bill for a year is just the value of imports.
C is wrong: the ratio of exports to imports between two countries describes bilateral trade, not reserve adequacy.
Exam tip: import cover = forex reserves ÷ monthly imports; 1991 crisis = about three weeks of cover.