Passage Based Questions: Open Economy Macroeconomics | Economics Class 12 - Commerce PDF Download

Passage - 1

Direction: Read the news article given below and answer the questions that follow:

Passage:
India's external account - both the current account and the Balance of Payments - deteriorated during the December quarter due to a surge in crude oil prices and record pullouts by foreign institutional investors.

The current account—sum of India’s exports and imports of goods and services—ended in a deficit of $23.0 billion (2.7 percent of GDP), reaching a nine-year high since the current account deficit (CAD) touched $31 billion during the December quarter of 2012, according to preliminary numbers released by the Reserve Bank of India. The CAD was less than half the latest levels at $9.9 billion or 1.3 percent of GDP in Q2’2021-22 and is even higher than the deficit of $2.2 billion or 0.3 percent of GDP in the same period a year ago. “The widening of CAD in Q3’21-22 was mainly due to a higher trade deficit,” RBI said in a release.

The primary macro variable set to deteriorate given the Russia-Ukraine conflict is the current account deficit, which is expected to exceed $100 billion in FY22-23, according to Barclays Capital. “The external balance, which had been a major factor of support for India for the past two years, has seen its vulnerability to higher oil prices decline over the years, but the simultaneous rise in prices of coal, natural gas, edible oils, and gold will weigh on the trade deficit,” said Rahul Bajoria, chief India economist at Barclays Capital.

Remittances by Indians employed overseas amounted to $23.4 billion, an increase of 13.1 percent from their level a year ago. Software services were the major savior with net inflows of $28 billion during the quarter compared to $23 billion in the same period a year ago.

In the capital account, foreign portfolio investment recorded a net outflow of $5.8 billion as against an inflow of $21.2 billion in Q3’20-21. Non-resident deposits recorded a net inflow of $1.3 billion compared with $3.0 billion in Q3’20-21. Net foreign direct investment recorded an inflow of $5.1 billion, lower than $17.4 billion a year ago. The capital account ended in a lower surplus of $23.2 billion compared to a surplus of $35.5 billion in the same period a year ago.

Overall, the balance of payments ended in a modest surplus of $465 million compared to a surplus of $32.5 billion in the same period a year ago. —Current account deficit touches nine-year high – The Economic Times – April 01, 2022

Q1: Describe the current account as outlined in the article.
Ans: The current account consists of transactions related to trade in goods and services, as well as transfers of payments.

Q2: What does a deficit in the account mentioned in the article imply?
Ans: A Current Account Deficit (CAD) refers to the situation where payments for imports of goods, services, and unilateral transfers exceed the receipts from exports of goods, services, and unilateral transfers.

Q3: Outline the components of the account discussed in the article.
Ans: The components of the current account of the Balance of Payments include:

• Export and Import of Goods: This refers to the trade in tangible goods, with imports shown on the debit side and exports on the credit side of the account.
• Export and Import of Services: This involves the trade in intangible services, including non-factor services only.
• Unilateral Transfers: These are one-sided payments or receipts of foreign currency without an exchange of goods or services, including gifts, charity, and donations.
• International Reserves: This covers factor payments like compensation to employees (wages, salaries, bonuses) and investment income (dividends, interest, profits).

Passage -2

Direction: Read the news article given below and answer the questions that follow:

Passage:
Mumbai: The rupee started the financial year 2022-23 on a muted note and inched higher by 3 paise to ₹75.71 against the US dollar in early trade on Monday amid a firm trend in the domestic equity market. At the interbank foreign exchange, the rupee opened lower at ₹75.77 against the American dollar, then touched an early high of ₹75.71, up 3 paise over its previous close. The local unit also reached ₹75.79 in initial deals.

On Thursday, the last trading session of FY22, the rupee advanced by 16 paise to close at ₹75.74 against the US dollar.

The local unit, however, closed the 2021-22 fiscal with overall losses of 3.61 percent or 264 paise against the American currency due to a stronger dollar and surging crude oil prices.

The forex market was closed on Friday for the annual account closing of banks.

Global oil benchmark Brent crude futures rose 0.13 percent to USD 104.53 per barrel.

Meanwhile, the dollar index, which measures the greenback's strength against a basket of six currencies, fell 0.06 percent to 98.57.

On the domestic equity market front, the 30-share Sensex was trading 1,462.66 points or 2.47 percent higher at 60,739.35, while the broader NSE Nifty inched higher by 393.75 points, or 2.23 percent, to 18,064.20.

Foreign institutional investors remained net buyers in the capital market on Friday as they purchased shares worth ₹1,909.78 crore, according to stock exchange data.

On the domestic macroeconomic front, India's current account deficit widened to USD 23 billion or 2.7 percent of the GDP in the December quarter, according to the Reserve Bank of India. The deficit was at USD 9.9 billion or 1.3 percent of the GDP in the second quarter of the fiscal, while the same stood at USD 2.2 billion or 0.3 percent of the GDP in the year-ago period, as shown by the Balance of Payments data. –Rupee trades in narrow range against US dollar in early session – The Economic Times – April 04, 2022

Q1: How will the scenario described in the article impact India?
Ans: Depreciation of the currency will make imports more expensive and exports more profitable.

Q2: How can India benefit from the situation discussed in the article?
Ans: India can benefit from this situation as follows:

• (i) As imports become more expensive, consumers will shift to purchasing domestic goods, which can increase the country's GDP.
• (ii) As exports become more profitable, there will be an incentive to export more, potentially decreasing the deficit in the Balance of Payments.