PREVIOUS YEAR SOLVED PAPERS - January 2017
46. Match the items of List-I with List-II and indicate the correct code.
| List–I | List–II |
| (a) Absolute Cost Advantage Theory | 1. The empirical evidence based on US export of labour intensive goods challenging the factor endowment theory. |
| (b) Comparative Cost Advantage Theory | 2. A country having a direct cost advantage in the production of a product on account of greater efficiency. |
| (c) Factor Endowment Theory | 3. A country should produce and export a commodity that primarily involves a factor of production abundantly available within the country. |
| (d) Leontief Paradox | 4. A country should specialize in the production and export of a commodity in which it possesses greatest relative advantage. |
CODES
| (a) | (b) | (c) | (d) | |
| 1 | 2 | 4 | 3 | 1 |
| 2 | 2 | 4 | 1 | 3 |
| 3 | 2 | 1 | 3 | 4 |
| 4 | 1 | 4 | 3 | 2 |
47. Match the items of List-I with List-II and indicate the code of correct matching:
| List–I | List–II |
| (a) Accommodating capital flow | 1. Creation of international reserve assets by the IMF and their allocation among member countries in order to improve international liquidity. |
| (b) Autonomous capital flow | 2. Estimate of foreign exchange flow on account of either variations in the collection of related figures or unrecorded illegal transactions of foreign exchange. |
| (c) SDR Allocation | 3. Inflow of foreign exchange to meet the balance of payments deficit, normally from the IMF. |
| (d) Statistical discrepancy | 4. Flow of loans/investments in normal course of business. |
CODES
| (a) | (b) | (c) | (d) | |
| 1 | 1 | 2 | 4 | 3 |
| 2 | 3 | 4 | 1 | 2 |
| 3 | 3 | 4 | 2 | 1 |
| 4 | 3 | 1 | 2 | 4 |
- Option : B
- Explanation : ∎ Balance of trade = Export of goods – Import of goods
∎ Balance of current account = Balance of trade + Net earnings on invisibles.
∎ Balance of capital account = Foreign exchange inflow – Foreign exchange outflow, on account of foreign investment, foreign loans, banking transactions, and other capital flows.
∎ Overall balance of payments = Balance of current account + Balance of capital account + Statistical discrepancy.
If the overall balance of payments is in surplus, the surplus amount is used for repaying the borrowings from the IMF and then the rest is transferred to the official reserves account. On the contrary, when the overall balance is found in deficit, the monetary authorities arrange for capital flows to cover up the deficit. Such inflows make take the form of drawing down of foreign exchange reserves or official borrowings or purchases (drawings) from the IMF. From this point of view, capital inflows are bifurcated into autonomous and accommodating ones. If the inflow of funds on the capital account is for meeting the overall balance of payments deficit, it is termed as accommodating or compensatory capital flow. In other words, accommodating capital inflows aim at putting the balance of payments in equilibrium. On the other hand, autonomous capital flows take place regardless of such considerations. A foreigner paying back the loan or the inflow of foreign direct investment is an apposite example of autonomous capital inflow. This is why autonomous capital inflow goes “above-theline”, while accommodating capital inflow goes “below-the-line”.
Accommodating capital flow is the inflow of foreign exchange to meet the balance of payments deficit, normally from the IMF.
Autonomous capital flow refers to flow of loans/investment in normal course of a business.
Statistical discrepancy refers to estimate of foreign exchange flow on account of either variations in the collection of related figures or unrecorded illegal transaction of foreign exchange.
SDRs allocation is the creation of international reserve assets by the IMF, and their allocation among member countries in order to improve international liquidity.
- Option : C
- Explanation : Agreement on Trade-Related Investment Measures (TRIMs)
The agreement on TRIMs is related to the measures (conditions and restrictions) imposed by some countries on foreign investment. Incidentally, restrictive measures on foreign investment were widely imposed by developed countries. The agreement on TRIMs aims to eliminate or modify the conditions and restrictions on foreign investment that are not consistent with the rules and regulations of the WTO. In case of modification of the unreasonable conditions, a transition period is allowed to the parties concerned. The transition period allowed is two years for developed countries, five years for underdeveloped countries, and seven years for less developed countries.
Some important provisions of this agreement are as follows:
∎ No country can impose any performance clause on foreign investors in respect of foreign-exchange earnings, foreign equity participation, and transfer of technology.
∎ Foreign investors should be treated on par with national investors.
∎ There should be no restriction in the area of foreign investment—it should be open.
∎ There should be no restriction on the import of raw materials and intermediate components related to foreign investment.
