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Economics Test- 01

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#1 Consider the following statements about Balance of payments 1. It shows country’s inflow and outflow of foreign exchange. 2. It covers only export and import of goods and services during specific period. 3. The net balance of payment of the world is positive. Which of the above are correct??Solution (c)

Balance of Payments
The Balance of Payment is an organized record of an overall economic transaction between the residents of the country and the rest of the world during the particular time period. It comprises of Current account payments and Capital account payments. The net Balance of Payment of world is zero
There are two key accounts in the Balance of Payment. They are:
· Current Account: The current account registers exports and imports in goods, trade in services and transfer payments.
· Capital Account: The capital account registers entire international procurements and sales of assets such as money, bonds, etc.

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#2 Which of the following agencies releases “Global Economic Prospect report”??Solution (a)

Some of the prominent reports released by World Bank
1. Ease of doing business report
2. World development report
3. Ease of living index
4. Universal health coverage index
5. Remittance report
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#3 Consider the following statements: 1. FDI is an investment made by individual or company of one country in another only by establishing new business 2. FII is investments in which an investor merely purchases equities of foreign-based companies. 3. In India Cabinet committee on economic affairs clears investments more than 2000 crores. Which of the above statements are NOT correct??Solution (b)

Incorrect options have been asked.

Foreign Direct Investment

Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company.

Foreign direct investments are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies. The key feature of foreign direct investment is that it is an investment made that establishes either effective control of, or at least substantial influence over, the decision making of a foreign business.

There are two routes by which India gets FDI.

· Automatic route: By this route FDI is allowed without prior approval by Government or Reserve Bank of India.

· Government route: Prior approval by government is needed via this route.

· The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate single window clearance of FDI application under Approval Route. The application will be forwarded to the respective ministries which will act on the application as per the standard operating procedure. Foreign Investment Promotion Board (FIPB) which was the responsible agency to oversee this route was abolished on May 24, 2017.

In India CCEA clears all the investments more than 5,000 crores.

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#4 With reference to balance of payments, which of the following constitutes the current account? 1. Balance of trade 2. Foreign assets 3. Balance of invisibles 4. Special drawing rights. Select the correct answer using the code given below.?Solution (c)

  • The current account is a country’s trade balance plus net income and direct payments.
  • The trade balance is a country’s imports and exports of goods and services.
  • The current account also measures international transfers of capital.
  • A current account is in balance when the country’s residents have enough to fund all purchases in the country.
  • Residents include the people; businesses and government. Funds include income and savings.
  • Purchases include all consumer spending as well as business growth and government infrastructure spending.

Components of the current account: goods, services, and income and current transfers.

1. Goods – These are movable and physical in nature, and for a transaction to be recorded under “goods,” a change of ownership from/to a resident (of the local country) to/from a non- resident (in a foreign country) has to take place. Movable goods include general merchandise, goods used for processing other goods, and non-monetary gold. An export is marked as a credit (money coming in), and an import is noted as a debit (money going out).

2. Services – These transactions result from an intangible action such as transportation, business services, tourism, royalties or licensing. If money is being paid for a service, it is recorded like an import (a debit), and if money is received, it is recorded like an export (credit).

3. Income – Income is money going in (credit) or out (debit) of a country from salaries, portfolio investments (in the form of dividends, for example), direct investments or any other type of investment. Together, goods, services, and income provide an economy with fuel to function. This means that items under these categories are actual resources that are transferred to and from a country for economic production.

4. Current Transfers – Current transfers are unilateral transfers with nothing received in return. These include workers’ remittances, donations, aids and grants, official assistance and pensions. Due to their nature, current transfers are not considered real resources that affect economic production.

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#5 Consider the following statements- 1. Convertibility of rupee means freely converting it only into US dollars and vice versa. 2. India currently has full convertibility of rupee in capital accounts only. Which of the above statements is/are correct??Solution (d)

Convertibility

Any currency may be current account or capital account convertible or both.

Current account convertibility implies that the Indian rupee can be converted to any foreign currency at existing market rates for trade purposes for any amount. It allows easy financial transactions for the export and import of goods and services. Any individual involved in trade can get foreign currency converted at designated banks or dealers. In essence, current account convertibility remains within the trading realms. In the beginning of reforms, the rupee was made partially convertible for goods, services and merchandise only. During mid-1990s, the rupee was made fully convertible for current account for all trading activities, remittances and indivisibles.

However, the rupee continues to remain capital account partially convertible.

Capital account convertibility allows freedom to convert local financial assets into foreign financial assets and vice-versa. It includes easy and unrestricted flow of capital for all purposes which may include free movement of investment capital, dividend payments, interest payments, foreign direct investments in domestic projects and businesses, trading of overseas equities by local citizens and domestic equities by foreigners, foreign remittances and the sale/purchase of immovable property globally. As of today, one can still bring in foreign capital or take out local money for these purposes, but there are ceilings imposed by the government that need approvals.

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