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.
