RBSE Solutions Class 12 Economics Chapter 24 Concept of International Trade

RBSE Class 12 Economics Chapter 24 Multiple Choice Questions

 

Question 1. Foriegn exchange market is defined as a place where :
(a) Goods and services are transacted
(b) Transactions of exchange of foreign currencies are effected
(c) Transactions of resources are done
(d) Transactions of services are done
Answer: (b) Transactions of exchange of foreign currencies are effected
In simple words: The foreign exchange market is a place where people buy and sell different types of money from various countries. It's where currencies are exchanged.

🎯 Exam Tip: Remember that a foreign exchange market primarily deals with the exchange of currencies, not physical goods or services directly.

 

Question 2. Which of the following exhibits trade deficit ?
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Question 3. Lowering down the external value of a country's own currency is called
(a) Depreciation
(b) Devaluation
(c) Revaluation
(d) Inflation
Answer: (b) Devaluation
In simple words: When a country's government officially lowers the value of its own money compared to other countries' money, it is called devaluation.

🎯 Exam Tip: Distinguish between 'devaluation' (government action) and 'depreciation' (market forces) when describing a fall in currency value.

 

Question 4. Balance of trade includes:
(a) Import of Services
(b) Export of Services
(c) Import of assets
(d) Import and export of goods
Answer: (d) Import and export of goods
In simple words: Balance of trade only looks at the total value of physical goods a country buys (imports) and sells (exports) to other countries.

🎯 Exam Tip: Remember that balance of trade focuses only on visible items (goods), unlike balance of payments which includes invisible items (services, assets) as well.

 

Question 5. If value of one dollar changes from Rs 65 to Rs 60, it is called :
(a) Revaluation
(b) Devaluation
(c) Depreciation
(d) Inflation
Answer: (a) Revaluation
In simple words: If you need less Indian Rupees to buy one US dollar than before, it means the Indian Rupee has become stronger. This increase in currency value due to government action is called revaluation.

🎯 Exam Tip: An increase in the value of domestic currency relative to foreign currency is called revaluation (if government-led) or appreciation (if market-led).

 

RBSE Class 12 Economics Chapter 24 Very Short Answer Type Questions

 

Question 1. Define International trade.
Answer: International trade refers to the exchange of goods and services between different countries. It allows countries to buy and sell products beyond their own borders.
In simple words: International trade is when countries buy and sell things to each other.

🎯 Exam Tip: Clearly state that international trade involves transactions across national borders to earn full marks.

 

Question 3. What is the meaning of trade?
Answer: Trade means the buying and selling of goods and services. Trade can be of two types: internal trade (within a country) and international trade (between countries).
In simple words: Trade means buying and selling things. It can happen inside one country or between different countries.

🎯 Exam Tip: When defining trade, mention both its fundamental action (buying and selling) and its two main categories (internal and international).

 

Question 4. When does trade deficit take place?
Answer: A trade deficit happens when a country imports more goods and services than it exports. This means the country is spending more on foreign goods than it earns from selling its own goods abroad.
In simple words: Trade deficit happens when a country buys more from other countries than it sells to them.

🎯 Exam Tip: The key to defining a trade deficit is the comparison: imports are greater than exports.

 

Question 5. State one importance of foreign trade.
Answer: One importance of foreign trade is that it offers more choices of goods and services to consumers, producers, and investors. This increases competition and variety in the market.
In simple words: Foreign trade gives people more choices of goods, helping them find better products.

🎯 Exam Tip: Focus on consumer choice or market competition as a key benefit when discussing the importance of foreign trade.

 

RBSE Class 12 Economics Chapter 24 Short Answer Type Questions

 

Question 1. Define Devaluation.
Answer: Devaluation is when a government purposely lowers the value of its country's money compared to foreign currencies. This is often done to make imports more expensive and exports cheaper, which helps to reduce a trade deficit or correct an imbalance in the balance of payments.
In simple words: Devaluation is when a government makes its country's money worth less compared to other countries' money to help sell more goods abroad.

🎯 Exam Tip: Emphasize that devaluation is a deliberate government action, distinguishing it from market-driven depreciation.

 

Question 2. What are invisible items?
Answer: Invisible items are things that cannot be physically seen or measured in quantities, unlike goods. These are typically services that are exchanged, such as banking services, insurance, and the transfer of technological knowledge.
In simple words: Invisible items are things like services that you can't see or touch, such as banking or insurance.

🎯 Exam Tip: When defining invisible items, highlight their non-physical nature and provide examples like services.

 

Question. What do you mean by Exchange Rate ?

 

Question. What do you mean by visible items?
Answer: Visible items are goods that are physical and can be seen, touched, and measured. The value of these items, both imported and exported, is recorded in a country's Balance of Trade. This means only physical goods are included in the Balance of Trade calculations.
In simple words: Visible items are physical goods that can be seen and measured, like cars or clothes. Their import and export values are part of the Balance of Trade.

🎯 Exam Tip: Stress that visible items are physical commodities and are accounted for in the Balance of Trade.

 

Question 5. What is closed economy ?
Answer: A closed economy is a country's economy that has no business or financial connections with other countries. In such an economy, the people only use goods and services that are produced within their own country.
In simple words: A closed economy is a country that does not trade or do business with any other countries.

🎯 Exam Tip: The key characteristic of a closed economy is the absence of international trade and financial transactions.

 

RBSE Class 12 Economics Chapter 24 Essay Type Questions

 

Question 1. Explain in detail the process of determination of foreign exchange rate ?
Answer: The foreign exchange rate is the price of one country's money when expressed in terms of another country's money in the international market. It shows how much of one currency you need to get another. This rate is set in the foreign exchange market where different currencies are swapped between countries. There are various types of exchange rates, such as spot, forward, fixed, and flexible rates.
Economists use different ideas to explain how exchange rates are decided. Key theories include the Demand and Supply Theory, Purchasing Power Parity (PPT), Balance of Payment theory, and the Mint Par theory.
The Demand and Supply Theory works just like how prices are set for goods in a market. In the foreign exchange market, the exchange rate is determined by how much foreign currency people want (demand) and how much is available (supply). This can be shown with a graph:

In the figure above, point E is where the demand for foreign exchange meets its supply. Here, the demand and supply are OY_a, and the exchange rate is OR₀ (1$ = Rs 68). If the exchange rate is OR₂, it means there is more foreign currency available than people want to buy. This causes the exchange rate to go down until it reaches E again. On the other hand, if the exchange rate is OR₁, it means people want more foreign currency than is available. This will push the exchange rate up until it returns to E.
Changes in the exchange rate affect both demand and supply. Many other economic factors also play a role, such as the amount of imports and exports, capital flows between countries, bank interest rates, uncertainty in the global money market, and political conditions.
In simple words: The foreign exchange rate is the price of one currency in terms of another. It's set by how much people want foreign money (demand) and how much foreign money is available (supply). If demand is higher than supply, the price goes up; if supply is higher, the price goes down.

🎯 Exam Tip: To explain exchange rate determination, clearly define it, mention the demand and supply forces, and use a simple diagram to illustrate the equilibrium point.

 

Question 2. Define International trade. Why is it essential ?
Answer: International trade involves the exchange of goods and services between different countries. It is also known as foreign trade and goes beyond the borders of a single nation, for example, trade between India and the USA.
International trade is very important for several reasons:
(i) Not all countries are good at producing all types of goods. So, they need to rely on other countries to get the things they need. This allows countries to focus on producing what they do best and trade for the rest.
(iii) International trade helps countries get advanced technology. This helps developing and less advanced countries to improve and become more modern.
(iv) Trade between countries also increases competition within a country. This encourages local businesses to improve the quality of their products and sell more.
(a) Improving the quality of goods.
(b) Increasing sales volume.
(v) Currently, the money earned from international trade makes up a big part of a country's total income (Gross National Product). It is a crucial part of how countries grow and develop.
In simple words: International trade is when countries buy and sell goods and services to each other. It is important because it lets countries get goods they can't make, helps them get new technology, increases local competition, and adds a lot to their national income.

🎯 Exam Tip: For this question, define international trade clearly and then list at least three distinct reasons for its importance, using simple, clear statements.

 

Question 3. Differentiate between Devaluation and Revaluation.
Answer: Both revaluation and devaluation are actions taken by governments to adjust a country's Balance of Payments. Devaluation is when a government lowers the value of its own currency compared to foreign currencies. This makes imports more costly and exports cheaper, aiming to reduce a trade deficit. Revaluation is the opposite; it's when a government increases the value of its country's currency in relation to foreign currencies. This makes exports more expensive and imports cheaper, helping to reduce a trade surplus. Both policies are typically used in a fixed monetary exchange rate system.
In simple words: Devaluation is when the government makes its money weaker to boost exports, while revaluation is when it makes its money stronger to reduce too many exports. Both are done to balance trade.

🎯 Exam Tip: Clearly state that both are government policies, define each, and explain their impact on imports, exports, and the balance of payments. Mentioning their use in a fixed exchange rate system adds depth.

 

Question 4. Balance of Payment is a more wider term than Balance of Trade. Explain.
Answer: The Balance of Payment (BOP) is a much broader concept than the Balance of Trade (BOT). The Balance of Trade only includes the value of visible items, which are physical goods that a country imports and exports. However, the Balance of Payment includes both visible items (goods) and invisible items (services, capital transfers, and other financial transactions). This comprehensive nature makes BOP a wider measure of a country's international economic dealings.
In simple words: Balance of Payments is a bigger idea than Balance of Trade. Trade only counts goods, but Payments includes goods, services, and all money transfers with other countries.

🎯 Exam Tip: To explain this difference, clearly state what each term includes: BOT for visible goods, and BOP for both visible and invisible items, and capital flows.

 

Question 5. Explain different items of Balance of Payment through a hypothetical example.
Answer: The Balance of Payment (BOP) records all economic transactions between a country and the rest of the world over a specific period. It is divided into two main accounts: the Current Account and the Capital Account. Let's look at an example:

This table shows how a country's receipts (credits) and payments (debits) are balanced over a period. The Current Account covers regular transactions like trade in goods and services, income from investments, and gifts. The Capital Account deals with financial flows related to investments and borrowings. In this example, the total credits and debits balance out at Rs 1200 crore, indicating a balanced Balance of Payment.
In simple words: The Balance of Payment tracks all money coming into (credits) and leaving (debits) a country. It includes payments for goods, services, income, and investments, making sure everything adds up in the end.

🎯 Exam Tip: When using an example, clearly distinguish between Current Account and Capital Account items, and ensure that total credits equal total debits for a balanced BOP.

 

RBSE Class 12 Economics Chapter 24 Other Important Questions - Answers

 

Chapter 24 Multiple-Choice Questions

 

Question 2. By what system different countries sought out their economic or business issues?
(a) Self Exchange System
(b) Domestic Exchange System
(c) Foreign Exchange System
(d) Monetory fund System
Answer: (c) Foreign Exchange System
In simple words: Countries use the foreign exchange system to handle their money and business dealings with other countries.

🎯 Exam Tip: Remember that international economic issues are typically resolved through the foreign exchange system, which facilitates currency conversion.

 

Question 3. When total debit is equal to the total credit of any country then Balance of Payment is:
(a) Balanced
(b) Unbalanced
(c) Not equal
(d) None of the options
Answer: (a) Balanced
In simple words: If a country's total money coming in (credit) is the same as its total money going out (debit), then its Balance of Payment is considered balanced.

🎯 Exam Tip: A balanced Balance of Payment always means that total credits perfectly offset total debits in a country's international transactions.

 

Question 4. Which principle is adopted in case of non-convertible paper money?
(a) Payment Equilibrium/Parity
(b) Coin parity
(c) Purchasing power parity
(d) None of the options
Answer: (c) Purchasing power parity
In simple words: For paper money that can't be easily exchanged for gold or other currencies, the idea of purchasing power parity is used. This means comparing what the same amount of money can buy in different countries.

🎯 Exam Tip: Recall that Purchasing Power Parity (PPP) is often applied to non-convertible currencies to compare their real value across countries based on what goods and services they can buy.

 

Question 5. If government does not interfere, then exchange rate is determined:
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Question 6. Lowering country's currency in terms of foreign currency by the government of any country is known as:
(a) Revaluation
(b) Devaluation
(c) Demonetization
(d) Monetization
Answer: (b) Devaluation
In simple words: When a government purposely reduces the value of its own money compared to foreign money, it's called devaluation.

🎯 Exam Tip: Differentiate government-initiated currency value changes (devaluation/revaluation) from market-driven changes (depreciation/appreciation).

 

RBSE Class 12 Economics Chapter 24 Very Short Answer Type Questions

 

Question 1. What is a closed economy ?
Answer: A closed economy is an economic system in which a country does not engage in business or financial interactions with any other country. Its population only consumes goods and services produced within its own borders.
In simple words: A closed economy is a country that doesn't trade or interact financially with other countries, producing everything it needs itself.

🎯 Exam Tip: Define a closed economy by highlighting its self-sufficiency and lack of international economic relations.

 

Question 2. Explain Balance of Payment.
Answer: The Balance of Payment (BOP) is a comprehensive record of all financial transactions that occur between a country and the rest of the world during a specific time period. It tracks money coming in and going out for trade, services, and investments.
In simple words: Balance of Payment keeps track of all money exchanges a country has with other countries, like for trade or investments.

🎯 Exam Tip: State that BOP is a systematic record of all international financial transactions for a country over a period.

 

Question 3. Cost of one American dollar in context to Indian Rupee declines from Rs 50 to Rs 48. Then it is said ...... of Indian Rupee.
Answer: Revaluation.
In simple words: If you need less Indian Rupees to buy one US dollar, it means the Indian Rupee has become stronger, which is called revaluation.

🎯 Exam Tip: When the domestic currency buys more foreign currency (i.e., less domestic currency is needed per unit of foreign currency), it indicates revaluation or appreciation.

 

Question 4. What is surplus foreign trade?
Answer: Surplus foreign trade happens when a country's exports are greater than its imports in international trade. This means the country sells more goods and services to other countries than it buys from them.
In simple words: Surplus foreign trade means a country sells more to other countries than it buys from them.

🎯 Exam Tip: Define surplus foreign trade by clearly stating that exports exceed imports.

 

Question 6. What will be the effect on foreign market demand if Indian rupee undergoes revaluation in context to American dollar ?
Answer: If the Indian Rupee undergoes revaluation against the American dollar, it means the Indian Rupee becomes stronger. As a result, Indian goods and services will become more expensive for foreign buyers, leading to a decline in demand for Indian goods and services in the foreign market.
In simple words: If the Indian Rupee gets stronger, Indian products become more costly for foreign buyers, so they will buy fewer Indian goods and services.

🎯 Exam Tip: Understand that a stronger domestic currency makes exports more expensive and imports cheaper, affecting foreign demand for domestic products negatively.

 

Question 7. What do you mean by fixed exchange rate.
Answer: A fixed exchange rate refers to a currency exchange rate that a country's government or central bank officially sets and maintains. It is not allowed to move freely with market forces.
In simple words: A fixed exchange rate is a set value for a country's money that its government decides and keeps steady.

🎯 Exam Tip: Emphasize that a fixed exchange rate is set by the government or central bank, not by market forces.

 

Question 8. How is foreign currency demand fulfilled ?
Answer: The demand for foreign currency is typically met through a country's exports of goods and services, as well as through foreign investments coming into the country. When a country exports, it receives foreign currency, and when foreign entities invest, they bring in foreign currency.
In simple words: Demand for foreign money is met by selling our goods to other countries (exports) and by getting investments from other countries.

🎯 Exam Tip: The primary sources for fulfilling foreign currency demand are exports and foreign investments.

 

Question 9. What do you mean by Trade Balance ?
Answer: Trade Balance is a record that tracks the total value of goods a country imports and exports with other countries over a period of one year. It shows whether a country is a net exporter or importer of visible goods.
In simple words: Trade Balance is a yearly record of how many goods a country buys from and sells to other countries.

🎯 Exam Tip: Remember that Trade Balance specifically refers to the difference between visible exports and visible imports over a year.

 

Question 10. Write three reasons for imbalance in Balance of Payment.
Answer: Three reasons for an imbalance in the Balance of Payment are:
1. Huge Expenditure on development: When a country spends a lot on development projects, it often needs to import capital goods and technology, leading to more payments.
2. Increase in consumption of imported goods: If people in a country start buying many foreign goods, the import bill rises, causing a deficit.
3. High cost of production: If a country's goods are expensive to produce, they might not sell well internationally, reducing exports and creating an imbalance.
In simple words: Reasons for unbalanced international payments include spending too much on development, buying too many foreign products, and having high costs to make goods at home.

🎯 Exam Tip: When listing reasons for BOP imbalance, focus on factors that significantly impact a country's import or export values.

 

Question 11. What do you mean by devaluation?
Answer: Devaluation is an official action by a government to decrease the value of its country's currency in relation to foreign currencies. This policy aims to make exports cheaper and imports more expensive to improve a country's trade balance.
In simple words: Devaluation is when a government lowers the value of its money against other countries' money, often to help sell more goods abroad.

🎯 Exam Tip: Clearly state that devaluation is a government-controlled reduction in currency value, distinct from market depreciation.

 

Question 13. Which items are included in Balance of Trade ?
Answer: Only visible items are included in the Balance of Trade. These are physical goods that can be seen, touched, and measured when they are imported or exported.
In simple words: Only physical goods that can be seen are part of the Balance of Trade.

🎯 Exam Tip: Remember that Balance of Trade strictly covers only visible goods, not services or financial flows.

 

Question 14. Which items are included in balance of payment?
Answer: Both visible and invisible items are included in the Balance of Payment. Visible items are physical goods, while invisible items include services, financial transfers, and capital movements.
In simple words: Both physical goods and invisible things like services and money transfers are counted in the Balance of Payment.

🎯 Exam Tip: For Balance of Payment, remember to include both visible (goods) and invisible (services, capital) items, making it comprehensive.

 

Question 15. What is meant by the monetary (money) value ?
Answer: The monetary value of a product or service refers to the worth it would bring in terms of money if it were sold in the market. It represents the price at which it can be exchanged.
In simple words: Monetary value is how much money something is worth if you sell it.

🎯 Exam Tip: Monetary value essentially means the market price or exchange value in terms of currency.

 

Question 16. What is the relation between demand of foriegn currency and exchange rate?
Answer: There is an inverse relationship between the demand for foreign currency and its exchange rate. This means that as the exchange rate for foreign currency goes up (it becomes more expensive), the demand for it tends to go down, and vice versa.
In simple words: When foreign money gets more expensive, people want to buy less of it. If it gets cheaper, they want to buy more.

🎯 Exam Tip: Highlight the inverse relationship: higher exchange rate, lower demand; lower exchange rate, higher demand.

 

Question 17. How is loss covered in current account?
Answer: A loss in the current account (e.g., a trade deficit) is typically covered by the inflow of net capital from the capital account. This means borrowing from other countries, foreign investments coming in, or using a country's foreign exchange reserves.
In simple words: If a country spends more than it earns in its current account, it covers the difference by getting more money through loans or investments from other countries.

🎯 Exam Tip: Remember that current account deficits are financed by surpluses in the capital account or by drawing down reserves.

 

Question 18. What is the main objective of foreign currency market ?
Answer: The main objectives of the foreign exchange market are to facilitate international trade and investment by allowing currencies to be exchanged, and to expand the scope for foreign investment. It enables smooth transactions across borders.
In simple words: The main goal of the foreign currency market is to help countries trade and invest with each other more easily.

🎯 Exam Tip: Focus on facilitating international trade and investment as the primary purposes of the foreign exchange market.

 

Question 20. What do you mean by Devaluation ?
Answer: Devaluation is a policy where a country's government officially reduces the value of its currency in relation to other foreign currencies. This is typically done to boost exports and control imports.
In simple words: Devaluation means the government intentionally makes its own money worth less compared to foreign money.

🎯 Exam Tip: Emphasize that devaluation is a deliberate reduction in currency value by a government.

 

Question 21. In which conditions will international trade not occur ?
Answer: International trade will generally not occur if the cost of producing goods and services is similar between countries. If there's no comparative advantage or cost difference, there's little incentive for countries to trade with each other.
In simple words: Countries won't trade much if it costs them roughly the same to make things as it does for other countries.

🎯 Exam Tip: The absence of comparative advantage or significant cost differences removes the primary incentive for international trade.

 

Question 22. What do you mean by trade rate?
Answer: The trade rate refers to the ratio at which a country's goods are exchanged for the goods of another country. It indicates how much of one country's product can be swapped for another country's product.
In simple words: Trade rate is how much of one country's goods you get for another country's goods.

🎯 Exam Tip: Define trade rate as the ratio of exchange for goods between two countries.

 

Question 23. What is tariff ?
Answer: A tariff is a tax that is imposed on goods and services when they are transported across international borders. It is usually charged by the importing country to make foreign goods more expensive or to raise revenue.
In simple words: A tariff is a tax put on goods when they enter or leave a country.

🎯 Exam Tip: Remember that a tariff is a border tax on imported or exported goods, often used for protection or revenue.

 

Question 24. How does export duty influence demand?
Answer: When an export duty is imposed, it increases the overall cost of a product for foreign buyers. This higher price makes the product less attractive, which then leads to a decrease in its demand in international markets.
In simple words: Export duty makes products more expensive for foreign buyers, so they buy less of them.

🎯 Exam Tip: An export duty increases the price of goods for foreign consumers, leading to reduced demand.

 

Question 25. What is venture capital ?
Answer: Venture capital refers to investments made in foreign exchange (forex) in the international money market with the aim of earning profits. It typically involves high-risk, high-reward investments in new or growing businesses.
In simple words: Venture capital is money invested in foreign exchange in global markets to make a profit.

🎯 Exam Tip: Note that venture capital, in this context, refers to speculative investment in foreign exchange for profit.

 

Question 26. What is hedging?
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Question 28. Write two ways to increase export.
Answer: Two ways to increase exports are:
1. Minimising the cost of production: By making goods cheaper to produce, a country can offer more competitive prices in international markets, attracting more buyers.
2. Maintaining the quality of product: High-quality goods are more appealing to foreign consumers and can build a strong reputation, leading to increased demand.
In simple words: To sell more products abroad, a country should make them cheaply and keep their quality high.

🎯 Exam Tip: Focus on competitive pricing (cost reduction) and product quality as key drivers for increasing exports.

 

Question 29. What is the nature of foreign exchange demand curve ?
Answer: The foreign exchange demand curve slopes downward. This indicates an inverse relationship between the exchange rate and the quantity of foreign currency demanded. As the price of foreign currency falls, the demand for it increases.
In simple words: The foreign exchange demand curve goes downwards, meaning people want more foreign money when its price is lower.

🎯 Exam Tip: Remember that a downward-sloping demand curve signifies an inverse relationship between price (exchange rate) and quantity demanded.

 

Question 30. What is the nature of foreign exchange supply curve?
Answer: The foreign exchange supply curve moves upward. This shows a direct relationship between the exchange rate and the quantity of foreign currency supplied. As the exchange rate rises, more foreign currency tends to be supplied to the market.
In simple words: The foreign exchange supply curve goes upwards, meaning more foreign money is available when its price is higher.

🎯 Exam Tip: An upward-sloping supply curve indicates a direct relationship between price (exchange rate) and quantity supplied.

 

Question 31. If one dollar costs Rs 40, What is the exchange rate of dollar and rupee ?
Answer: The exchange rate is \( \$1 = \text{Rs } 40 \).
In simple words: The exchange rate is simply one dollar equals forty Indian Rupees.

🎯 Exam Tip: State the exchange rate clearly as a direct equivalence between the two currencies.

 

Question 32. Write two sources of foreign exchange supply.
Answer: Two sources of foreign exchange supply are:
1. Getting subsidies from foreign countries: When foreign countries provide financial aid or subsidies, it brings foreign currency into the country.
2. Getting loans from foreign countries: Borrowing money from other nations or international organizations increases the supply of foreign currency.
In simple words: Foreign money comes from other countries giving us aid or when we borrow money from them.

🎯 Exam Tip: Identify government-level financial inflows like subsidies and loans as key sources of foreign exchange supply.

 

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Question 35. Write two items of Current Account.
Answer: Two items typically included in the Current Account are:
1. Export of goods: The value of physical products sold to other countries.
2. Income from foreign investments: Earnings from investments made abroad, such as interest or dividends.
In simple words: The Current Account includes money from selling goods to other countries and earnings from investments made abroad.

🎯 Exam Tip: Clearly list examples of both goods and income flows as distinct components of the Current Account.

 

Question 36. Write two barriers of foreign trade.
Answer: Two common barriers to foreign trade are:
1. Tariff (commercial rate): A tax imposed on imported goods, which makes them more expensive and less competitive than domestic goods.
2. Quota: A limit set on the quantity of specific goods that can be imported or exported, restricting trade volume.
In simple words: Barriers to foreign trade include tariffs (taxes on imports) and quotas (limits on how much can be traded).

🎯 Exam Tip: Focus on tariffs (taxes) and quotas (quantity limits) as the primary direct barriers to international trade.

 

Question 37. What do you mean by exchange rate ?
Answer: The exchange rate is the price of one country's currency when it is expressed in terms of another country's currency. It shows how much of one currency is needed to buy a unit of another currency.
In simple words: Exchange rate is the price of one country's money measured by another country's money.

🎯 Exam Tip: The core definition of exchange rate is the value of one currency in terms of another.

 

Question 38. Write two reasons of development of foreign trade market.
Answer: Two reasons for the development of the foreign trade market are:
1. Increase in international trade: As countries trade more goods and services, the need for a market to exchange currencies grows.
2. Increase in foreign capital investment: More money being invested across borders means more demand for exchanging currencies, driving market development.
In simple words: The foreign trade market grew because countries traded more goods and because more money was invested between countries.

🎯 Exam Tip: Link the growth of the foreign trade market directly to the expansion of international trade and capital flows.

 

Question 39. What do you mean by visible trade ?
Answer: Visible trade refers to the import and export of physical goods between two countries. These goods are tangible, meaning they can be seen, touched, and measured.
In simple words: Visible trade is the buying and selling of physical goods, like products you can see, between countries.

🎯 Exam Tip: The key characteristic of visible trade is that it involves physical, tangible goods that are imported and exported.

RBSE Class 12 Economics Chapter 24 Short Answer Type Questions (SA-I)

 

Question 1. Differentiate between Foreign Trade Surplus and Trade Deficit.
Answer: Foreign trade surplus happens when a country sells more goods to other countries (exports) than it buys from them (imports). Trade deficit occurs when a country buys more goods from other countries (imports) than it sells (exports).
In simple words: A trade surplus means you sell more than you buy, while a trade deficit means you buy more than you sell.

🎯 Exam Tip: Clearly define both terms and explain the difference in a single, concise sentence for full marks.

 

Question 2. What do you mean by foreign trade exchange ? Mention two competitors of foreign trade exchange.
Answer: Foreign trade exchange refers to the process where goods and services are traded between two or more countries. It involves converting one country's currency into another's to complete transactions. Two main competitors in the foreign exchange market are speculators and hedgers.
In simple words: Foreign trade exchange is when countries trade things using different money. People who guess future money values and people who want to avoid money risk are key players.

🎯 Exam Tip: When defining foreign trade, remember to emphasize the cross-border nature of goods, services, and currencies. For competitors, name two distinct types of market participants.

 

Question 4. What records are kept by Balance of Payment ?
Answer: The Balance of Payment is a system used to record all international money transactions for any country within a specific time period.
In simple words: The Balance of Payment keeps track of all money coming in and going out of a country because of international dealings.

🎯 Exam Tip: Highlight that the Balance of Payment is a *method* for *recording* all *international transactions* for a country.

 

Question 5. When does Balance of Trade show loss ?
Answer: The Balance of Trade shows a loss (or deficit) when the total value of goods imported by a country is more than the total value of goods it exports.
In simple words: A country has a trade loss when it buys more goods from other countries than it sells.

🎯 Exam Tip: Remember that Balance of Trade specifically refers to *goods*, not services, and a loss means imports exceed exports.

 

Question 6. When does Balance of Trade show surplus ?
Answer: The Balance of Trade shows a surplus when the total value of goods exported by a country is more than the total value of goods it imports.
In simple words: A country has a trade surplus when it sells more goods to other countries than it buys.

🎯 Exam Tip: Contrast "loss" with "surplus" by focusing on whether exports or imports are greater, and remember it applies only to goods.

 

Question 7. Write down the basic principle of ascertaining the exchange rate.
Answer: The basic principle for figuring out the exchange rate is to find the point where the demand for a country's currency equals its supply in the market. This is where the currency's value is set.
In simple words: The exchange rate is found when how much people want a currency matches how much of it is available.

🎯 Exam Tip: The core concept here is the interaction of demand and supply for a currency in the foreign exchange market.

 

Question 8. Who are the individuals due to whom foreign currency demand takes place ?
Answer: Foreign currencies are demanded by individuals who wish to import goods, pay for foreign services, or invest money in other countries.
In simple words: People need foreign money to buy things from other countries, use services there, or invest their money abroad.

🎯 Exam Tip: Focus on the three main reasons people would need to acquire another country's currency: buying, using services, and investing.

 

Question 10. What do you mean by Balance of Payment ?
Answer: The Balance of Payment is a broad economic record that includes all money transactions between a country and the rest of the world. It includes both visible items (goods) and invisible items (services and transfers).
In simple words: Balance of Payment is a full record of all money exchanges between one country and all other countries, covering goods, services, and gifts.

🎯 Exam Tip: Emphasize that Balance of Payment is a *wide concept* covering *both visible and invisible items*, unlike Balance of Trade.

 

Question 11. Which records are kept in the Capital Accounts ?
Answer: Capital Accounts record financial transactions involving a country's assets. All international transactions related to buying or selling assets, like investments and loans, are kept in this account.
In simple words: Capital Accounts track all international money movements related to a country's financial assets, such as investments and loans.

🎯 Exam Tip: Remember that Capital Accounts specifically deal with *financial transactions* and *assets*, distinct from goods and services.

 

Question 12. What do you mean by loss in current account ?
Answer: A loss in the current account (also called a current account deficit) means that a country's foreign payments for goods, services, and transfers are greater than its foreign receipts from these items.
In simple words: A current account loss means a country spends more foreign money than it earns from goods, services, and gifts.

🎯 Exam Tip: Clearly state that a loss implies foreign payments *exceed* foreign receipts in the current account.

 

Question 13. What is spot exchange rate ?
Answer: The spot exchange rate is the current rate at which one currency can be immediately exchanged for another in the market. It is the rate that applies to transactions happening right now.
In simple words: The spot exchange rate is the price of one money for another right now, for an immediate trade.

🎯 Exam Tip: The key idea of the spot exchange rate is "immediate" or "current" transaction, reflecting present market conditions.

 

Question 14. What do you mean by import and export ?
Answer: Import means buying goods and services from other countries and bringing them into one's own country. Export means selling goods and services to other countries and sending them out of one's own country.
In simple words: Import is buying from other countries, and export is selling to them.

🎯 Exam Tip: Differentiate clearly between "buying from" (import) and "selling to" (export) other countries.

 

Question 15. What do you mean by internal trade ?
Answer: Internal trade refers to the buying and selling of goods and services that happen entirely within the borders of a single country. This means transactions occur between people or businesses in the same nation.
In simple words: Internal trade is simply buying and selling things inside one country.

🎯 Exam Tip: The defining characteristic of internal trade is that it occurs *within the geographical boundaries* of a single nation.

 

Question 17. What is the effect on exchange rate by a change in banking rate ?
Answer: If bank interest rates increase, foreign investments become more attractive, leading to more foreign currency flowing into the country and a favorable exchange rate. If bank rates decrease, foreign investment reduces, making the exchange rate less favorable.
In simple words: Higher bank rates attract foreign money, making our currency stronger. Lower bank rates push foreign money away, making our currency weaker.

🎯 Exam Tip: Connect changes in bank rates directly to foreign investment flows, which then influence the supply and demand for foreign currency, impacting the exchange rate.

 

Question 18. What do you mean by exchange control ?
Answer: Exchange control refers to all the rules and limits set by a central bank (like RBI) and the government that affect the exchange rate or the currency markets. These controls are put in place to manage the flow of foreign money.
In simple words: Exchange control means a government or central bank sets rules to manage how its money is exchanged with foreign money.

🎯 Exam Tip: Specify that exchange control involves *restrictions* and is implemented by the *government and central bank* to influence exchange rates.

 

Question 19. What do mean by Dumping ?
Answer: Dumping is a trade practice where a company sells its products in a foreign market at a much lower price than it charges in its home market. This is a type of price discrimination.
In simple words: Dumping is when a country sells its products in another country for less money than it charges at home.

🎯 Exam Tip: The key aspects of dumping are selling in a *foreign market* at a *cheaper rate* than in the *domestic market*.

 

Question 20. What is shown by the third element, “error and omission”, of Balance of Payment?
Answer: The "error and omission" element in the Balance of Payment shows that it is impossible to perfectly record every single international transaction. It accounts for any mistakes or unrecorded transactions.
In simple words: "Error and omission" in the Balance of Payment means we cannot perfectly count every single money movement across borders.

🎯 Exam Tip: This element serves as an adjusting entry to ensure that the Balance of Payments always balances out, accounting for data collection imperfections.

 

Question 21. Explain the relation between demand of foreign currency and exchange rate.
Answer: There is an inverse relationship between the demand for foreign currency and its exchange rate. This means if the foreign currency's price (exchange rate) goes down, people will demand more of it. For example, if the US dollar becomes cheaper in India, Indian people will want to buy more US goods and services, increasing the demand for dollars.
In simple words: When foreign money becomes cheaper, people want to buy more of it. This makes the demand for foreign currency go up as its price goes down.

🎯 Exam Tip: Emphasize the "inverse" relationship and use a simple example to illustrate how a lower exchange rate for foreign currency increases its demand.

 

Question 22. What is shown by the downward slope of foreign exchange demand ?
Answer: The downward slope of the foreign exchange demand curve shows the inverse relationship between the exchange rate and the quantity of foreign currency demanded. This means that as the foreign currency becomes cheaper (lower exchange rate), people demand more of it.
In simple words: A downward-sloping demand curve for foreign money means people want more foreign money when its price is lower.

🎯 Exam Tip: Relate the downward slope directly to the inverse relationship between price (exchange rate) and quantity demanded.

 

Question 23. What is favorable balance of trade ?
Answer: A favorable Balance of Trade occurs when a country's total value of exports is greater than its total value of imports.
In simple words: A favorable balance of trade means a country sells more goods to other countries than it buys.

🎯 Exam Tip: Define "favorable" in terms of exports being greater than imports, and remember it applies only to trade in goods.

 

Question 24. Differentiate between Balance of Trade and Balance of Payment.
Answer: Balance of Trade only includes the value of a country's visible imports and exports (goods). In contrast, the Balance of Payment is a broader record that includes all foreign financial transactions, including both visible items (goods) and invisible items (services, transfers, investments).
In simple words: Balance of Trade only counts goods bought and sold, but Balance of Payment counts all money dealings with other countries, including goods, services, and investments.

🎯 Exam Tip: The key difference is scope: Balance of Trade is narrow (goods only), while Balance of Payment is wide (goods, services, capital transfers).

 

Question 25. Write two points of importance of Fixed Exchange Rate System.
Answer: Two important points about a Fixed Exchange Rate System are:
1. It reduces uncertainty, which helps increase international trade as businesses know what exchange rates to expect.
2. It encourages foreign investment because investors are less worried about currency value changes.
In simple words: A fixed exchange rate helps countries trade more easily by making currency values stable, and it also attracts more foreign investment because the risk is lower.

🎯 Exam Tip: Focus on stability and certainty as the main benefits of a fixed exchange rate system, leading to increased trade and investment.

 

Question 26. Write down one benefit of open economy.
Answer: One benefit of an open economy is that it offers consumers and investors a wider choice of goods, services, and investment opportunities from both domestic and foreign markets. This also increases competition, leading to better products and prices.
In simple words: An open economy gives people more choices of what to buy and where to invest, and it also makes businesses compete more, which is good for everyone.

🎯 Exam Tip: The primary advantage of an open economy is the expansion of *choices* and increased *competition*.

 

Question 27. Write down the features of Balance of Payment.
Answer: Here are two features of the Balance of Payment:
1. It includes all visible items (goods) and invisible items (services, transfers).
2. All receipts (money coming in) and payments (money going out) are recorded using a double-entry bookkeeping system.
In simple words: The Balance of Payment records all types of international money exchanges, like goods, services, and gifts, and it uses a special accounting method where every money movement is noted twice.

🎯 Exam Tip: Emphasize the inclusion of *both visible and invisible items* and the use of the *double-entry system* as key features.

 

Question 28. Comment in favour of Fixed Exchange Rate.
Answer: A fixed exchange rate system offers stability and certainty in international transactions, which helps reduce risks for importers and exporters. This predictability can encourage more international trade and investment. It prevents currency speculation that can destabilize markets.
In simple words: A fixed exchange rate is good because it makes international trade and investment more steady by removing currency value surprises and stopping people from guessing currency movements.

🎯 Exam Tip: Focus on stability, reduced risk, and discouragement of speculation as the main arguments for a fixed exchange rate.

 

Question 29. Comment in favour of fluctuating exchange rate.
Answer: A fluctuating (or flexible) exchange rate helps to naturally balance the exchange rate at an international level by reacting to market forces of demand and supply. This system also helps discourage speculation, as the constant movement makes it harder to predict currency changes for profit.
In simple words: A changing exchange rate helps money values find their natural level based on what people want and what is available. It also makes it harder for people to make money by betting on currency changes.

🎯 Exam Tip: The main benefits of a fluctuating exchange rate are its ability to self-correct based on market forces and its role in deterring destabilizing speculation.

 

Question 30. Write two reasons of obtaining foreign currency.
Answer: Two reasons for needing foreign currency are:
1. To pay for imports: A country needs foreign currency to buy goods and services from other nations.
2. To make international payments: This includes payments for things like foreign travel, education abroad, or sending money to relatives overseas.
In simple words: Countries need foreign money to buy things from other countries and to make payments for services or gifts abroad.

🎯 Exam Tip: Focus on the basic transactions that require foreign currency: buying things from abroad and making other payments across borders.

RBSE Class 12 Economics Chapter 24 Short Answer Type Questions (SA-II)

 

Question 1. What do you mean by open economy ? Mention any two types in which open economy extends your choice of selection.
Answer: An open economy is one where a country trades goods and services with other countries, meaning it's not closed off. This allows for global exchanges. Two ways an open economy gives you more choices are:
1. You can choose between buying goods made at home or goods imported from foreign countries.
2. Investors can choose to put their money into assets within their own country or in foreign countries.
In simple words: An open economy means a country trades with others. This gives people more choices for goods to buy and places to invest their money.

🎯 Exam Tip: Define an open economy by its international trade. For expanding choices, think about consumer goods and investment opportunities.

 

Question 2. What do you mean by flexible exchange rate ?
Answer: A flexible exchange rate is one that is determined by the natural forces of demand and supply in the foreign exchange market, without any interference from banks or government authorities. These rates are constantly changing based on market conditions.
In simple words: A flexible exchange rate is a money value that changes all the time, set by how much people want it and how much is available, not by the government.

🎯 Exam Tip: The core idea of a flexible exchange rate is that it is *market-determined* by *demand and supply*, with *no government intervention*.

 

Question 4. Mention the main functions of foreign exchange market.
Answer: The main functions of a foreign exchange market are:
1. Transferring purchasing power: It allows money to be moved easily between different countries for trade and investment.
2. Arranging credit: It helps arrange credit for international trade, making it smoother for businesses.
3. Risk management: It provides ways, like forward contracts, to reduce the risk of changes in exchange rates for future transactions.
In simple words: The foreign exchange market helps move money between countries, offers credit for trade, and helps businesses avoid big losses if currency values change.

🎯 Exam Tip: Focus on the three key roles: facilitating *transfer* of money, supporting *credit* for trade, and managing *risk* from currency fluctuations.

 

Question 5. Define foreign exchange rate.
Answer: Foreign exchange rate is the price of one country's currency expressed in terms of another country's currency. It tells you how much of one currency you need to buy one unit of another currency.
In simple words: The foreign exchange rate is how much one country's money is worth compared to another country's money.

🎯 Exam Tip: The definition must highlight the comparison: the *price of one currency* in terms of *another*.

 

Question 6. Differentiate between Balance of Trade and Balance of Payment.
Answer: The Balance of Trade is a narrower concept that only includes visible items (goods) traded between countries. The Balance of Payment, however, is a much wider concept that includes all international transactions, covering visible items (goods), invisible items (services, transfers), and capital account transactions (investments, loans).
In simple words: Balance of Trade only counts goods, while Balance of Payment counts everything—goods, services, and money movements for investments.

🎯 Exam Tip: Clearly state the scope difference: visible items for Balance of Trade, and all visible, invisible, and capital items for Balance of Payment.

 

Question 7. What do you mean by open economy ? How does our choice expand through open economy ? State two ways.
Answer: An open economy is an economic system where a country trades goods, services, and financial assets with other countries. It means there's mutual exchange across borders. Our choices expand in two main ways:
1. We get more options for goods and services: Consumers can choose between products made locally and those imported from other countries.
2. We get more investment options: Investors can choose to invest in assets within their own country or in foreign countries.
In simple words: An open economy means a country trades with others. This gives people more choices for things to buy and places to invest, both at home and abroad.

🎯 Exam Tip: Define an open economy by its cross-border trade of goods, services, and financial assets. For expanding choices, focus on consumer goods and investment opportunities.

 

Question 8. What are the two main parts of Balance of Payment ?
Answer: The Balance of Payment records all international transactions for a country over a specific time and is divided into two main parts:
1. Current Account
2. Capital Account
In simple words: The Balance of Payment is split into two main sections: the Current Account for daily money flows and the Capital Account for long-term investments.

🎯 Exam Tip: Remember these two main components are essential for understanding the overall Balance of Payment structure.

 

Question 9. Differentiate between open economy and closed economy.
Answer: Here are the key differences between an open economy and a closed economy:
Open Economy:
1. Has trade relations with other countries.
2. Offers more opportunities for development and growth.
3. Domestic income and national income can be different.
Closed Economy:
1. Has no trade relations with other countries.
2. Has fewer opportunities for development.
3. Domestic income and national income are the same.
In simple words: An open economy trades with other countries, grows more, and its local income can differ from the national income. A closed economy does not trade, grows less, and its local income is the same as the national income.

🎯 Exam Tip: The fundamental difference lies in *trade relations* with the outside world. This impacts development opportunities and the relationship between domestic and national income.

 

Question 10. What do you mean by current account ?
Answer: The Current Account is a part of the Balance of Payment that records all payments made and received for visible goods, invisible services, and one-sided transfers (like gifts) within a specific time period. Its largest parts are imports and exports.
In simple words: The Current Account tracks all everyday international money movements, including buying and selling goods, services, and receiving or giving gifts.

🎯 Exam Tip: Emphasize that the Current Account covers *goods, services, and transfers* and is a major component of the Balance of Payment.

 

Question 11. What do you mean by capital account ?
Answer: The Capital Account is a part of the Balance of Payment that records all international transactions involving financial assets. This includes movements of investment funds, loans, and changes in a country's foreign reserves.
In simple words: The Capital Account records all international money flows related to investments, loans, and other financial assets.

🎯 Exam Tip: Differentiate the Capital Account by its focus on *financial assets* and *investment-related flows* rather than day-to-day trade.

 

Question 12. Explain fixed exchange rate system. State two benefits of fixed exchange rate system.
Answer: A fixed exchange rate system is when a country's central bank sets and maintains the exchange rate of its currency at a specific value against another currency or a basket of currencies. Two benefits of this system are:
1. It helps international trade grow because businesses face less uncertainty about currency values.
2. It encourages foreign investment by providing a stable currency environment, reducing risk for investors.
In simple words: A fixed exchange rate means a country's money value is set and kept steady by its central bank. This helps increase international trade and foreign investments because things are more predictable.

🎯 Exam Tip: Define the system as *government-fixed* and highlight *stability leading to increased trade and investment* as key benefits.

 

Question 13. What is flexible exchange rate system ?
Answer: A flexible exchange rate system is where the value of a currency is determined purely by the forces of demand and supply in the foreign exchange market, without any government intervention. It is also known as a "free exchange rate" because market dynamics alone set the rate.
In simple words: A flexible exchange rate is one where the value of money goes up and down freely, based on how much people want it and how much is available, with no government control.

🎯 Exam Tip: Emphasize "market-determined" by "demand and supply" and "no government intervention" for a clear definition.

 

Question 14. Mention the benefits of flexible exchange rate.
Answer: Here are three benefits of a flexible exchange rate system:
1. It means the central bank doesn't need to spend money to keep foreign exchange reserves at a certain level.
2. It removes barriers that might stop international trade and capital from moving freely between countries.
3. It helps countries avoid problems like devaluation (lowering currency value) or revaluation (raising currency value) through government policies.
In simple words: A flexible exchange rate saves the central bank money, makes international trade and investment smoother, and helps avoid sudden government changes to currency values.

🎯 Exam Tip: Focus on the advantages related to resource allocation (no reserves needed), market freedom, and automatic adjustment without policy intervention.

 

Question 15. What do you mean by Managed Floating ?
Answer: Managed floating is a type of exchange rate system where the currency's value is generally allowed to float and be determined by market forces. However, the central bank may occasionally intervene to stabilize the currency or influence its value, preventing extreme fluctuations.
In simple words: Managed floating means a country's money value usually floats freely, but the central bank steps in sometimes to stop big ups and downs.

🎯 Exam Tip: The key idea of managed floating is a *combination* of market determination with *occasional central bank intervention* to smooth volatility.

 

Question 16. What are the main sources of demand for foreign exchange ?
Answer: The main reasons people demand foreign exchange are:
1. To buy foreign assets: If people want to purchase land, houses, shares, or bonds in other countries, they need foreign currency.
2. To import from abroad: When people or businesses want to buy goods and services from other countries, they need to pay in foreign currency.
In simple words: People need foreign money to buy things like property or stocks in other countries, and to buy goods or services from abroad.

🎯 Exam Tip: Remember the two primary drivers for foreign exchange demand: *investing in foreign assets* and *importing foreign goods/services*.

 

Question 17. Mention the main sources of foreign exchange supply.
Answer: The main sources of foreign exchange supply are:
1. Export of goods and services: When a country sells goods and services to other countries, it receives foreign currency.
2. Foreign Direct Investment (FDI): Foreign companies investing in a country bring in foreign currency.
3. Income from foreigners' assets: Foreigners buying assets or investing in the country bring in foreign currency.
4. Subsidies and gifts from other countries: Financial aid or gifts from abroad increase the supply of foreign currency.
In simple words: Foreign money comes into a country mainly from selling goods and services to other countries, foreign companies investing here, earnings from foreigners' assets, and international aid or gifts.

🎯 Exam Tip: Consider the opposite of demand: *exports*, *foreign investments into the country*, and *foreign aid/gifts* are key sources of supply.

 

Question 18. Explain the meaning of Balance of Payment.
Answer: The Balance of Payment (BOP) is a complete record of all economic transactions between a country and the rest of the world over a specific financial year. It tracks money flowing in (receipts) and money flowing out (payments) due to international trade, services, and investments.
In simple words: Balance of Payment is like a financial diary that records all the money exchanges a country has with other countries in a year.

🎯 Exam Tip: Define BOP as a *systematic record* of *all economic transactions* between a country and the *rest of the world* over a *year*.

 

Question 19. Mention the main elements of Current Account.
Answer: The main parts of the Current Account are:
1. Visible trade: This includes all physical goods that are bought and sold internationally.
2. Invisible trade: This covers the trade of services, such as banking, insurance, and tourism.
3. Current transfer payments: These are one-sided transactions like foreign gifts, donations, or grants, where no direct repayment is expected.
In simple words: The Current Account includes trade of physical goods, trade of services like banking, and one-way money transfers like gifts.

🎯 Exam Tip: Categorize the Current Account items into *visible goods*, *invisible services*, and *one-sided transfers*.

 

Question 21. What do you mean by Balance of Trade ?
Answer: The Balance of Trade refers to the total value of visible goods (physical items) that a country imports and exports within one financial year. It systematically records these transactions, but it does not include invisible items like services.
In simple words: Balance of Trade measures only the value of physical goods a country buys from and sells to other countries in a year.

🎯 Exam Tip: Specify that Balance of Trade deals *only* with *visible items* (goods) and focuses on their import and export values.

 

Question 22. What is Current Account balance ?
Answer: The Current Account balance represents the net outcome of all current transactions, including visible goods exports and imports, invisible services exports and imports, and one-sided transfers. It's calculated as (Visible Exports + Invisible Exports) - (Visible Imports + Invisible Imports).
In simple words: The Current Account balance shows if a country earns more or less money overall from trading goods and services and receiving or giving gifts internationally.

🎯 Exam Tip: Remember the formula for Current Account balance includes both visible and invisible trade, plus transfers.

 

Question 23. Explain Capital Account balance.
Answer: The Capital Account balance reflects the net change in a country's foreign assets and liabilities. It records the international sale and purchase of monetary assets, like stocks, bonds, and real estate. The balance is found by subtracting expenses from buying foreign assets from the income earned by selling domestic assets to foreigners.
In simple words: The Capital Account balance shows how much a country earns from selling its assets (like land or shares) to foreigners versus how much it spends buying assets in other countries.

🎯 Exam Tip: Focus on the Capital Account's role in tracking *monetary assets* and how its balance is derived from the net flow of these assets.

 

Question 25. What is meant by currency depreciation ?
Answer: Currency depreciation means a fall in the value of a country's currency relative to foreign currencies in a flexible exchange rate system. For example, if you needed Rs 50 for one US dollar before and now you need Rs 60, the Indian rupee has depreciated.
In simple words: Currency depreciation is when your money becomes worth less compared to foreign money, making foreign goods more expensive for you.

🎯 Exam Tip: Clearly link depreciation to a *fall in value* in a *flexible exchange rate system* and contrast it with devaluation (government action).

 

Question 26. What is the effect of Balance of Payment on foreign exchange reserve ?
Answer: If a country has an unfavorable (deficit) Balance of Payment, its foreign exchange reserves will decrease because more foreign currency is leaving than entering. Conversely, a favorable (surplus) Balance of Payment will increase its foreign exchange reserves.
In simple words: If a country's Balance of Payment is bad, it loses foreign money reserves. If it's good, it gains foreign money reserves.

🎯 Exam Tip: Directly connect a BOP deficit/surplus to a decrease/increase in *foreign exchange reserves*.

 

Question 27. Why does supply of foreign currency increase due to the increase in foreign exchange rate ?
Answer: When the foreign exchange rate increases, it means a foreign currency becomes more expensive for domestic buyers. This makes the domestic goods and services cheaper for foreign buyers, boosting exports and thus increasing the supply of foreign currency in the domestic market.
In simple words: If foreign money gets more expensive, it means our goods look cheaper to foreigners. So, they buy more from us, and we get more foreign money.

🎯 Exam Tip: Explain the chain reaction: higher foreign exchange rate makes domestic goods cheaper for foreigners, boosting exports, and thus increasing foreign currency supply.

 

Question 28. When foreign currencies rate declines its demand increases. Comment.
Answer: This statement is true because there is an inverse relationship between the exchange rate and the demand for foreign currency. If a foreign currency's rate declines (becomes cheaper), domestic buyers can purchase more foreign goods and services for the same amount of their own currency. This increased purchasing power leads to a higher demand for that foreign currency. For example, if 1 Euro costs less in Indian Rupees, Indians will buy more European goods, increasing the demand for Euros.
In simple words: When foreign money gets cheaper, people want to buy more of it because their own money can buy more things from abroad.

🎯 Exam Tip: Confirm the inverse relationship and illustrate with an example showing how a cheaper foreign currency increases demand for foreign goods/services, thereby increasing demand for the foreign currency itself.

RBSE Class 12 Economics Chapter 24 Essay Type Questions

 

Question 1. Explain the factors which influence the foreign exchange rate.
Answer: Several factors can influence the foreign exchange rate:
(i) Import & Export: If a country imports more than it exports, the demand for foreign currency increases, which tends to raise the foreign exchange rate (making the domestic currency weaker). If exports exceed imports, the supply of foreign currency increases, which can lower the foreign exchange rate.
(ii) Sale and purchase of shares, and bonds: When people in one country buy shares or bonds in foreign countries, it increases the demand for foreign currency and weakens the domestic currency. Conversely, foreigners buying domestic shares or bonds will increase the supply of foreign currency, strengthening the domestic currency.
(iii) Bank rates: Higher interest rates (bank rates) in a country can attract foreign investment, increasing the supply of foreign currency and potentially lowering the exchange rate (strengthening the domestic currency). Lower bank rates can have the opposite effect.
(iv) Speculation: If speculators expect a foreign currency's value to rise in the future, they will buy it now, increasing demand and pushing the exchange rate up. If they expect it to fall, they will sell, increasing supply and pushing the exchange rate down.
(v) Inflation and Deflation: During inflation, a country's goods become more expensive, reducing exports and increasing imports. This increases the demand for foreign currency, weakening the domestic currency. During deflation, the opposite tends to happen, strengthening the domestic currency.
In simple words: Many things change foreign money values: how much we buy and sell internationally, investing in other countries, interest rates, guesses about future values, and whether prices are going up or down in a country.

🎯 Exam Tip: List and briefly explain each factor clearly, showing how it impacts demand or supply of foreign currency and, consequently, the exchange rate.

 

Question 2. Define Balance of Payment. Explain the main items of balance of payment.
Answer: The Balance of Payment (BOP) is a systematic record of all monetary transactions between a country and the rest of the world during a specific period, usually one year. It acts as an accounting statement that summarizes all international economic dealings.
The main items of the Balance of Payment are:
(a) Current Account:
    (i) Export and import of commodities: This includes the value of visible goods (like cars, clothes, food) that are exported or imported. Gold and silver trade are also part of this.
    (ii) Export and import of services: This covers invisible trade, such as banking, insurance, shipping, and tourism services exchanged with other countries.
    (iii) Income from investments and compensation: This includes income earned by residents from investments abroad (like interest, dividends, profits) and compensation paid to foreign workers.
    (iv) Current transfer payments: These are one-sided transfers like gifts, grants, donations, and remittances (money sent by workers abroad) that don't require any return payment.
(b) Capital Account:
    (i) Foreign investment: This includes foreign direct investment (FDI), where foreigners invest in physical assets like factories, and portfolio investment, where they buy shares or bonds.
    (ii) External borrowings and lending: This covers all loans taken from foreign countries or given to foreign countries.
    (iii) Changes in foreign exchange reserves: This accounts for the country's central bank's purchases or sales of foreign currencies to influence the exchange rate.
In simple words: The Balance of Payment is a yearly record of all money exchanges between a country and the world. It has two main parts: the Current Account, which tracks goods, services, and gifts; and the Capital Account, which tracks investments, loans, and how much foreign money the central bank holds.

🎯 Exam Tip: Provide a clear definition of BOP, then systematically list and briefly explain the components under both the Current and Capital Accounts, differentiating visible and invisible trade.

 

Question 3. Define exchange rate. Explain favourable and unfavourable exchange rate.
Answer: The exchange rate is the price of one country's currency in terms of another currency. It shows how many units of one currency are needed to buy a single unit of another currency. It is generally determined by the supply and demand for foreign exchange.
Favorable and unfavorable exchange rates:
- A **favorable exchange rate** for a country means its currency can buy more foreign currency than before. For example, if 1 US dollar used to cost Rs 70 and now costs Rs 50, it's favorable for India because Indians can buy US goods cheaper.
- An **unfavorable exchange rate** means a country's currency can buy less foreign currency than before. Using the same example, if 1 US dollar used to cost Rs 70 and now costs Rs 90, it's unfavorable for India because Indians have to pay more for US goods.
The concept of favorable/unfavorable depends on the perspective of the country concerned.
In simple words: The exchange rate is the price of one country's money against another. A good exchange rate means your money buys more foreign money; a bad one means your money buys less foreign money.

🎯 Exam Tip: Start with a clear definition of the exchange rate. Then, use a simple, consistent example with numbers to illustrate both favorable and unfavorable scenarios from a specific country's perspective.

 

Question 4. Define foriegn exchange rate. How foreign exchange rate is determined in an independent market ?
Answer: The mutual price of currencies, expressed in terms of each other, is called the foreign exchange rate. For example, if you need to pay Rs. 50 to buy one US dollar, then the exchange rate is \( \$1 = \text{Rs. } 50 \), or \( 1 = \frac { 1 }{ 50 } \) Dollar, which is 2 cents. This rate shows how much one country's currency is worth compared to another country's currency.
According to Crowther, "The rate of exchange measures the number of units of one currency which are exchanged in the foreign market for one unit of another."

In an independent market, the foreign exchange rate is decided by the forces of demand and supply. This process can be understood with graphs.

Demand for foreign currency: Foreign currencies are needed by people who want to:
1. Buy goods from other countries.
2. Pay for services from foreign countries.
3. Invest money in foreign countries.

The demand curve for foreign exchange (DD) slopes downwards, showing that as the exchange rate decreases (e.g., from OR to OR₁), the demand for foreign exchange increases (e.g., from OM to OM₁).


Supply of foreign currency: The supply of foreign currency mainly comes from exports. When foreigners buy our goods and services, they pay in their currency, which increases our foreign exchange reserves.


If the foreign demand for a country's exports is very elastic (more than one), then the foreign exchange supply curve will slope upwards from left to right (S to S₁). If demand is unit elastic (one), the supply curve will be a vertical line. If demand is inelastic (less than one), the supply curve will slope downwards.

The foreign exchange rate is determined where the demand and supply curves for foreign exchange meet, creating an equilibrium point.


In this figure, the equilibrium point is where the demand and supply for foreign exchange meet. For example, point P shows the equilibrium where demand (D) and supply (S) meet, setting the exchange rate at OR and quantity at OM₁. If the demand for foreign currency does not change (stays on D) and supply increases (shifts to S₁), the exchange rate will fall to OR₁. Conversely, if supply stays constant (S) and demand increases (shifts to D₁), the exchange rate will rise to OR₂.
This way, changes in exchange rates affect demand and supply. Many other economic factors also play a role, such as the volume of imports and exports, capital flows between countries, bank rates, and global economic or political conditions.
In simple words: Foreign exchange rate is the price of one currency in relation to another. It is decided by how much foreign currency people want to buy (demand) and how much is available (supply) in the market. Many things like trade, investments, and government policies can change these rates.

🎯 Exam Tip: When explaining exchange rate determination, always define what it is first. Then, separately discuss demand and supply, illustrating with simple diagrams, before combining them to show equilibrium. Also, mention other factors that influence the exchange rate for a complete answer.

RBSE Class 12 Economics Chapter 24 Numerical Questions

 

Question 1. Prove using the following information, that open economy multiplier is less than closed economy multiplier. Consumption (C) = 0.75 Marginal propensity to import (M) = 0.25
Answer:
For a closed economy:
Closed economy multiplier \( = \frac { 1 }{ 1-C } \)
\( = \frac { 1 }{ 1-0.75 } \)
\( = \frac { 1 }{ 0.25 } = 4 \)

For an open economy:
Open economy multiplier \( = \frac { 1 }{ 1-C+M } \)
\( = \frac { 1 }{ 1-0.75+0.25 } \)
\( = \frac { 1 }{ 0.5 } = 2 \)

Since \( 2 < 4 \), it is proven that the open economy multiplier (2) is less than the closed economy multiplier (4).
In simple words: The multiplier for an open economy is smaller than for a closed economy. This is because in an open economy, some money leaves the country through imports, which reduces the multiplying effect within the economy.

🎯 Exam Tip: Remember the formulas for both closed and open economy multipliers. Pay attention to whether the marginal propensity to import (M) is included, as it's the key difference between the two.

 

Question 3. One country's export is Rs. 7,000 crore and import is Rs. 9,000 crore. Calculate its balance of trade and mention its nature.
Answer:
Balance of trade \( = \) Export \( - \) Import
Balance of trade \( = \text{Rs. } 7,000 \text{ crore} - \text{Rs. } 9,000 \text{ crore} \)
Balance of trade \( = \text{Rs. } -2,000 \text{ crore} \)

The nature of this balance of trade is a deficit, as imports are greater than exports, resulting in a negative balance.
In simple words: When a country buys more goods from other countries than it sells, it has a trade deficit. Here, the country imported goods worth Rs. 9,000 crore and exported only Rs. 7,000 crore, leading to a deficit of Rs. 2,000 crore.

🎯 Exam Tip: Always use the formula: Balance of Trade = Exports - Imports. A negative result means a trade deficit, while a positive result means a trade surplus.

 

Question 4. Balance of trade deficit of one country is Rs. 5,000 crore. If the value of imports is Rs. 9,000 crore, calculate the value of export.
Answer:
We know that:
Balance of trade \( = \) Export \( - \) Import
Since it's a deficit, the balance of trade is \( - \text{Rs. } 5,000 \text{ crore} \).
\( - \text{Rs. } 5,000 \text{ crore} = \text{Export} - \text{Rs. } 9,000 \text{ crore} \)
Rearranging the equation to find Export:
Export \( = \text{Rs. } 9,000 \text{ crore} - \text{Rs. } 5,000 \text{ crore} \)
Export \( = \text{Rs. } 4,000 \text{ crore} \)

Thus, the value of exports is Rs. 4,000 crore.
In simple words: To find out how much a country exported when it has a trade deficit, you take the total imports and subtract the deficit amount.

🎯 Exam Tip: When given a deficit, remember to treat the balance of trade value as negative in your calculation. Clearly label your final answer with the correct unit (e.g., Rs. crore).

 

Question 5. Balance of trade deficit of one country is Rs. 4,000 crore. If the value of export is Rs. 13,000 crore, calculate the value of imports.
Answer:
We know that:
Balance of trade \( = \) Export \( - \) Import
Since it's a deficit, the balance of trade is \( - \text{Rs. } 4,000 \text{ crore} \).
\( - \text{Rs. } 4,000 \text{ crore} = \text{Rs. } 13,000 \text{ crore} - \text{Import} \)
Rearranging the equation to find Import:
Import \( = \text{Rs. } 13,000 \text{ crore} + \text{Rs. } 4,000 \text{ crore} \)
Import \( = \text{Rs. } 17,000 \text{ crore} \)

Thus, the value of imports is Rs. 17,000 crore.
In simple words: If a country has a trade deficit and you know how much it exported, you can find its imports by adding the deficit amount to the exports.

🎯 Exam Tip: Always set up the formula correctly, ensuring the deficit is represented as a negative value. Be careful with rearranging terms to avoid algebraic errors.

 

Question 7. Surplus of balance of trade of one country is Rs. 800 crore. If the value of imports is Rs. 9,000 crore, calculate the value of export.
Answer:
We know that:
Balance of trade \( = \) Export \( - \) Import
Since it's a surplus, the balance of trade is \( + \text{Rs. } 800 \text{ crore} \).
\( \text{Rs. } 800 \text{ crore} = \text{Export} - \text{Rs. } 9,000 \text{ crore} \)
Rearranging the equation to find Export:
Export \( = \text{Rs. } 800 \text{ crore} + \text{Rs. } 9,000 \text{ crore} \)
Export \( = \text{Rs. } 9,800 \text{ crore} \)

Thus, the value of exports is Rs. 9,800 crore.
In simple words: When a country has a trade surplus, it means exports were more than imports. To find the exports, just add the surplus amount to the total imports.

🎯 Exam Tip: A trade surplus indicates a positive balance. Ensure you add the surplus to imports to find the total exports, as exports must be higher than imports in this scenario.

 

Question 8. Calculate the value of imports when the balance of trade is (-) Rs. 800 crore and the value of exports is Rs. 500 crore.
Answer:
We know that:
Balance of trade \( = \) Export \( - \) Import
Given the balance of trade is \( - \text{Rs. } 800 \text{ crore} \):
\( - \text{Rs. } 800 \text{ crore} = \text{Rs. } 500 \text{ crore} - \text{Import} \)
Rearranging the equation to find Import:
Import \( = \text{Rs. } 500 \text{ crore} + \text{Rs. } 800 \text{ crore} \)
Import \( = \text{Rs. } 1,300 \text{ crore} \)

Thus, the value of imports is Rs. 1,300 crore.
In simple words: If a country has a deficit, you can find how much it imported by adding the export value to the deficit amount (treating the deficit as a positive value for this addition).

🎯 Exam Tip: Be careful with the signs when dealing with deficit. A negative balance of trade (deficit) means imports exceeded exports. Always use the formula and solve for the unknown term algebraically.

 

Question 9. Calculate the balance of Current Account from the following:
Items
(i) Export of goods
(ii) Export of services
(iii) Balance of visible trade
(iv) Transfer of 5 crore from one cuountry to another
Amount
80 crore
25 crore
40 crore
5 crore
Answer:
The Current Account balance includes the balance of visible trade (goods), invisible trade (services), and one-sided transfers (gifts or remittances).

Balance of Current Account \( = \) Balance of visible trade \( + \) Export of services \( + \) Transfer of money from one country to another
Balance of Current Account \( = \text{Rs. } 40 \text{ crore} + \text{Rs. } 25 \text{ crore} + \text{Rs. } 5 \text{ crore} \)
Balance of Current Account \( = \text{Rs. } 70 \text{ crore} \)

Thus, the balance of the Current Account is Rs. 70 crore.
In simple words: The Current Account adds up the net income from trading goods, trading services, and money received as gifts or aid. We add the balance from visible trade, the exports of services, and any money received as transfers.

🎯 Exam Tip: Remember that the Current Account broadly covers transactions in goods, services, income, and current transfers. Ensure you correctly identify which items are inflows (positive) and which are outflows (negative) for a precise calculation.

 

Question. Calculate the balance of Balance of Payment account. Is the total balance of payment balanced ?
Items
(i) Capital Account Balance
(ii) Value of imports
(iii) Value of exports
(iv) One-sided transfer
(v) Balance of visible trade
Amount (Rs)
(-) 400 crore
150 crore
450 crore
100 crore
200 crore
Answer:
The Balance of Payment (BoP) is the sum of the current account balance and the capital account balance. The current account includes visible trade (exports - imports of goods) and one-sided transfers.

Balance of Payment account \( = \) Value of exports \( - \) Value of imports \( + \) One-sided transfers \( + \) Capital Account Balance
Balance of Payment account \( = \text{Rs. } 450 \text{ crore} - \text{Rs. } 150 \text{ crore} + \text{Rs. } 100 \text{ crore} + (-\text{Rs. } 400 \text{ crore}) \)
Balance of Payment account \( = \text{Rs. } 300 \text{ crore} + \text{Rs. } 100 \text{ crore} - \text{Rs. } 400 \text{ crore} \)
Balance of Payment account \( = \text{Rs. } 400 \text{ crore} - \text{Rs. } 400 \text{ crore} \)
Balance of Payment account \( = \text{Rs. } 0 \text{ crore} \)

Yes, the Balance of Payment is balanced because the total balance is zero.
In simple words: The Balance of Payment combines a country's trade in goods and services (current account) with its financial flows (capital account). Here, after adding up all the exports, imports, transfers, and capital movements, the final balance is zero, meaning the country's international accounts are balanced.

🎯 Exam Tip: Remember that the Balance of Payment (BoP) must always theoretically balance to zero because every international transaction creates an equal and opposite entry. If your calculation doesn't yield zero, double-check your figures and signs.