Question

(a) Select a newspaper/magazine/Internet article published in 2019-2020 that is related to balance of payments and/or foreign exchange markets. Summarize the content of the article. The source of the article should be provided in the reference.

(b) Discuss the article selected in part (a) using relevant economic concepts and theories from A) Balance of Payment/ B)Determinants of Import and Export/ C) Demand and Supply of Foreign Exchange/ D) Equilibrium Exchange Rate.

You can provide additional information beyond the textbook and lecture notes to enrich your discussion. The sources of such additional information, if any, should be provided in the references.

Answer 1

(A)

ANSWER- Article on BOP

Balance of payments to be 'very, very strong' this year: Piyush Goyal

India's balance of payments this year is going to be "very very strong" on the back of significant improvement in exports and a fall in imports, Commerce and Industry Minister Piyush Goyal said on Monday.

He said that "good" green shoots are visible in the economy and exports have shown a "good" turnaround.

"We are in July at about 91 percent export level of July 2019 figures. Imports are still at about 70-71 percent level of July 2019. So, broadly our balance of payments this year is going to be very very strong, which is why we feel confident that Indian industry will see opportunities for themselves, will see opportunities of growth," he said at a FICCI webinar.

India's exports fell for the fourth straight month in June as shipments of key segments like petroleum and textiles declined but the country's trade turned surplus for the first time in 18 years as imports dropped by a steeper 47.59 percent.

The country posted a trade surplus of $0.79 billion in June.

source - moneycontrol (website)

(B. ) ANSWER-

(a). The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year.

(b.) The eight factors that influences the value of a country ‘s exports and imports are as follows:

i. The country’s inflation rate:

If the country has a relatively high rate of inflation, domestic households and firms are likely to buy a significant number of imports. The country’s firms are also likely to experience some difficulty in exporting. A fall in inflation, however, would increase the country’s international competitiveness and would be likely to increase exports and reduce imports.

ii. The country’s exchange rate:

A fall in a country’s exchange rate will lower export prices and raise import prices. This will be likely to increase the value of its exports and lower the amount spent on imports.

iii. Productivity:

The more productive a country’s workers are, the lower the labour costs per unit and cheaper its products. A rise in productivity is likely to lead to greater number of households and firms buying more of the country’s products – so exports should rise and imports fall.

iv. Quality:

A fall in the quality of a country’s products, relative to other countries’ products, would have an adverse effect on the country’s balance of trade in goods and services.

v. Marketing:

The amount of exports sold is influenced not only by their quality and price but also by the effectiveness of domestic firms in marketing their products. Similarly, the quantity of imports purchased is affected by the efficacy of the marketing undertaken by foreign firms.

vi. Domestic GDP:

If incomes rise at home, more imports may be bought. Firms are likely to buy more raw materials and capital goods, and some of these will come from abroad. Households will buy more products, and some of these will be imported. The rise in domestic demand may also encourage some domestic firms to switch from the foreign to the domestic market. If this does occur, exports will fall.

vii. Foreign GDP:

If incomes abroad rise, foreigners will buy more products. This may enable the country to export more.

viii. Trade restrictions:

A relaxation in trade restrictions abroad will make it easier for domestic firms to sell their products to other countries.

(c) A country's exchange rates with other countries will move to ensure that the total demand for its currency equals the total supply of its currency (as the price of apples changes to match the demand and supply of apples). The total demand and supply for a country's currency is recorded in its balance of payments.

(d) The equilibrium exchange rate is the long-term exchange rate that equals the purchasing power parity (PPP) of a currency in a world where all goods are traded and where markets are fully efficient