TN State Board 12th Economics Important Questions Chapter 7 International Economics

Question 1.
What is International Economics?
Answer:
International economics is that branch of economics which is concerned with the exchange of goods and services between two or more countries.

Question 2.
Define international trade.
Answer:
International trade refers to trade or exchange of goods and services between two or more countries. It is trade across political boundaries.

Question 3.
State any two merits of trade.
Answer:

  • Trade is one of the powerful force of economic integration.
  • It brings Foreign exchange to our country.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 4.
What is the main difference between Adam Smith and Ricardo with regard to the emergence of foreign trade?
Answer:

Adam Smith

 David Ricardo

According to Smith, International trade was absolute cost advantage.  According to Ricardo, a country can gain from trade when it produces at relatively lower costs.

Question 5.
Define Terms of Trade.
Answer:
The gains from international trade depend upon the terms of trade which refers to the ratio of export prices to import prices.

Question 6.
What do you mean by balance of payments?
Answer:
BOP is a systematic record of a country’s economic and financial transactions with the rest of the word over a period of time.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 7.
What is meant by Exchange Rate?
Answer:
It is the price paid in the home currency for a unit of foreign currency that is the rate at which one currency is exchanged for another country.

Question 8.
Describe the subject matter of International Economics.Answer:
It is classified into:

  1. Pure theory of trade – This explains the causes for foreign trade, volume of trade, balance of trade and payments.
  2. Policy issues – This covers the policy issues like method of regulating trade use of taxation, foreign aid, FDI and disequilibrium in the balance of payments.
  3. International Cartels and trade Bloes – It deals with the economic integration in the form of custom unions, monetary unions and the operation of MNCs.
  4. International financial and trade regulatory institutions – Financial institutions like IMF, IBRD, WTO etc are also part of International economics.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 9.
Compare the Classical Theory of international trade with Modern Theory of International trade.
Answer:

Classical theory

 Modern theory

It explains the international trade on the basis of value of labour.  It explains the international trade on the basis of value of general theory.
Factor is labour is presented.  Factor is labour and capital (multi factor) is presented.
Comparative cost differences in efficiency of the worker is attributed.  Comparative cost difference in factor endowment is attributed.

Question 10.
Explain the Net Barter Terms of Trade and Gross Barter Terms of Trade.
Answer:

Net Barter Terms of Trade

 Gross Barter Terms of Trade

It is the ratio between the prices of exports and of imports.  It is an improvement over the net terms of trade.
This is used to measure the gain from international trade.  It is an index of relationship between total physical quantity of imports and the total physical quantity of exports.
It is named by Viner as the “commodity terms of trade”.  If for a given quantity of exports, more quantity of import can be consumed by a country, then one can say that terms of trade are favourable.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 11.
Distinguish between Balance of Trade and Balance of Payments.
Answer:

Balance of Trade

 Balance of Payments

BOT refers to total value of country’s exports of commodities and total value of imports of commodities.  BOP is a systematic record of a country’s economic and financial transactions with the rest of the world over a period of time.
Only export and import of commodities are included in the statement of balance of trade of a country.  When a payment is received from a foreign country, it is a debit transaction.
Movements of goods are also known as Visible trade.  When a payment is made to a foreign country, it is a debit transaction.

Question 12.
What are import quotas?
Answer:
Import quota is a quantitative limit fixed on the import of some type of good. This may be set in terms of value or physical units. This is imposed to conserve foreign exchange or to protect domestic consumption.
Import Control:
Imports may be controlled by,
(i) Imposing or enhancing import duties.
(ii) Restricting imports through import quotas.
(iii) Licensing and even prohibiting altogether the import of certain non¬essential items. But this would encburaee smugeling.
By cutting market supply the price of the imported product is likely to rule and black market may develop.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 13.
Write a brief note on flexible exchange rate.
Answer:
Flexible exchange rate is also known as floating exchanging rate. Under this system, exchange rates are freely determined in an open market by market forces of demand and supply. Market prices vary every day.

Question 14.
State the objectives of Foreign Direct Investment.
Answer:

  1. Sales expansion
  2. Acquisition of resources
  3. Diversification
  4. Minimization of competitive risk.

Question 15.
Discuss the differences between Internal Trade and International Trade.
Answer:

Internal Trade

 International Trade

Trade takes place between different individuals and firms within the same nation.  Trade takes place between different individuals and firms in different countries.
Labour and capital move freely from one region to another.  Labour and capital do not move easily from one nation to another.
There will be free flow of goods and services since there are no restrictions.  Goods and services do not easily move from one country to another since there are a number of restrictions like tariff and quota.
There is only one common currency.  There are different currencies.
The physical and geographical conditions of a country are more or less similar.  There are differences in physical and geographical conditions of the two countries.
Trade and financial regulations are more or less the same.  Trade and financial regulations such as interest rate, trade laws differ between countries.
There is no difference in political affiliations, customs and habits of the people and government policies.  Differences are pronounced in political affiliations, habits and customs of the people and government policies.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 16.
Explain briefly the Comparative Cost Theory.
Answer:
Comparative cost theory was formulated by David Ricardo and it was refined by J.S.Mill. According to Ricardo, the basis of trade is the comparative cost difference. A country can gain from trade when it produces at relatively lower cost.

Even when a country enjoys absolute advantage in both goods, the country would specialize in production and export of those goods which are more advantageous. But even when there is absolute disadvantage, the country would specialize in production and export of the commodity in which it is less disadvantages.

Assumptions:

  1. There are only two nations and two commodities.
  2. Element of cost of production is labour.
  3. All labourer have equal efficiency.
  4. Labour is perfectly mobile within the country but’ perfectly immobile between countries.
  5. Production is subject to the law of constant returns.
  6. Foreign trade is free from all barriers.
  7. No change in technology.
  8. No transport cost.
  9. Perfect competition.
  10. Full employment.
  11. No government intervention.

Illustrations:
Ricardo’s theory of comparative cost is explained with Hypothetical example with production cost of cloth and wheat in America and India.

TN Board 12th Economics Important Questions Chapter 7 International Economics 1

Explanation:
From diagram, we know that India has an absolute advantage in production of both cloth and wheat. But India should concentrate on production of wheat in which there is comparative cost advantage. (80/120<90/100). For America cost advantage is less in cloth production. But America will produce cloth and exchange for wheat.

With trade, India can get I unit of cloth and I unit of wheat by using 160 labour units. But without trade, India will have to use 170 units of labour. Likewise with trade America uses 200 units of labour but without trade. It has to use 220> units of labour for getting 1 unit of cloth and 1 unit of wheat.

Criticism:

  • Labour cost is small portion of the total cost.
  • Labourers in different countries are not equal in efficiency.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 17.
Discuss tine Modern Theory of international Trade.
Answer:
This was developed by Eli Heckscher and Bertil Ohlin which is based on Ricardian Theory. This theory says that the basis for international trade is factor endowment, so it is called as “Factor endowment Theory”.

Theory – Modem theory explains and attributes international differences in comparative cost to
(i) Difference in endowments of factor of production between countries.
(ii) Difference in the factor of proportions required in production.

Assumptions:

  1. There are 2 countries and 2 commodities and 2 factors.
  2. Countries differ in factor endowments
  3. Commodities are categorized in terms of factors intensity
  4. Countries use same production technology.
  5. Countries have identical demand conditions

TN Board 12th Economics Important Questions Chapter 7 International Economics 2

Explanation:
According to Heckscher a capital abundant country will export the capital intensive goods and labour – abundant country will export labour – intensive goods.

Illustrations:

TN Board 12th Economics Important Questions Chapter 7 International Economics 3

In the above example, even though India has more capital in absolute terms, America is more richly endowed with capital because the ratio of capital in India is 0.8 which is less than that in America where it is 1.25.

TN Board 12th Economics Important Questions Chapter 7 International Economics 4

Limitations:
(i) Factor endowment of a country may change over time.
(ii) The efficiency of the same factor may differ in the two cormtries.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 18.
Explain the types of Terms of Trade given by Viner.
Answer:
Viner has devised another concept called
(a) “The single factor terms of trade” and
(b) ‘Double factoral terms of trade”

(i) Single factoral terms of trade – It is an improvement upon the commodity terms of trade. It represents the ratio of export – price index to the import price index adjusted for changes in the productivity of a country’s factors in the production of exports
Tf = (Px/ Pm)Fx
Tf – single factoral terms of trade index
Fx – Productivity in exports.
(ii) Double factoral terms of trade – This is the another index constructed by Viner.

Tff = (Px /Pm) (Fx / Fm)

Which takes into account the productivity in country’s exports as well as the productivity of Foreign factors. So Fm represents import index.

Question 19.
Bring out the components of balance of payments account.
Answer:
The credit and debit items are shown vertically in the BOP account of a country. Horizontally, they are divided into three categories
(i) The current account:
It includes all international trade transactions of goods and services, international services transactions.

(ii) The capital account:
Financial transactions consisting of direct investment and purchases of interest bearing financial instruments, non – interest bearing demand deposits and gold fall under the capital account.

(iii) The official settlements account or official reserve assets account:
The official reserve assets of a country include its gold stock, holdings of its convertible foreign currencies and Special Drawing Rights (SDRs) and its net position in the international monetary fund IMF.

Balance Of Payment (BOP)
Account chart:
Credit (Receipts) – Debit (Payments) = Balance [Deficit (-), Surplus (+)]
Deficit if Debit > Credit.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 20.
Discuss the various types of disequilibrium in the balance of payments.
Answer:
There are three types of BOP disequilibrium
(i) Cyclical disequilibrium:
This occurs of because of two countries passing through different phases of business cycle and the elasticities of demand may differ between countries.

(ii) Secular disequilibrium:
This occurs because of long-run and deep changes in an economy, as it advances from one stage of growth to another. In the initial stages of development imports exceed exports and domestic investment exceeds domestic savings.

(iii) Structural disequilibrium:
Structural changes in the economy may also cause BOP disequilibrium such structural changes include development of alternative sources of supply etc.

Question 21.
How the Rate of Exchange is determined? Illustrate.
Answer:
The equilibrium rate of exchange is determined in the foreign exchange market in accordance with the general theory of value that is by the interaction of the forces of demand and supply. Thus the rate of exchange is determined at the point where demand for Forex is equal to the supply of Forex.

TN Board 12th Economics Important Questions Chapter 7 International Economics 5

Explanation of diagram:
(i) Y axis – Exchange rate (value of rupee in dollars)
(ii) X axis – Demand and supply of Forex
(iii) E – point of Equilibrium. (At this point of ‘E’ DD interseeks SS)
(iv) P2 – The exchange rate

Question 22.
Explain the relationship between Foreign Direct investment and economic develop.
Answer:
FDI – Foreign direct is an important factor in the economy. FDI and Foreign trade are closely related. In, developing countries, FDI in the natural resource sector, including plantations increase the trade volume. Foreign production by FDI is useful to substitute Foreign trade.

FDI is helpful to accelerate the economic growth by facilitating essential imports needed for carrying out development programmes. FDI is encouraged by the factors such as Foreign exchange shortage and acceleration of the pace of economic development. Many developing countries prefer Foreign investment to imports.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Multiple Choice Questions:

Question 1.
Trade between two countries is known as trade.
(a) External
(b) Internal
(c) Inter-regional
(d) Home
Answer:
(a) External

Question 2.
Which of the following factors influence trade?
(a) The stage of development of a product
(b) The relative price of factors of productions
(c) Government
(d) All of the above
Answer:
(d) All of the above

Question 3.
International trade differs from domestic trade because of:
(a) Trade restrictions
(b) Immobility of factors
(c) Different government policies
(d) All the above
Answer:
(d) All the above

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 4.
In general, a primary reason why nations conduct international trade is because:
(a) Some nations prefer to produce one thing while others produce another
(b) Resources are not equally distributed among all trading nations
(c) Trade enhances opportunities to accumulate profits
(d) Interest rates are not identical in all trading nations
Answer:
(b) Resources are not equally distributed among all trading nations

Question 5.
Which of the following is a modern theory of international trade?
(a) Absolute cost
(b) Comparative cost
(c) Factor endowment theory
(d) None of these
Answer:
(c) Factor endowment theory

Question 6.
Exchange rates are determined in:
(a) money market
(b) foreign exchange market
(c) stock market
(d) capital market
Answer:
(b) foreign exchange market

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 7.
Exchange rate for currencies is determined by supply and demand under the system of:
(a) Fixed exchange rate
(b) Flexible exchange market
(c) Constant
(d) Government regulated
Answer:
(b) Flexible exchange market

Question 8.
Net export equals:
(a) Export × Import
(b) Export + Import
(c) Export – Import
(d) Exports of services only
Answer:
(c) Export – Import

Question 9.
Who among the following enunciated the concept of single factoral terms of trade?
(a) Jacob Viner
(b) G.S.Donens
(c) Taussig
(d) J.S.Mill
Answer:
(a) Jacob Viner

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 10.
Terms of Trade of a country show:
(a) Ratio of goods exported and imported
(b) Ratio of import duties
(c) Ratio of prices of exports and imports
(d) Both (a) and (c)
Answer:
(c) Ratio of prices of exports and imports

Question 11.
Favourable trade means value of exports are than that of imports.
(a) More
(b) Less
(c) More or Less
(d) Not more than
Answer:
(a) More

Question 12.
If there is an imbalance in the trade balance (more imports than exports), it can be reduced by:
(a) decreasing customs duties
(b) increasing export duties
(c) stimulating exports
(d) stimulating imports
Answer:
(c) stimulating exports

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 13.
BOP includes:
(a) visible items only
(b) invisible items only
(c) both visible and invisible items
(d) merchandise trade only
Answer:
(c) both visible and invisible items

Question 14.
Components of balance of payments of a country includes:
(a) Current account
(b) Official account
(c) Capital account
(d) All of above
Answer:
(d) All of above

Question 15.
In the case of BOT,
(a) Transactions of goods are recorded.
(b) Transactions of both goods and services are recorded.
(c) Both capital and financial accounts are included.
(d) All of these
Answer:
(a) Transactions of goods are recorded.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 16.
Tourism and travel are classified in which of balance of payments accounts?
(a) merchandise trade account
(b) services account
(c) unilateral transfers account
(d) capital account
Answer:
(b) services account

Question 17.
Cyclical disequilibrium in BOP occurs because of:
(a) Different paths of business cycle.
(b) The income elasticity of demand or price elasticity of demand is different.
(c) Long-run changes in an economy
(d) Both (a) and (b)
Answer:
(d) Both (a) and (b)

Question 18.
Which of the following is not an example of foreign direct investment?
(a) the construction of a new auto assembly plant overseas.
(b) the acquisition of an existing steel mill overseas.
(c) the purchase of bonds or stock issued by a textile company overseas.
(d) the creation of a wholly owned business firm overseas.
Answer:
(c) the purchase of bonds or stock issued by a textile company overseas.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Question 19.
Foreign direct investments not permitted in India:
(a) Banking
(b) Automic energy
(c) Pharmaceutical
(d) Insurance
Answer:
(b) Automic energy

Question 20.
Benefits of FDI include, theoretically:
(a) Boost in Economic Growth
(b) Increase in the import and export of goods and services
(c) Increased employment and skill levels
(d) All of these
Answer:
(d) All of these

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

Samacheer Kalvi 12th Economics Notes Chapter 7 International Economics

→ Internal trade: Trade within country – (domestic trade) or (home trade) or intra – regional trade.

→ Net barter terms of trade: The ratio between exports and imports also known as (commodity terms of trade).

→ Visible trade: Movements of goods, exports and imports of commodities.

→ Favourable balance of trade: When the total value of commodity exports of a country exceeds the total value of commodity imports of that country (opp) is unfavourable balance of trade.

→ Credit side: When payment is received from foreign country, it is credit transaction.

→ Debit side: Import of goods and services.

→ Devaluation: Deliberate reduction of the official rate at which domestic currency is exchanged for another currency.

→ Exchange control: The state intervention in the FOREX market.

→ FOREX: Foreign currencies.

→ Current account deficits: A deficit in the current account is excess of payments over receipts.

→ FPI: Entry of funds into a nation where foreigners deposit money in nations bank.

→ FII: It is an investment in hedge funds, pension funds and mutual funds.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

→ International economics:
Economics which deals with the economic interdependence among countries and studies the effects of such interdependence and the factors that affect it.

→ Absolute cost advantage:
According to Adam Smith, “the basis of international trade was absolute cost advantage. It is the ability of a business to produce more, sell more of goods or services than competitors, using the same amount of resource.’’’

→ Ricardo’s theory of comparative cost advantage:
According to Ricardo, “a country can gain from trade when it produces at relatively lower cost. Even when a country enjoys absolute advantage in both goods, the country would specialize in the production and export of those goods which are relatively more advantageous.”

→ International trade:
“A capital – abundant country will export the capital intensive goods, while the labour. Abundant country will export the labour intensive goods”.

→ FOREX:
“FOREX is the system or process ofconverting one national currency into another, and of transferring money from one country to another.”

→ Equilibrium Exchange Rate – Ragner Nurkes:
“The equilibrium exchange rate is that rate, which over a certain period of time, keeps the balance of payments in equilibrium”.

→ Foreign Direct Investment:
Investment in a foreign country that involves some degree of control and participation in management.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

→ Net Barter Terms of Trade T = (Px / Pm) × 100
Tn = Net Barter Terms of Trade
Px = Index number of export prices
Pm = Index number of import prices

→ Gross Barter Terms of Trade Tg = (Qm / Qx) × 100.
Qm = Index of import quantities
Qx = Index of export quantities

→ Income Terms of Trade Ty = (Px / Pm) Qx
Px = Price index of exports
Pm = Price index of imports
Qx = Quantity index of exports

→ The Single Factoral Terms of Trade Tf = (Px / Pm) Fx
Tf = Single factoral terms of trade index
Fx = Productivity in exports

→ Double Factoral Terms of Trade Tff = (Px / Pm)(Fx / Fm)
Fm = Import index

→ Balance of Payment (BOP) Account Chart
Credit (Receipts) – Debit (Payments) = Balance [Deficit (-), Surplus (+)]
Deficit if Debit > Credit

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

→ Balance of Payments Disequilibrium R / P = 1
It occurs when
Demand ≠ supply
Debit > Credit → Deficit

→ Favourable BOP R/P > 1

→ Unfavourable BOP R/P < 1

→ Real Exchange Rate = \(\frac{e \mathrm{P}_{f}}{p}\)
P = Price levels in India
Pf = Price levels in abroad (US)
e = Nominal exchange rate.

Samacheer Kalvi TN Board 12th Economics Important Questions Chapter 7 International Economics

→ WTO – World Trade Organization

→ IMF – International Monetary Fund

→ BOT – Balance Of Trade

→ BOP – Balance Of Payments

→ FOREX – Foreign Exchange

→ USD – United State Dollars

→ NEER – Nominal Effective Exchange Rate

→ REER – Real Effective Exchange Rate

→ NER – Nominal Exchange Rate

→ RER – Real Exchange Rate

→ FDI – Foreign Direct Investment

→ LDC – Lower (or) Less Developed Country

→ FPI – Foreign Portforio Investment

→ FII – Foreign Institutional Investment

→ UDC – Under Developed Countries

→ SDRs – Special Drawing Rights

TN Board 12th Economics Important Questions