1-6 lflfgto hternational Ecanomics (Bus. Eco.-Vl) (T.Y.B.Com.) (Sem.

- Vl)

2. have explained the basis of intemational trade in terms of factor endowments.

3. are determined by factor's supply and demand.
4. takes place because of the factor price differences in the two countries.
[Ans. (1) - David Ricardo; (2) - Heckscher and Ohlin; (3) - Factor prices;
(4)
- Cost differencesl

B. Choose the correct answer:

1. The theory of comparative cost advantage theory was given by
a) Alfred Marshall b) David Ricardo
c) Taussig d) Haberler
2. The Ricardo's comparative cost theory is based on which of the following assumption
a) No transport cost b) Full employment equilibrium
c) Free Trade d) All of these
3. Which of the following is not the assumption of Ricardo's comparative cost theory?
a) Labour is perfectly mobile within a country
b) Technology is constant
c) Labour is homogeneous
d) Two countries exchanging more than two commodities
4. Which of these are the limitation of Ricardo's comparative cost theory?
a) One-sided theory
b) Unrealistic assumption of perfectly mobility
c) Restrictive model
d) All of these
5. Factor endowment theory of international trade was developed by
a) Adam Smith b) David Ricardo
c) Heckscher and Ohlin d)
Alfred Marshal
6. Heckscher Ohlin theory is based on which of the following assumption
a) Two countries b) Two goqds
c) Two factors d) All of these
7. Which of these are the limitation of Heckscher - Ohlin theory?
a) Simplification
Over b) Partial equilibrium
Both (a) and (b)
c) d) None of these
8. In Heckscher - Ohlin theory if international trade, the most important source of
difference in relative commodity prices between nations is a difference in a factor
endowments.
a) Factor endowments b) Technology
c) Tastes d) Demand conditions
9. Hecksher - ohlin theory of international trade is known ds, _ theory of
international trade.
a) Classical b) Opportunity cost
c) Modern d) None of these
Theories of lntunational Traile f;o3o11o L7

10' According to Hecksher - ohlin theory, product price depends on

a) Factor intensity b) Factor abundance
c) Both (a) and (b) d) None of these
11. According to H-O theory, the international trade takes place due to the difference in

a) supply
Factor b) Technology
c) Capital formation d) All of the above
[Ans.: (1 - b); (2 - d); (3 - d); (a - d); (5 - c); (6 - d); (z - c); (8 - a);
(9 - c); (10 - c); (11 - d)I

C. State whether the following statements are True or False :

1. Ricardo's comparative cost theory has no limitation .

2. According to Ricardo, it is the comparative cost advantage which lies at the root of
specialisation and trade.
3. Two countries and two commodities is the sole assumption of Ricardo's comparative
cost theory.
4. According to Adam Smith, if there is an absolute cost difference, a country will
specialise in the production of a commodity having an absolute advantage.
5. Trade will not take place in case of proportional cost differences.
6. Ricardo's doctrine of international trade is not applicable to underdeveloped
countries.
7. There is absent of transport cost in Heckscher - Ohlin theory.
8. The H- O theory consist of only price criterion of relative factor endowments.
9. The H - O theory is one-sided theory.
10. The modern theory of international trade supplements but does not supplant the
classical theory of international trade.
11. Heckscher - Ohlin theory neglects demand conditions.
12. Hecksher - Ohlin theory is also based on unrealistic assumption.
[Ans.: True : 2, 4,5, 6,?,9, 70, 11.,12 False : ]., 3, I ]

rffs
28 T"r"rf International Economics (Bus. Eco.-VI) (T.Y.B.Com,) (Sem. -Vl)
MODEL QUESTTONS
1. What is meant by terms of trade? Explain the various types of terms of trade
2. Explain in detail the concept of net barter terms of trade.
3. Explain the concept of gross barter terms of trade with limitations.
4. Explain in the concept of income terms of trade with limitations
5. Discuss Jacob Viner concepts of terms of trade.
6. Discuss single factoral and double factoral terms of trade with limitation.
7. Discuss net and gross barter terms of trade with limitation.
8. Distinguish between :

a) Net Barter Terms of Trade and Gross Barter Terms of Trade

b) Single Factoral Terms of Trade and Double Factoral Terms of Trade
c) Real cost Terms of Trade and Utility Terms of Trade
9. Write short notes :

i) Net barter terms of trade

ii) Gross barter terms of trade
iii) Income terms of trade
iv) Single Vs Double factoral tems of trade
v) Real cost Vs Utility terms of trade
vi) Types of terms of trade

oBJECTTVE QUESTTONS
A. Fill in the blanks:
1. expresses the relationship between the export prices and import prices of a
country.
2. Net barter terms of trade is also known as _.
3. concept is an improvement over the real cost terms of trade.
4. Prof. Taussig introduced the concept of _ barter terms of trade.
5. Prof. Robertson calls utility terms of trade index as the
[Ans. (1) - Terms of trade; (2) - commodity terms of trade; (3) - The utility terms of
trade; (4) - Gross; (5) - true terms of trade]

B. Choose the correct anslver:

1. Commodity terms of trade is also known as _.
a) Gross barter terms of trade b) Net barter terms of trade
c) Income terms of trade d) Utility terms of trade
2. Gross Barter terms of trade is symbolically expressed as _.
.Px
a)
^\
m b) ff.r*
c),Qm
A;
-. pfr'Fx.RxU
d) Px
Termsof Traile cff 29

3. The concept of income terms of trade is given by _.

a) Prof.Taussig b) Prof. Viner
c) G.S. Dorrance d) None of the above
4. has introduced the concept of single factoral terms of trade.
a) Jacob
Prof. Viner b) Prof. Taussig
c) G.S. Dorrance d) Prof. Ohlin
5. Prof. Viner has introduced the following concepts of terms of trade.
a) Single Factoral terms of trade b) Real cost terms of trade
c) Utility terms of trade d) All of the above
6. refer as the index of the value of exports divided by the price index for imports.
a) Gross barter term of trade
b) Income terms of trade
c) Net barter terms of trade
d) Utility terms of trade
7. The rate at which one country's product exchange for those of the other is referred as

a) Terms of trade
b) Internal trade
c) International trade
d) None of the above
8. Terms of trade expresses the relationship between
a) Export and import b) Demand and supply
price d) -.
c) Export price and import None of these
9 Tvoes of terms of trade include
a) Net barter term of trade
b) Gross barter terms of trade
c) Income terms of trade
d) All of the above
10. introduced the concept of gross barter terms of trade.
a) Adam Smith b) Alfred Marshall
c) Taussig d) David Ricardo
lAns. (1 -b); (2 - c); (3 - c); (4 - a); (5 - d); (6 -b); (7 - a); (8 - c); (e - d);
(10 - c)l

C. State whether the following statements are True or False:

1. If the import prices is greater than the export prices terms of trade are favourable to
the country.
2. Net barter terms of trade is the ratio between the prices of imports to the price of
exports.
38 ffrr lnternational Economics Bus. Eco.-Vl) (T.Y.B.Com.) (Sem. -VI)
oBJECTM QUESTIONS
A. Fill in the blanks:
1. of a country reveals its offer of export against its demand for imports.
2. Offer curves are also known as
3. Offer curve is a typical curve.
-.
[Ans. (1) - Offer curve; (2) - reciprocal demand curve; (3) - demand]

B. Choose the correct answer:

1. Offer curve reoresent demand.
a) Horizontal c) Reciprocal
b) Vertical d) None of these
2. The offer curve of a country reveals its offer of against its demand for imports.
a) price b) demand
c) exports None- of these
d)
3. had put forward the technique of offer curve.
a) Marshall and Edgeworth b) J.S. Mill
c) David Ricardo d) None of these
4. According to ]. S. Mill, equilibrium terms of trade is determined by demand.
a) Market b) Aggregate
c) Reciprocal d) Effective
5. Gains from international trade leads to _.
a) expansion of market b) increase in national income
c) world welfare d) all of these
6. Reciprocal demand is expressed in terms of _ .
a) demand curve b) offer curve
c) supply curve d) all the above
lAns. (1 - c); (2 - c); (3 - a); (4 - c); (5 - d); (6 - b)I

C. State whether the following statements are True or False :

1. The offer curve of a country is based on the relative price of two commodities.
2. The price ratio curve has a limit beyond which the offer curve cannot go.
3. The intersecting point of two demand curves determines the terms of trade called
gross barter terms of trade.
4. Shift in the terms of trade takes place when there is a change in the offer curve of any
country.
5. The offer curve is a typical demand curve.
6. The two offer curves are called the reciprocal demand curves of the two countries.
7. The equilibrium terms of trade must fall with the domestic cost ratio.
8. Gains from trade are possible when the cost ratios of the trading countries are
different.
9. International trade brings in many dynamic gains.
[Ans. True : L,2, 4, 5, 6,7,8, 9 False : 3 ]

Irff
46 lnternational Economics Gu* Eco.-VI) (T.Y.B.Com) (Sem. -Vl)
f0f0j,
4. Distinguish between free trade and Protection.
5. "Both free trade and protection have their virtues and vices" Discuss.
6. Discuss the arguments advanced in support of free trade. Would you suPPort the
policy of free trade for developing countries.
7. On what grounds can the poliry of protection be defended.
8. Write short notes on:
i) Free trade v/s Protection
ii) Pros and cons of free trade
iii) Pros and cons of protection
iv) Commercial Policy (Trade policy)

oBIECTTVE QUESTTONS
A. Choose the correct answer
1. Commercial oolicv is also refer as
a) trade policy b) international trade policy
c) both a) and b) d) none of these
2. The objective of commercial poliry is / are
a) increase trade relation b) protect domestic market
c) restrict import of goods d) All of the above
3. Free trade policy is absence of
a) tariffs b) quotas
c) exchange control d) All of the above
4. Under free trade benefit more.
a) consumer b) agents
c) middlemen d) None of these
5. Under free trade will be higher.
a) wages b) interest
c) rent d) all of the above
6. Free trade is based on the principle of _ .

a) Comparative cost advantage

b) Comparativedisadvantage
c) Productionpossibilityadvantage
d) None of these
7. Which of the following is not an argument for protectionism
a) to protect infant industries
b) to increase the level of imports
c) to protect small industries
d) to improve the balance of payments
CommercialPolicy ff$ 47

8. A tariffis a tax on_

a) domestic goods and services
b) foreign goods and services
c) quality of goods
d) None of the above
9. Protectionism
a) increase the quality of imports
b) decrease the government revenue
c) increase the- govemment earnings from tax
d) All of the above
10. Which of the following is an argument far free trade
a) prevents monopolies
b) unfavourable terms of trade
c) unfavourable balance of payments
d) All of the above
lAns.: (1 - c), (2 - d), (3 - d), (4 - a), (5 - d) (6 - a), (7 -b), (8 - b) (9 - c),
(10-a)I

B. State whether the following statements are True or False

l. Tariffs and quotas are important device under protectionism.
2. Free trade leads to open competition.
3. Protection does not brings any revenue to government.
4. Free trade enables international specialisation.
5. Protection does not help infant industries.
6. Protection help in improving the terms of trade.
7. Protection is adopted only by developing countries.
8. Infant industries require free trade to flourish.
g. Free trade refers to restriction on international trade.
10. Free trade prevent monopolies
11,. Commercial policy increase trade relation with other countries.
12. Free trade is encouraged by WTO.
L3. Free trade enriches both trading partners.
[Ans.: True : 1.,2, 4, 6, 10,'J..L,12,13 False : 3,5,7, 8,9 |

csf
60 fff lnternational Economics (Bus. Eco.-VI) (T.Y.B.Com.) (Sem. -Vl)
6. Tariff permit the market forces of Quotas, however, by fixing a
maximum
demand and supply to operate freely. limit on supply, inhibit the free play of
market forces.

7. Tariffs, provides protection to the Quotas provides protection to old

domestic market from foreign inefficient firms.
competition.

MODEL QUESTION
1. What do you mean by trade barriers? Explain the various types of trade barriers.
2. Explain the different types of tariffs OR Define tariff and how are they classified.
3. Examine the effects of tariffs on different sector of an economy.
4. What is meant by non - tariff barriers? Explain the various types of non - tariff
barriers.
5. What are the effects of non- tariff barriers.
6. Distinguish between Tariff and non - tariff barriers.
7. Distinguish between Tariff and Quotas
8. Explains with the help of a diagram, the effects of tariffs.
9. Explains with the help of a diagram, the effects of quotas.
L0. Why are quotas preferred to tariffs in developing countries.
11. Write short notes :
i) Types of tariff barriers
ii) Types on non - tariffs barriers
iii) Effect of tariff barriers
iv) - tariff barriers
Effect of non
v) Tariff barriers V / s Non - tariff barriers
vi) Tariff V/s Quotas

oBIECTTVE QUESTTON
A. Choose the correct answer
1. Which of the following restrict the use of tariffs
a) World Trade Organisation (WTO)
b) European Union (EU)
c) North American Free Trade Agreement (NAFTA)
d) All of the above
2. The main objective of trade barriers are _ .

a) to encourage new industries domestically

b) to reduce unnecessary imports
c) to conserve valuable foreign exchange
d) All of the above
TariffandNon-TariffBaniers sicl 61

3. is a tvpe of tariff barriers.

a) Embargo b) Ad-valorem duties
c) Product standard d) Consular Formalities
4. is a type of non - tariff barriers.
a) Import Quotas b) Export duties
c) Import Duties d) Specific Duties
5. An international trading company of the Government of India
a) State Transport Corporation
b) State Service Corporation
c) State Trading Corporation
d) All of the above
6. Tariff barriers restrict import
a) indirectly b) directly
c) None of these d) All of the above
7. creates a trade bloc.
a) OPEC b) NAFTA
c) ASEAN d) All of the above
8. Consular documents include
a) Certificate of origin b) Import certificates
c) Certified consular invoices d) All of the above
9. Trade barriers are often called
a) Free trade b) Protection
c) both a and b d) None of the above
10. Redistribution effect is called
a) Revenues effect b) Consumption effect
c) Productive effect d) Transfer effect
lL. Imposing of tariff, raises domestic prices causing fall in consumption of domestic
eoods is
a) Protectiveeffect b) Revenue effect
c) Consumption effect d) Terms of trade effect
lAns.: (1 - d), (2 - d), (3 - b), (4 - a), (5 - c), (6 - a), (7 - d), (8 - d, (9 - b), (10 -d),
(11 - c)l

B. State whether the following statements are True or False :

1. Tariffs helps in improving the terms of trade of a country.

2. Non - tariff barriers are trade barriers that restrict imports.
3. Quota increases the revenue of government.
4. Tariff. are superior to quotas in developing countries.
5. WTO restrict the use of tariffs.
90 1pf11P hturnational Economics (Bus. Eco.-Vl) (T.Y.B.Com.) 6em. -Vl)
6. Objective of ASEAN
7. ASEAN Economic Community

oBJECTTVE QUESTION
A. Choose the correct answer
f. is the World's largest single market area.
a) European Union b) India
c) Pakisthan d) Srilanka
2. At present, European Union consist of member countries.
a) 26 b) 27
c) 28 d) None of these above
3. occurs when a group of countries agree to eliminate tariff between
themselves.
a) Free Trade Area b) Preferential Trade Agreement
c) Both a and b d) None of these
4. When an economy unlon involves't'frifyi"g currency it becomes
a) Customs Union b) Trade Union
c) Economic and Mdhetary Union d) AX of the above
5. is not a legislAting institutiory but diifines the EU's overall political directions
and priories.
a) European Parliarnent b) European Council
c) European Commission d) All of the above
6. is an official inititution of tfre Europdail Union.
a) European Council b) Eirropehn Parliament
c) European Commidsion d) European Investment Bank
7. The advisory body of the European Union
a) European Econbmic and Socidl Committee
b) European Comn\ittee of thEfl8$ions
c) Both a and b
d) None of the above
8. Euro is the official currency for member countries of European Union.
a) 16 b) 17
c) 18 d) 19
-
9. The _ is the single currency of the European Union.
a) dollar b) euro
c) yen d) pound
10. is the second largest currency in thii world.
a) Dollar b) Euro
c) Yen d) pound
International Economic Integration fsi 91

11. The ASEAN Community include

a) Political-security Community b) Economic - Community
c) Socio-Cultural Community d) All of the above
1.2. became an ASEAN dialogue partner in 1995.
a) India b) Pakisthan
c) Srilanka d) None of these
13. Look East Poliry has now transformed into a _.
a) Act European Policy b) Act East Policy
c) Act West Policy d) East Asia Policy
14. The referendum for Brexit was held on
a) 231une201.6 b) 23Jrne2017
c) 23August2017 d) 23June2018
15. ASEAN was formed in
a) t947 b) L967
c) L977 -. d) 1987
L6) European Union is also known as
a) European Economic Community b) European Common Market
c) European Community d) All of the above
lAns.: (1 - a); (2 - c); (3 -a); @ - c); (s - b); (6 - a); (7 - c);(8 -d); (9 - b); (10 - b);
(11 -d); (12 - a); (13 - b); (1,4 - a); (15 - a); (16 - d) 1

B. State whether the following statements are True or False :

1. The European Union is a national Organisation.

2. India is a member of European Union.
3. European Ombudsman is an impartial body.
4. Preferential trade agreement abolish tariff completely.
5. Customs union have a common tariff against the outside world.
6. ASEAN is a growing hub of consumer demand.
7. The EU is built on an institutional system with governing bodies.
8. EU is one of the largest trading powers of the World.
9. Brexit will result in massive job losses in UK.
10. ASEAN is a regional intergovernmental organisation.
11. EU has multiple market.
12. There are many restrictions on the movement of goods, services, capital and people
with the European Union.
[Ans.: True : 3, 5, 6, 7 , 8, 9, 10 False : L, 2, 4, Ll, 12 I

rrrrr'
7/T.Y.B.Com.-International Eco. (Bus. Eco.-VI) (Sem.-VI)
Balance of Payments rfrff L07

MODEL QUESTTONS
1. What is Balance of payment ? Describe the structure of balance of payments of a
country.
2. "Balance of payments always balances." Comment.
3. Examine the causes of disequilibrium in the balance of payments.
4. Discuss the different types of disequilibrium in balance of payments.
5. What is do you means by balance of payments? Analyse various types of
disequilibrium in balance of payments.
6. Discuss various methods of correcting disequilibrium in the balance of payments?
7. Discuss the monetary measures in correcting disequilibrium in balance of payment.
8. Discuss non-monetary measures through which disequilibrium problem could be
overcome.
9. Distinguish between balance of trade and balance of payments.
10. Write a note on :

a) Structure of Balance of payments

b) Causes of disequilibrium in Balance of payment
c) Monetary measures of Balance of payment
d) Non-monetary measures of Balance of payments
e) Types/kinds of disequilibrium in balance of payments.

oBIECTTVE QUESTTONS
A. Fill in the blanks z '
f. is a statement of a systematic record of all economic transactions between one
country and the rest of the world.
2. In the account, only transactions relating to goods are entered.
3. means a decline in the rate of exchhnge of one country in terms of another's.
4. Restrictions on the use of foreign exchange by the Central bank are called
5. are duties levied on imports.
6. Restrictions imposed on the quantity of imports is
7. Balance of payment always
-.
8. term long run disequilibrium as fundamental disequilibrium.
[Ans. (].) - Balance of payments; (2) - trade; (3) - Exchange Depreciation;
(4) - exchange controls; (5) - Tariffs; (6) - Quotas; (7) - balances; (8) - IMFI

B. Choose the correct answer:

1. In balance of payment accoun! all goods exported and imported are recorded in

a) Capital account c) Merchandise account

b) Invisible account d) None of these
8/T.Y.B.Com.-International Eco. (Bus. Eco.-V! (Sem.-VI)
108 jf1fff lnturnational Economics (Bus. Eco.-VD (T.Y.B.Com.) 6em. - Vl)

2. Gifts and charities account are also known as :

a) Export c) Unilateral transfer

b) Import d) Long-term borrowing
3. In BOP, total receipts must be equal to total
a) payment c) deficit
b) income d) all of these
4. Reducing the value of domestic currency in term of foreign currency :

a) Deflation c) Exchange control

b) Tariff d) Devaluation
5. Non-monetary measures include:
a) Tariff and Quotes c) Import substitution
b) Export promotion d) All of these
6. The current account in the balance of payments
a) is a total of all the visible items of trade
-.
b) includes merchandise trade and services
c) always shows a surplus
d) includes autonomous and accommodating flows
7. A deficit in India's balance of payments in recent times is due to
a) a steep rise in the price of crude oil
b) increase in export related imports
c) increase in imports on accounts of globalization
d) all of the above
8. Good performance on _ has helped India to improve its current account balance
in recent times.
a) tradeaccount b) invisible account
c) Capital account d) all of the above
9. After covering deficits on current account, excess capital account receipts are added
to
a) IMF account b) Official transfers
c)-.Foreign exchange reserves d) Bank capital
10. Reducing public expenditure to correct BOP disequilibrium is a measure.
a) Monetary b) Fiscal
c) Special d) None of these -
11. is not a cause of deficit in balance of payments.
a) increase inimport b) fall in exports
c) capital outflow d) capital inflows
L2. Devaluation of a currency is brought about by the
a) World Bank b) Asian Development Bank
c) International Finance Corporation d) Government
Balance of Payments f;f1ff 10g

13. When total exports are more than total imports then current account of balance of
_.
payment is in
a) Deficit b) Balance
c) Surplus d) Both deficit and surplus .

1,4. disequilibrium is chronic in nature.

a) Cyclical b) Fundamental
c) Structural d) Monetary
15. Expenditure switching poliry is also known as
a) Devaluation b) Revaluation
c) Both a and b d) None of these
16. term long run disequilibrium as fundamental disequilibrium.
a) IMF b) UN
c) WTO d) None of the above
lAns. (1 - c); (2- c); (3 - a); (4- d); (s - d); (6 - b); (7 - d); (8 - b); (9 - c);
(10-b); (11-d); (12-d); (13-c), (14-b), (L5-a), (16-a)I

C. State whether the following statements are True or False :

1. Depreciation of a currency make the imports cheaper.

2. Devaluation means official reduction in the value of domestic currency.
3. Current account deals with payments of debt and claims.
4. Inflation is the only cause to the disequilibrium in balance of payment.
5. When an exchange control is adopted, all the exporters have to surrender their
foreign exchange earnings to the central bank.
6. Tariffs promote trade.
7. Quotas bring revenue to the government.
8. Export promotion increase exports.
9. Balance of trade always balances.
10. Balance of payments always balances.
11. Items that give rise to receipts of foreign currency are listed on the debit side of the
balance of payments.
1,2. Short-term lending is listed on the debit side of the balance of payments.
13. Tariffs and quotes are indirect measures to correct disequilibrium in balance of
payment.
14. Deflation and Devaluation are the direct measures to correct disequilibrium in
balance of payment.
15. Current account includes real transaction.
16. The BOP is in equilibrium when the difference between curreht and capital account is
equal to zero.
17. IMF term long run disequilibrium as fundamental disequilibrium.
18. Tariffs are more effective than Quotas.
 Organisation
WorldTrade !,1!,i 727

Century to follow. A vicious circle of unending negotiations, disputes and

disagreements is not unlikely when side by side with WTO globalisation, regionalism
and trade blocs and emerging and strengthening in the process of expanding
unbalanced world economy.
Possible emergence of economic imperialism with the growing dominance of
foreign MNCs as well as emerging'Unfair Capitalism' under speculative pursuit in
stock market and forex market developihg countries are exposed to a new danger
under the impact of globalisation and liberalisation forced by the WTO. If it goes
beyond limit, globalised market economies may derail with dire consequences at all
levels - economic, social and political. The WTO needs a rethinking on the issue to
build-up a 'iust' and 'Robust Global Capitalism' rather than paving the way for
'Unfair Capitalism'in the new world economic order.

MODEL QUESTTONS
1. What are the objectives of WTO?
2. Discuss the functions of WTO?
3. Discuss the agreements of WTO with reference to TRIPs, TRIMs and GATs.
4. Explain the agreements on TRIPs and GATs under WTO. (April,2075)
5. Discuss the agreements of WTO with reference to TRIMs and TRIPs.
6. Discuss WTO agreements with reference to TRIMs and GATS
7. Explain the principles of WTO agreements.
8. Explain the development in TRIPs, TRIMs and GATS. Or Explain the recent
development in WTO agreements.

OBJECTIVE QUESTIONS
A. Fill in the blanks:
1. WTO replaced in 1995.
2. TRIPs deals with
3. Protection is made available for years for patents.
4. The terms of -.is 50 years.
-
[Ans. (1) - GATT; (2) - intellectual property rights; (3) -20; (4) - copyright]
-
B. Choose the correct answer:
1. WTO replaced GATT and came into existence on
a) 1,lanuary7957 c) 1"JanuarY1991
b) L" january L995 d) l."January 1996
2. TRIPs stand for
a) Trade Related Investment Property Rights
b) Trade Related Investment Public Rights
c) Trade Related Intellectual Property Rights
d) Trade Related Investment in services
L22 alofff lnternational Economics (Bus. Eco.-Vl) (T.Y.B.Com.) (Sem. -Vl)
3. Under the foreign investors will be given same rights as the national
investor in the matter of investment.
a) TRIPs b) TRIMs
c) GATs d) None of these
4. GATs deals with trade in
a) Services b) patent
c) copyright d) trademarks
5. TRIMs deals with
a) investment
Foreign b) Foreign aid
c) Services d) Goods
6. Under WTO TRIPs cover
a) Patents b) Copy rights
c) Trade marks d) All of the above
7. agreement deals in trade in services
a) TRIMs b) TRIPs
c) GATs d) All the above
8. The WTO agreements cover
a) TRIPs b) TRIMs
c) GATs d) All the above
9. WTO oromote trade.
a) bilateral b)
multilateral
c) both (a) and (b) d)
none of these
10. The only international organisation deahng with the global rules of trade
between nations.
a) WTO b) UN
c) IMF d) None of:these
[Ans. (1-b); (2-c); (3-b); (4-a); (5-a); (6-d); (7 -c); (8-d); (9-b); (10-a)]

C. State whether the following,statements are True or False :

1. The purpose of WTO is to remove restrictions in international trade.
2. The agreements of WTO are related to only non-agricultural goods.
3. GATS is concerned with agreement on services.
4. TRIMs cover a wide range of government regulations concerning investment.
5. WTO promotes bilateral trade.
6. India has not removed restriction on imports.
7. India is a founder member of WTO.
8. WTO liberalised trade.
9. Most Favoured Nations (MFN) rule under WTO implies that some countries
have more advantage in trade.
10. WTO deals with domestic trade.
[Ans.: True:1,3,4,7,8 False 22,5,6,9,707
f:fi
L30 fff International Economics (Bus. Eco.-Vl) (T.Y.B.Com.) 6em. - Vl)

3. Covered interest rate arbitrage

In the covered interest rate arbitrage, the investors borrow money from one country
and invest in another country which has higher rate of interest. That is Arbitrage can
borrow amount in US $ and invest in India where interest rate is higher. Here the investor
make riskless profits by borrowing money from US and invest in India, as the interest rate
differential is higher than forward differentials. But if the interest rate differentials is less
than forward differentials, investors can invest in US by borrowing money from India to
make riskless profits.

MODEL QUESTTONS
L. What is foreign exchange market? Explain its functions.
2. Explain the functions and participants of foreign exchange market.
3. Discuss spot and forward exchange rates.
4. Explain arbitrage in foreign exchange market.
5. Distinguish between: Spot and forward exchange rates
6. Write a note on :

a) Spot Exchange rate

b) Forward Exchange rate
c) Arbitrage
d) Functions of foreign exchange market

oBIECTTVE QUESTTONS
A. Fill in the blanks:
1. refers to the rate at which the transaction take place at a future date.
2. refers to the Process of buying and selling a foreign currency in two different
market at same time.
[Ans. (1) - Forward exchange rate; (2) - Arbitrage]

sr
B. Choose the correct answer:
f. is the current exchange rate between two countries.
a) Spot exchangerate c) Arbitrage
b) Forward exchange rate d) Speculation
2. is the exchange rate quoted for fufure delivery of currencies exchange.
a) Spot exchange rate
c) Forward exchange rate
b) Arbitrage
d) None of these
3. The dealer in foreign exchange market :

a) Commercial banks c) Bill brokers

b) Central banks d) aU of these
Foreign Exchange Market ff1f L31

4. The act of buying a currency in one market and selling it in another to make profit is

a) Arbitrage c) None of these

b) Speculation d) All of these
5. The functions of foreign exchange market include
a) provision of facilities for transfer of funds
b) provision of short-term finance for trade
c) provision of facilities for trading
d) all of the above
6. is not a function of foreign exchange market.
a) Transfer c) Credit
b) Hedging d) Investment
7. Hedgers enters the forward exchange market to _.
a) earn more profit c) Speculate
b) cover the risk d) all of these
8. Hedging operations helps _ to cover the risks.
a) exporters b) Speculators
b) importers d) All of the above
lAns. (1 - a); (2- c); (3 - d); (a - a); (5 - d); (6 - d); (7 - b); (8 - d)l

C. State whether the following statements are True or False :

1. Spot exchange rate is the rate at which the delivery of foreign exchange has to be
made at future date.
2. Forward rate is the exchange quoted for future delivery of currencies exchange.
3. Central bank and Commercial banks are the only dealers in foreign exchange market.
4. Arbitrage is the act of buying a currency in one country and selling it in another in
order to make profit.
5. Arbitrage helps to equalize the exchange rate.
6. Commercial banks are authorized to deal in foreign exchange market.
7. Hedgers enters forward exchange market to cover the risk.
8. There is only a single exchange rate in the foreign exchange market.
9. Forward exchange rates are current exchange rates between two currencies.
10. Commercial banks do not participate in the foreign exchange market.
11. Arbitrage is a riskless activity.
12. Arbitrager earn riskless profit.
13. Forward exchange rate may be higher or lower than spot rate.
']..3 False : l, 3, 8, 9, 107
[Ans. True :2, 4, 5, 6,7, L1., L2,
flfli
ExchangeRateDetermination !.fin 1,, 137

Panel (B) shows that when supply is increased from Sg to 51 (say, due to more
exPorts) given the demand for foreign exchange, the rate of exchange decreased from OR6
to OR1.
Trade flows explain the long-term exchange rate. Trade flows never change
drastically. Capital flows, on the other hand, are subject to drastic changes in short-run. In
short run, demand and supply of foreign exchange change are thus, largely caused by
capital flows. Outflows of capital decreases the supply of foreign exchange; thus, causing
exchange rate to rise. lnflows of capital increases the supply of foreign exchange, leading
to fall in exchange rate. When a country relies too much on portfolio foreign investment in
its capital market, it is subject to danger of destabilization of exchange rates due to sudden
shifts - withdrawal of foreign capital.

MODEL QUESTIONS
1. Discuss the demand for and supply of foreign exchange.
2. Show how equilibrium rate of exchange is determined.
3. Explain the determination of foreign exchange rate with the help of a diagram.
4. What are the factors influencing demand for and supply of foreign exchange.
5. Distinguish between :

a) Demand for and supply of foreign exchange

5. Write a note on :

a) Equilibrium rate of exchange

b) Changes in exchange rate
c) Demand for foreign exchange
d) Supply of foreign exchange.

oBIECTTVE QUESTTONS
A. Fill in the blanks:
1. Transactions in the foreign exchange market are carried out are termed as
2. Demand for foreign exchange varies with the exchange rates.
-.
3. When supply of foreign exchange is increased given"the demand for foreign
exchange, the rate of exchange
4. When demand for foreign exchange increases, the exchange rate
-. (3) decrease; (4)
[Ans. (1) - exchange nte; (2) - inversely; - - increases]

B. Choose the correct answer:

1. The _ is the rate at which the currencies of two nations are exchanged for each
other:
a) Spot rate c) fixed rate
b) forward rate d) exchange rate
138 frn lnturnational Economics (Bus. Eco.-Vl) (T.Y.B.Com.) (Sem. -Vl)
2. The relationship between supply of foreign exchange and rate of exchange is
a) Direct c) Negative
b) Inverse d) None of these
3. The supply of foreign exchange depends on the country's
a) export of goods to foreign countries
-.
b) export of services to foreign countries
c) investment of foreign countries in host country
d) 'all of these
4. Demand for foreign currency is influented primarily by
a) size of export b) size of import
-.
c) both (a) and (b) d) none of these
5. Supply of foreign currency is influenced by _.
a) size of export b) size of import
c) both (a) and (b) d) none of these
6 Equilibrium rate of exehange deperds on
a) Demand factors b) Supply factors
-.
c) Both (a) and (b) d) None of these
7. Foreign exchange in a country is demanded for
a) Imports of goods b) export of services
-.
c) export of goods d) Import of capital
lAns. (1 - d); (2- a); (3 - il; @-b); (5 - a); (6 - c); (7 - a)l

C. State whether the following statements al€ True or False :

1. The demand for foreign exchange is the decreasing function of the rate of exchange.
2. The exchange rate is determined where demand for foreign exchange exceed supply
of foreign exchange.
3. The total supply of foreign exchange curve is sloping upward.
4. Supply of foreign currency varies directly with the rate of exchange.
5. Demand for foreign exchange and rate of exchange are inversely related.
6. Equilibrium rate of exchange is stable in the short-run.
7. The supply of foreign exchange depends on the country's import of goods and
services to foreign countries.
8. Any variation in demand or supply of foreign exchange will lead to a variation in the
rate of exchange.
9. The rate of exchange is the function of demand and supply of foreign exchange.
[Ans. True :1.,3, 4,5, 8,9 False : 2, 6,71

frff
L46 International Eanomics (Bus. Eco.-VD G.Y.B.Com.) (Sem. -Vl)
Evaluation. In',l,3,
spite of all its limitations the purchasing power parity doctrine is the
only sensible explanation of long-term changes in exchange rates under all monetary
conditions, gold standard, etc. The theory also explains what determines the balance of
payments itself. It shows that trade and payments among countries change mainly due to
changes in relative price levels of the countries concerned. ln the long rury therefore, the
exchange rates depend on relative prices and price changes.
The theory has its importance when price movements are a significant factor affecting
exchange rates. But when price fluctuations are not so important the theory has liftle
significance.
In short, although the theory has its drawbacks, it explains the working of a long-
term tendenry in exchange rates, which has an important bearing on practical policy in
regard to foreign trade and payments. In recent research stuthes, empirical evidences tend
to support some form of long-run PPP.

MODEL QUESTTONS
1. Explain the absolute version of purchasing power parity theory of exchange rate and
point out its limitations.
2. Discuss the Relative version of purchasing power parity theory and bring out its
limitation.
3. Discuss the limitations of PPP theory.
4. Critically examine the purchasing power parity theory. :

5. Explain the purchasing power parity theory.

6. Write short notes
i) Absolute version of purchasing power parity theory.
ii) Relative version of purchasing power partity theory.
iii) Limitationof PPP theory.

oBJECTTVE QUESTTONS
A. Fill in the blanks:
1. The relative version is considered to be to absolute version.
2. The relative version of the PPP theory is propounded by
3. According to theory, the exchange rate between two currencies is determined
by their purchasing power.
-
[Ans. (1) - superior; (2) - Cassel; (3) - purchasing power parity]

B. Choose the correct answer:

1. The purchasing power parity theory was introduced by
a) Alfred Marshal
b) Milton Friedman
c) Gustav Cassel
d) None of the above
PurchasingPotoer paity Theory tfr u7
2. The short-comings of ppp Theory
a) ignores real determinants
b) neglect capital transactions in international relations
g) Fails to explain large volatility
d) all of these
3. The PPP theory assumes group of commodities in both countries.
a) similar
b) different
c) export
d) import
4. The limitation of purchasing power parity theory includes
a) selection of index numbers
b) Applicable to static economy
c) Applicable in long run
d) All of these
5. With the breakdown of the gold standard, the lost significance in the exchange
market.
a) Balance of payment theory
b) Mint parity theory
c) Purchasing power parity theory
d) None of these
lAns. (1 - c); (2 - d); (3 - a); (4 - d); (s - b)I

C. State whether the following statements are True or False:

1. The rate of exchange will be determined at the point where the internal purchasing
powers of the two currencies became equal.
2. The PPP theory is free from criticisms.
3. Gustav Cassel introduced the PPP theory.
4. The PPP theory is based on the international purchasing power of any two currencies.
5. The PPP theory uses the price index to measure the changes in the equilibrium rate of
exchange.
6. The PPP theory takes into account both current and capital accounts.
7. The absolute version can be used to determine the equilibrium exchange rate.
8. The relative version explains charges in equilibrium exchange rate.
9. Though the absolute version appears to be very elegant and simple, it is totally
useless.
10. The absolute version of PPP theory consider both traded goods and non-traded
goods.
[Ans. True : 1, 3, 5,8, 9 False :2, 4, 6,7, 10]
ift

L
RBI 8 Exchange Rate Management fff fi3
Thus, the RBI has used a varied mix of techniques in intervening in the foreign
exchange market-indirect measures such as press statements and in more extreme
situations, monetary measures to affect the value of the rupee and well as direct purchase
and sale in the foreign exchange market using spot forward and swap transaction (Ghosh
2002).

MODEL QUESTTONS
1. Explain the role of RBI in the Foreign Exchange Market. Or Outline the role of central
banks in foreign exchange market.
2. Explain RBI's intervention in exchange rate management in India.
3. Discuss the stages of RBI's intervention in foreign exchange rate management since
1991,.
4. Comparision between : Fixed, Flexible and Managed flexible exchange rate.
5. Write short note on :
i) Role of central bank (RBI) in foreign exchange management
ii) Liberalised exchange rate management system.
iii) Modified liberalised exchange rate management system
iv) FERA and FEMA
v) Fixed exchange rate.
vi) Flexible exchange rate.
vii) Managed flexible exchange rate.

oBIECTTVE QUESTTONS
A. Choose the correct answer:
1. FEMA stands for _.
a) Foreign Exchange Management Act
b) Foreign Exchange Marketing Act
c) Foreign Exchange Import Act
d) None of these
2. The Foreign Exchange Regulation Act came into force
a) ]anuary 1.,2000 b) January"l,,1974
c) |anuary L,1976 d) January 7,L999
3. was introduced as a transitional measure and entailed a dual exchange rate
system.
a) FERA b) FEMA
c) LERMS d) None of these
1. FERA was replaced by _ in India.
a) FEMA b) FMCG
c) NEER d) LERMS
5. The RBI introduced on 1" March,1993.
a) LERMS
b) FERA
c) FEMA
d) Modified Liberalised Exchange Rate Management System
154 jP$af lnternational Economics (Bus. Eco.-VI) (T.Y.B.Com.) 6em. -Vl)

6. The main objectives of RBI's intervention in the lndian foreign Exchange market is tc
a) reduce inequalities b) maintain stability
c) both (a) and (b) d) none of these
7. India adopt exchange rate system.
a) Fixed b) Flexible
-
c) Managed d) none of these
8. The _ has been authorised to issue licences to those who are involved in
foreign exchange transaction.
a) RBI b) Government
c) Private companies d) All of these
9. The main objectives of RBI's intervention in the Indian foreign exchange market
is
a) to ensure safety of the country b) to promote trade
c)-.to reduce income inequalities d) to maintain exchange rate stability
10. Under the flexible exchange rate system exchange rate is determined by
a) the monetary authority
b) the price of gold -.
c) the demand and supply of foreigrr exchange
d) noneofthe above
lAns. (1 -a);(2-b); (3 -c);(4-a); (5-d); (6 -b);(7 -c); (8 -a);(9 -d); (10-c)l

B. following statements are True or False

State whether the
1. LERMS was introduced with a dual exchange rate system.
2. FERA gave wide powers to RBI.
3. RBI regulates the foreign exchange market.
4. LERMS was introduced which replace unified market determined exchange rate
system.
5. When there is excess supply of dollars the central bank sells dollars in the market.
6. FEMA was replacgd by FERA.
7. FEMA confers power to the central.government and the RBI.
8. The RBI does not directly deal with the public.
9. Export of gold and jewellery do not need the permission from RBI.
10. The aim of the RBI's intervention in the foreign exchange market is to reduce exce
volatility.
11. Flexible exchange rates are fixed by the government authorities.
12. The IMF was established with the objective of promoting exchange rate stability.
13. In fixed exchange rate the rate of exchange depends on forces of demand and suppl.
1,4. The monetary authority (Central Bank) of a country play an important role und,
managed flexibility.
15. Fixed exchange rate system are perrnanently fixed.
[Ans.: True : 1.,2,3,7,8,1.0,12,'14 False : 4,5, 6,9,'],'1,'].,3,15|

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