External Sector of Economy

India has signed a Trade and Economic Partnership Agreement (TEPA) with EFTA, which is a regional group consisting of four countries. Which one of the following countries is not a member of this group ?

[amp_mcq option1=”Switzerland” option2=”Norway” option3=”Iceland” option4=”England” correct=”option4″]

EFTA (European Free Trade Association) is a regional trade organisation comprising four member states: Iceland, Liechtenstein, Norway, and Switzerland. India signed a Trade and Economic Partnership Agreement (TEPA) with EFTA in March 2024. England is part of the United Kingdom, which is not a member of EFTA.

EFTA consists of Iceland, Liechtenstein, Norway, and Switzerland.

The TEPA between India and EFTA aims to boost trade and investment between the two sides. Liechtenstein is often included with Switzerland due to customs union arrangements, but is a separate EFTA member state.

Which of the following is not included in the Capital Account of the Balance of Payments of a country ?

[amp_mcq option1=”Foreign Direct Investment” option2=”Commercial Borrowing” option3=”Invisibles” option4=”External Assistance” correct=”option3″]

The correct option is C. The question asks which item is *not* included in the Capital Account of a country’s Balance of Payments (BoP).

The Balance of Payments (BoP) is a summary of all economic transactions between a country and the rest of the world over a period of time. It is divided into two main accounts: the Current Account and the Capital Account (sometimes including a Financial Account).
– The **Current Account** records trade in goods (visibles), services (invisibles), income (investment income, compensation of employees), and current transfers (remittances, grants). “Invisibles” refers to services, income, and current transfers.
– The **Capital Account** (or Capital and Financial Account combined) records capital transfers and transactions involving financial assets and liabilities. This includes Foreign Direct Investment (FDI), Foreign Portfolio Investment (FPI), loans (commercial borrowing, external assistance), and banking capital.

Options A (Foreign Direct Investment), B (Commercial Borrowing), and D (External Assistance) are all types of financial transactions or capital flows that are recorded in the Capital Account (or Financial Account, which is part of the broader Capital and Financial Account structure in modern BoP presentations). Option C (Invisibles) is a component of the Current Account, specifically related to trade in services, income, and current transfers. Therefore, “Invisibles” are not included in the Capital Account.

Which of the following is/are the effects of devaluation or depreciation of currency ?

• 1. It leads to increase in imports and decrease in exports.
• 2. It leads to increase in exports and decrease in imports.
• 3. It leads to increase in domestic inflation.
• 4. It leads to decrease in domestic inflation.

Select the correct answer using the code given below :

[amp_mcq option1=”1 and 3 only” option2=”1 and 4 only” option3=”2 and 3 only” option4=”3 only” correct=”option3″]

Devaluation or depreciation of a currency makes a country’s goods cheaper for foreign buyers (increasing exports) and foreign goods more expensive for domestic buyers (decreasing imports). It also tends to increase domestic inflation due to the higher cost of imports and potential demand-pull effects from increased exports.

1. **It leads to increase in imports and decrease in exports:** Incorrect. Depreciation makes imports more expensive, thus decreasing them. It makes exports cheaper, thus increasing them.
2. **It leads to increase in exports and decrease in imports:** Correct. This is the primary intended effect of depreciation/devaluation, improving the trade balance.
3. **It leads to increase in domestic inflation:** Correct. Imports become more expensive, increasing the cost of imported raw materials and finished goods, leading to cost-push inflation. Increased foreign demand for domestic goods can also lead to higher prices if supply cannot keep up (demand-pull inflation).
4. **It leads to decrease in domestic inflation:** Incorrect.

The effects of devaluation/depreciation on trade balance are described by the Marshall-Lerner condition, which states that a currency devaluation will only improve the balance of trade if the sum of the price elasticities of demand for imports and exports is greater than one. Inflationary effects are a common side effect, especially in economies reliant on imports.

The SWIFT (The Society for Worldwide Interbank Financial Telecommunication) frequently mentioned in news, is essentially a

[amp_mcq option1=”Global financial intelligence agency” option2=”Global terror finance detection system” option3=”Global money transfer system” option4=”Global stock-market information sharing system” correct=”option3″]

SWIFT (The Society for Worldwide Interbank Financial Telecommunication) is essentially a secure messaging network used by financial institutions globally to transmit information and instructions for money transfers and other financial transactions. While it doesn’t hold funds or manage accounts directly, it enables the communication required for these transactions to occur between banks across the world.

– SWIFT is a cooperative owned by its member financial institutions.
– It provides a standardized and reliable way for banks to communicate about transactions, facilitating international payments.

While SWIFT is used for financial transactions, it can also play a role in tracking illicit finance flows, and its services can be leveraged by financial intelligence units or be subject to sanctions, but its primary function is not as a dedicated intelligence or detection system. It is the backbone of international money transfer communications.

Which one of the following assists a country through ‘Extended Fund Facility’, often talked about in news ?

[amp_mcq option1=”International Fund for Agricultural Development” option2=”International Monetary Fund” option3=”International Bank for Reconstruction and Development” option4=”United Nations Development Programme” correct=”option2″]

The International Monetary Fund (IMF) assists a country through the ‘Extended Fund Facility’ (EFF).

– The Extended Fund Facility (EFF) is an IMF lending arrangement established in 1974.
– It provides support to countries experiencing serious balance of payments problems due to structural issues that require a longer period to resolve.
– EFF arrangements are typically longer than Stand-By Arrangements and involve comprehensive structural reforms.

– The International Fund for Agricultural Development (IFAD) is a UN specialized agency focusing on rural poverty reduction.
– The International Bank for Reconstruction and Development (IBRD) is the original component of the World Bank Group, providing loans to middle-income and poorer countries.
– The United Nations Development Programme (UNDP) is the UN’s global development network, focusing on development challenges.
– Only the IMF provides the EFF instrument for balance of payments support and structural reforms.

While forming the ‘Indo-Pacific Economic Framework for Prosperity’, the member countries launched collective discussions towards future negotiations on four pillars. Which one of the following is not one of those pillars?

[amp_mcq option1=”Clean energy, decarbonisation and infrastructure” option2=”Defence cooperation and intelligence sharing” option3=”Supply chain” option4=”Tax and anti-corruption” correct=”option2″]

Defence cooperation and intelligence sharing is not one of the four pillars of the Indo-Pacific Economic Framework for Prosperity (IPEF).

– The Indo-Pacific Economic Framework for Prosperity (IPEF) was launched in May 2022.
– It focuses on economic cooperation among member countries.
– The four pillars of the IPEF are:
1. Supply Chain
2. Clean Economy (Clean Energy, Decarbonisation, and Infrastructure)
3. Fair Economy (Tax and Anti-Corruption)
4. Trade

– IPEF is distinct from security initiatives or alliances in the Indo-Pacific region. Its primary goals are economic, aiming to promote resilience, sustainability, inclusivity, economic growth, fairness, and competitiveness for member countries.
– The participating countries engage in discussions and negotiations on agreements under these economic pillars.

Since 2014-15, India has consistently run trade surplus with which one among the following countries?

[amp_mcq option1=”China” option2=”Saudi Arabia” option3=”USA” option4=”Germany” correct=”option3″]

Since 2014-15, India has consistently run a trade surplus with the USA.

India’s trade relationship with the USA is strong, characterized by significant exports of goods and services from India, often resulting in a trade surplus for India.

India typically runs trade deficits with countries like China (due to large imports of manufactured goods and raw materials) and Saudi Arabia (due to high imports of crude oil). Trade balance with Germany varies but often leans towards a deficit or a small surplus/deficit for India compared to the significant surplus with the USA.

Which one of the following countries is not a founding member of the New Development Bank ?

[amp_mcq option1=”Brazil” option2=”Canada” option3=”Russia” option4=”India” correct=”option2″]

The correct answer is Canada.

The New Development Bank (NDB) was established by the BRICS states (Brazil, Russia, India, China, and South Africa) as a multilateral development bank. The founding members are explicitly the BRICS countries.

The NDB was formally established in 2014 and commenced operations in 2015. Its headquarters are located in Shanghai, China. Countries beyond the original BRICS members have since been admitted as members.

As per the extant policy, Foreign Direct Investment is permitted in the defence sector under the automatic route up to which one of the following limits?

[amp_mcq option1=”26 percent” option2=”74 percent” option3=”51 percent” option4=”49 percent” correct=”option2″]

As per the extant policy around the time this question was framed (likely 2018-2019), Foreign Direct Investment (FDI) was permitted in the defence sector under the automatic route up to 49 percent.

– The limit for FDI under the automatic route in the defence sector was 49%.
– Beyond 49% and up to 100%, FDI was permitted under the government route, provided it was likely to result in access to modern technology or for other reasons to be recorded.

– The FDI policy in defence manufacturing has been progressively liberalized over the years. Initially, it was restricted to 26%. It was later increased to 49% under automatic route. In 2020, the limit under the automatic route was further increased to 74%.

The members of NAFTA are,

[amp_mcq option1=”USA, Canada and Mexico” option2=”USA, Canada and India” option3=”USA, Canada and Japan” option4=”USA, UK and India” correct=”option1″]

The members of NAFTA were A) USA, Canada and Mexico.

NAFTA stands for the North American Free Trade Agreement. It was a trade bloc that came into effect in 1994, creating a free-trade zone in North America. Its member countries were the United States of America, Canada, and Mexico.

NAFTA was renegotiated and replaced by the United States–Mexico–Canada Agreement (USMCA), which came into effect on July 1, 2020. The USMCA retained much of NAFTA’s structure but introduced several updates and changes, particularly concerning automotive rules of origin, labor provisions, and dispute resolution mechanisms.