Question

5. Explain why the infant-industry argument is valid.

6. Explain one reason why the U.S. dollar has higher value than the Indian Ruppies in the international exchange rate marketplace.

7. write out one major difference between a country's balance of trade(BOT) and Balance of Payment (bop).

8. Explain the reason why loans to a country are entered on the Credit Side of that country's Balance of Payment account.
9. Why does the supply of a country's currency increase if/when the country's level of imports increase.explain.

10. Analyze how the exchange rate of the u.s. dollar would be impacted by a fall in U.S. domestic interest rates.

Answer 1

Ans-5) Infant Industry means a relatively new industry which is at very early stage of operation. i.e just started to operate. Infant - Industry argument means it must be protected ,say by imposing tariffs on foreign goods. It can be validated by following reasons -:

• To protect the domestic industries from cut throat competition by foreign countries .
• To allow the new industries to develop and increase production without the fear of foreign players.
• To help the infant industry in achieving efficiency.
• To provide incentives to domestic Producers.
• To protect jobs in the economy.

The infant industry is especially protected in developing countries because they are unable to compete with the low price and highn quality products from foreign markets. So they need time to spread their roots and enter the race of supplying high quality goods. It also gives them time and resources to achieve economies of scale which then lowers the cost of production and hence prices. However, a permanent protection of infant industries can make them incompetent due to lack of competition and hence less incentive to improve/innovate.

Ans-6) The U.S Dollar has high value as compared to Indian Rupee because the U.S Dollars are widely accepted as currency across the nations in contrast to Indian rupee. This creates an increase in demand for the dollars (U.S) thereby increasing the value of dollars globally. This appreciates the U.S Dollars in comparison to Indian rupee.

Ans-7) BOT vs BOP

Basis	Balance of Trade (BOT)	Balance of Payments (BOP)
Components	It records the transaction/movement of goods only (tangible items only)	It records the transaction of both goods and service(tangible + intangible items)

Ans-8) The Credit side of BOP shows the receipts and the debit side Of BOP shows the payment side. So loans to a country is recorded on the Credit sie of BOP by the Receiving nation(borrower nation). This is so because the loan means capital inflow in the economy which is a receipt for the country (as they have received cash) and hence recorded on credit side. The loans will be recorded on debit side of BOP by the lending nation because there has been a capital outflow from their country(payment).