Economics Test - 12

The cprrect answer is Current account.

• There are three components of balance of payment-current account, capital account, and financial account.

Key Points

• The current account monitors the inflow and outflow of goods and services between countries.
• It covers all the receipts and payments made for raw materials and manufactured goods.
• It deals with the short-term transactions or the difference between its savings and investments.
• These are also called as actual transactions because they have a real impact on income, output and employment levels through the movement of goods and services in the economy.

The correct answer is External Assistance.

• The current account net Invisibles record the receipts and payments with respect to 
  • Services
  • Transfers
  • Remittance
• ​Services: Export and import of services is recorded under net invisible. It includes travel, transportation, insurance, Government Not Included Elsewhere(GNIE) and miscellaneous services.
• Transfers: It includes grants gifts etc which do not need to be compensated or reciprocated. Once it is received it need not be repaid.
• Remittance: These are the transfers sent to native countries which are directly earned by labour or workers in foreign countries.
• External Assistance is the part of Capital Account.

Additional Information

• Balance of Payment(BoP) of a country is a systematic record of all its economic transaction with the outside world in a given year.
• Balance of Payments composed of the 
  • Current Account
  • Capital Account
  • Errors and Omissions
• ​Capital Account: It is composed of external lending and borrowing, foreign currency deposits of banks, external bonds issued by the Government of India, FDI, FII.
• Current Account: It maintains records of export-import, interest payments, private remittances and transfers.
• Errors and Omissions: The difference between debit and credit entries of all transactions.

The correct answer is Balance of Trade(BOT).

Key Points

• ​Balance of trade is the difference between the value of a country's exports and the value of a country's imports for a given period.
• It is the largest component of a country's balance of payments (BOP).
• Sometimes the BOT between a country's goods and the BOT of its services are distinguished as two separate figures.
• The balance of trade is also referred to as the trade balance.
• The formula for calculating the BOT = (Total value of exports - The total value of its imports).

Additional Information

•  Net Invisibles
  • Net invisible trade is the total international transaction that does not include an exchange of tangible goods.
  • Global financial services and insurance companies, shipping services, and tourism all engage in invisible trade.
  • Medical tourism is one of the modern businesses that has emerged in invisible trade.
• The Balance of Payments (BOP)
  • The balance of payments is a statement of all transactions made between entities in one country and the rest of the world over a defined period, such as a quarter or a year.
  • It summarizes all transactions that a country's individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country.
  • The balance of Payments includes both the current account and capital account.
• The overall balance of payments deficit (surplus)
  • The account by which the money coming into a nation is more than the money going out in a particular time frame.
  • The decrease or increase in official reserves is known as the overall balance of payments deficit or surplus.

The correct answer is Services.

Key Points

• Invisible export:-
  • ​It is the export of services.
  • It is that export that does not have a tangible physical appearance.
  • Invisibles export Example:-
    • Services (e.g. Software services)
    • Transfers (e.g. Remittance, Grant)
    • Income (e.g. Investment income)

The correct answer is Restricted floating.

• Restricted floating is known as an error-prone swing.

Key Points

• An exchange rate is the value of one nation's currency versus the currency of another nation or economic zone. 
  • It means, for example, how much rupees will it take to buy a US dollar.
    • This will be the exchange rate of the Indian rupee and USD. 
    •  1 USD is approximately equal to 75 rupees.
• Most exchange rates are free-floating and will rise or fall based on supply and demand in the market.
  • A free-floating exchange rate rises and falls due to changes in the foreign exchange market. 
• Indian currency is free-floating.
• A few countries also have a restricted currency exchange rate.
  • A restricted currency can have its value set by the government. 
  • This rate is an error-prone swing.

The correct answers Managed Exchange Rate Regime.

• India follows the managed exchange rate system.
• A managed exchange rate system is a hybrid or mixture of the fixed and flexible exchange rate system in which the government of the economy attempts to affect the exchange rate 
  • by buying or selling foreign currencies
  • indirectly by thorough monetary policy.
• India follows the managed but flexible exchange rate system in which government buy or sell its currency to reduce day-to-day volatility of currency fluctuations and some time times go for systematic interventions for desired objectives.
• For better management of currency exchange rates India introduce the own method known as the dual exchange rate.
• Under the dual exchange rate mechanism, there are two exchange rate for rupees
  • official rate
  • market-determined ​​

Additional Information

• Fixed Currency regime: Exchange rate of a particular currency is fixed by the IMF(International Monetary Fund) keeping the currency in front of a basket of important world currencies.
• Floating Currency regime: A method of regulating exchange rates of the world currencies based on the market mechanism(demand and supply). The domestic currency is left free to float against a number of foreign currencies to determine its own interest rate.

All prices are quoted in dollar terms and the local currency is no longer used in transactions. Reserve bank of India (RBI) wishes to fix an exact par value for the rupee. Most exchange rates change slightly on a day-to-day basis, and market forces generally determine the basic trends.

The correct answer is Devaluation.

• In the foreign exchange market, when the exchange rate of a domestic currency is cut down by its government against any foreign currency is known as devaluation.
• The exchange rate is the comparison of various currencies against each other.
• Devaluation is also known as official Depreciation.

​Additional Information

• Revaluation: When the government increases its the exchange rate of its domestic currency against any foreign currency.
• Depreciation: When domestic currency loses its value against any foreign currency in the foreign exchange market.​​​​​​

The correct answer is Nominal Effective Exchange Rate.

• Nominal Effective Exchange Rate(NEER) of the rupee is a weighted average of exchange rates before the currencies of India's major trading partners.
• NEER provide the value of rupee in terms of major foreign exchange market currencies.
• NEER is an indicator of a country's international competitiveness in terms of the foreign exchange market.

Additional Inforamtion

• Nominal Exchange Rate: Exchange rate of one currency against the another.
• Real Effective Exchange Rate: When inflation is adjusted with NEER it is called Real Effective Exchange Rate.
• Real Exchange Rate:  It is the ratio of foreign to domestic prices, measured in the same currency.

The correct answer is Decreases

Key Points

• Any­one earning a fixed income is damaged by in­flation in terms of real purchasing power parity.
• With the rise in prices of goods and fixed salaries, consumers are now able to purchase less as compared to what they were earning before the price hike.
• Inflation, therefore, reduces the purchasing power parity of the consumers with fixed income.
• On the other hand, people earning flexible incomes may gain during inflation.
• The nominal incomes of such people outstrip the general price rise, due to which, real incomes of this group in­crease.
• A fall in the purchasing power of the people leads to a fall in the demand for goods and services in the economy.