XI_Eco_Development_Ch-5_Foreign Trade_Solutions.

Class XI    Economics

Indian Economic Development

Chapter – 5 India’s Foreign Trade

Q.1. Define International Trade.

Ans. International trade refers to the export and import of goods and services across different countries of the world.

Q.2. Define the following terminology.

a)   Gains of Trade

b)  Volume of Trade

c)   Direction of Trade

d)  Composition of Trade

e)   Trade Surplus

f)    Trade Deficit

Ans. Their meanings are:

a) Gains of Trade – Benefits of trade arising out of export and import of a country.

b) Volume of Trade – Quantum of export and import of a country.

c) Direction of Trade – Countries to which a country exports its goods and services and the countries from which it imports.

d) Composition of Trade – Types of goods and services we export and import.

e) Trade Surplus – Trade Surplus occurs when exports > imports.

f) Trade Deficit – Trade Deficit occurs when exports < imports.

Q.3. Did Inward looking trade strategy (Import Substitution Policy) led to monopolistic exploitation of the market?

Ans. Yes. Inward looking trade strategy offered protection to domestic industry from foreign competition. Thus, in absence of international competition, domestic industries started monopolistic exploitation of the market.

Q.4. Is international trade based on the principal of comparative cost advantage? Give reason.

Ans. Yes. Because a country specializes in the production of those commodities for which its cost of production is less than that in most other countries of the world.

Q.5. Does international trade yield gain only to the exporting trading partner?

Ans. No. International trade yields gain to both exporting as well as importing countries. While exporters get international market access to sell their surplus production, the importers get goods cheaper than their cost of production in the domestic economy.

Q.6. A massive fall in crude oil price has also led to a fall in our exports. Give one possible reason for this fact.

Ans. True. Because a fall in crude oil price has led to the decline in income of oil exporting countries (Gulf countries). Accordingly, their demand for imports of our products has declined leading to a fall in Indian exports.

Q.7. Explain any five gains which a country yield from International trade.

Ans. A country can yield a number of gains from International trade. Some of them are mentioned below:

a) International specialization.

b) Greater access to market to sell the surplus domestic production.

c)  Import of goods and services which cannot be produced in domestic economy.

d) Source of earning the foreign exchange, essential for developing countries to make developmental imports.

e) Good quality goods and services, and in large varieties can be availed at internationally competitive rates.

f) Larger opportunities for investment and thereby, higher growth of the country.

Q.8. What do you understand by Inward Looking Trade Strategy?

Ans. Inward Looking Trade Strategy is also known as Import Substitution Policy. It refers to the production of those goods domestically which are being imported from the rest of the world. For example, instead of importing the vehicles from foreign countries, our domestic industry can be encouraged to produce them within the country itself. This policy would protect the domestic automobile producers from foreign competition.

The basic aim behind initiating this policy was to protect the domestic industry from international competition and also to save the foreign exchange reserves. The saved foreign exchange reserves were utilized for developmental imports such as import of plant and machinery, which cannot be produced efficiently domestically due to lack of technology or investment. This strategy of import substitution is implemented through import quotas and import duties.

But there was a major lack in this strategy. The government focused on saving foreign exchange reserves through import substitution rather than maximizing them through the policy of export promotion.

Q.9. Differentiate between import substitution and export promotion strategies.

Ans. Import Substitution: It is a strategy to save foreign exchange by encouraging domestic production of such goods which the country has been importing from the rest of the world. Through this strategy, the domestic industry is given protection from the foreign competition by imposing the restrictions through import duties and quotas.

Export Promotion: It is a strategy to earn foreign exchange by promoting domestic exports and making domestic industry competitive in international market.

Q.10. Should India rely more on ‘Import Substitution’ rather than ‘export promotion’ to improve its BOT (Balance of Trade i.e. Net of exports and imports of goods)?

Ans. Amidst globalization which has resulted free trade and moderate tariffs, the policy of import substitution to protect the domestic industry is no longer a viable option. India has to rely on the policy of export promotion to improve its balance of trade. However, we can certainly focus on greater domestic output so that our import bills are reduced. But it would be more through competition rather than the policy of protection.

Q.11. Exports from India have tended to lag behind our imports. According to you, what is the principal reason behind it?

Ans. We have failed to promote our exports to the desired extent basically because of high domestic cost of production leading to low competitive power in the international market. On the other hand, imports have continued to rise because these are of essential goods like oil and defense goods, the domestic production of which is low due to the lack of natural resources, investment or the lack of technology.

Q.12. State the good and the bad impacts of Inward Looking Trade Strategy i.e. Import Substitution Policy.

Ans. The good impacts are as follows:

a) Structural Transformation leading to High Industrial Growth - Structural Transformation occurs when share of Industrial sector in GDP rises with corresponding fall in share of agriculture sector. With import substitution policy, the former increased from nearly 12 per cent in 1951 to about 25 per cent in 1991 leading structural transformation of Indian economy.

b) Diversification of Industrial Growth – Jute and textile industries were no longer the only part of Modern Industry. Rather the engineering goods and wide range of consumer goods industries were emerging. Also, there was a noticeable growth of Sunrise industry viz., electronic goods industry.

c) Opportunities of Investment – The protection to Small Scale Industry opened up newer opportunities of investment for those who had just small amount of capital leading to greater self-employment, and in turn resulting more utilization of latent (hidden) resources.

The bad impacts are as follows:

a) Growth of Inefficient Public Monopolies – Protection of public sector industry led to the growth of inefficient public monopolies. For example, telecom industry was a Govt. monopoly till around 1990. People had to wait for years just to get a telephone connection. And now we get repeated SMS offering new connection for free.

b) Lack of Competition implied Lack of Modernization – Since domestic industries were protected from foreign competition, they did not bother to modernize their products and services or to adopt newer technology to match the international standards of quality. E.g. Fiat and Ambassador were the only car models in India. Policy of protection resulted a near-monopoly of domestic car industry.

c) Indiscriminate spread of Public Sector Enterprises – During 1950-1990, public sector was given more importance in production of a large number of goods that led to indiscriminate spread of public sector undertakings (PSUs) resulting two things:

(i) Inefficient use of public resources.

(ii) Swallowing up opportunities of investment for private sector.

d) Economically Unviable PSUs – A Political Compulsion – A private sector enterprise would shut-down if running into losses. But even inefficient public sector enterprises continue operating due to political compulsion as politicians and Trade unions oppose their shut down on the point of social injustice.