Question 4 - Kinds of Bank
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Q.4. Explain some of the kinds of banks?
OR
How many types of banks are there? Briefly explain each of them.
OR
Write a short note on kinds of banks.
KINDS OF BANKS
Some important types of banks are as follows
i. Central Banks.
This bank is of great significance in the banking system of a country. Central Bank is considered as the Bank of government and directly or indirectly control the activities of all the banks operating in the country. State Bank of Pakistan is the central bank of Pakistan.
ii. Commercial Bank
This is another most important type of the banking system. It is main function is to receive deposits, advance loans and discounting of bills.
iii. Industrial Bank
These type of banks provide loans to industries. Generally these banks advance loans for long periods.
iv. Agricultural Bank
The main functions of these banks is to provide loans for long and short periods to the agriculturists. Long period loans are used for acquisition of and improvement of land while short period loans is used for purchasing seeds manures and for current expenditure.
v. Exchange Bank
These banks deal in foreign currencies in the form of bill of exchange, drafts, telegraphic transfers etc. They buy and sell foreign currencies.
vi. Saving Bank
Saving Banks provide incentives to people of small means to save money. These banks provide monetary facilities to the people.
vii. Land Mortgage Banks
These banks are meant to provide loans to agricultural by mortgaging their lands. An agricultural has to mortgage his his land if he wants to take loan from this particular type of a bank.
viii. Co-Operative Bank
Such type of banks are usually run by co-operative societies through its members. These are non-scheduled banks. They are meant for the benefits of the society and its members.
Question 20 - Circumstances a Bill of Exchange is Dishonoured
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Q.5. Under what circumstances a bill of exchange is dishonoured
When a bill of exchange is drawn in the favour of a specified person or firm, it is not necessary that the bill will be accepted. Due to some complexities the drawee does not accept the bill. The circumstances under which a bill of exchange is dishonoured are as follows.
Dishonour By Non-Acceptance
When a bill of exchange is drawn against the drawee and the drawee defuses to accept the same, this refused is called dishonour by non-acceptance.
Dishonour By Non-Payment
When the bill is presented to the drawee for its payment, sometimes the drawee fails to pays it. This failure of the drawee to the payment of the bill dishonours the bill by non-payment. In such a situation the drawer of the bill holds the complete right to take lawful action against the drawer.
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Q.4. Explain some of the kinds of banks?
OR
How many types of banks are there? Briefly explain each of them.
OR
Write a short note on kinds of banks.
KINDS OF BANKS
Some important types of banks are as follows
i. Central Banks.
This bank is of great significance in the banking system of a country. Central Bank is considered as the Bank of government and directly or indirectly control the activities of all the banks operating in the country. State Bank of Pakistan is the central bank of Pakistan.
ii. Commercial Bank
This is another most important type of the banking system. It is main function is to receive deposits, advance loans and discounting of bills.
iii. Industrial Bank
These type of banks provide loans to industries. Generally these banks advance loans for long periods.
iv. Agricultural Bank
The main functions of these banks is to provide loans for long and short periods to the agriculturists. Long period loans are used for acquisition of and improvement of land while short period loans is used for purchasing seeds manures and for current expenditure.
v. Exchange Bank
These banks deal in foreign currencies in the form of bill of exchange, drafts, telegraphic transfers etc. They buy and sell foreign currencies.
vi. Saving Bank
Saving Banks provide incentives to people of small means to save money. These banks provide monetary facilities to the people.
vii. Land Mortgage Banks
These banks are meant to provide loans to agricultural by mortgaging their lands. An agricultural has to mortgage his his land if he wants to take loan from this particular type of a bank.
viii. Co-Operative Bank
Such type of banks are usually run by co-operative societies through its members. These are non-scheduled banks. They are meant for the benefits of the society and its members.
Question 20 - Circumstances a Bill of Exchange is Dishonoured
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Q.5. Under what circumstances a bill of exchange is dishonoured
When a bill of exchange is drawn in the favour of a specified person or firm, it is not necessary that the bill will be accepted. Due to some complexities the drawee does not accept the bill. The circumstances under which a bill of exchange is dishonoured are as follows.
Dishonour By Non-Acceptance
When a bill of exchange is drawn against the drawee and the drawee defuses to accept the same, this refused is called dishonour by non-acceptance.
Dishonour By Non-Payment
When the bill is presented to the drawee for its payment, sometimes the drawee fails to pays it. This failure of the drawee to the payment of the bill dishonours the bill by non-payment. In such a situation the drawer of the bill holds the complete right to take lawful action against the drawer.
Drafting a Bill of Exchange
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Q.19. How does a bill of exchange is drafted?
While drafting a bill of exchange the following are necessary.
i. STAMP
To prepare a bill of exchange in the form of a legal document, the drawer of the bill has to pay a tax to the Government which is accepted by issuing a stamp. The value of the stamp depends upon the amount for which the bill has been drawn.
ii. AMOUNT PAYABLE
The amount payable should be written clearly. It is necessary that the amount should be written in words and figures.
iii. DATE
The date on which the bill is being drawn or prepare should be posted accurately. The date is usually written on the upper side of the bill.
iv. NAME OF THE DRAWEE
It is necessary that the name of the drawee should be mentioned in the bill. The words ‘’OR ORDER OR BEARER’’’ indicate the persons to whom the bill has to be paid.
v. FOR VALUE RECEIVED
A bill of exchange is always drawn against a certain amount or value. Therefore the words ‘’For Value Received’’’ should always be written on the bill.
vi. SIGNATURE OF THE DRAWEE
A bill lacking the signature of the drawer is unacceptable and unlawful. Such type of a bill can be dishonoured. That is why the structure of the drawer are essential.
vii. NAME & ADDRESS OF THE DRAWEE
The closing of the bill includes the name and address of the drawee. It is written on the left side corner of the bill.
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Q.19. How does a bill of exchange is drafted?
While drafting a bill of exchange the following are necessary.
i. STAMP
To prepare a bill of exchange in the form of a legal document, the drawer of the bill has to pay a tax to the Government which is accepted by issuing a stamp. The value of the stamp depends upon the amount for which the bill has been drawn.
ii. AMOUNT PAYABLE
The amount payable should be written clearly. It is necessary that the amount should be written in words and figures.
iii. DATE
The date on which the bill is being drawn or prepare should be posted accurately. The date is usually written on the upper side of the bill.
iv. NAME OF THE DRAWEE
It is necessary that the name of the drawee should be mentioned in the bill. The words ‘’OR ORDER OR BEARER’’’ indicate the persons to whom the bill has to be paid.
v. FOR VALUE RECEIVED
A bill of exchange is always drawn against a certain amount or value. Therefore the words ‘’For Value Received’’’ should always be written on the bill.
vi. SIGNATURE OF THE DRAWEE
A bill lacking the signature of the drawer is unacceptable and unlawful. Such type of a bill can be dishonoured. That is why the structure of the drawer are essential.
vii. NAME & ADDRESS OF THE DRAWEE
The closing of the bill includes the name and address of the drawee. It is written on the left side corner of the bill.
Theory of Comparative Advantage
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Question 35 - Theory of Comparative Advantage
Q.5. What are the assumptions and criticism relating to the theory of comparative advantage?
ASSUMPTIONS OF THE THEORY
The comparative cost theory is based on the following assumptions:
i. labour is regarded as the sole factor of production and the cost of production only consists of labour cost.
ii. Production is subject to the law of constant returns.
iii. Factors of production are assumed to the perfectly modile within a country but immobile between countries.
CRITICISM
The theory of comparative cost is criticized on the following grounds.
Assumption of Constant Cost
The classical economists were of the opinion that additional quantities & a commodity could be obtained with the same expenditure of cost per unit us previously But this is not valid assumptions lost ratios are subject to change where specialization between the two countries has gone a pace.
Some Static Assumptions
The comparative cost theory in a number of static assumptions of fixed costs industrial production functions between trading countries and fixed supply of land, labour, capital etc. It cannot be applied 100% to the real world.
Assumption of perfect mobility inside and immobility outside a country
This assumptions seems to be un-applicable to todays modern world of communication and technology the development of cheap quick and safe means of transport and communication has broken down this immobility to a great extent.
Question 35 - Theory of Comparative Advantage
Q.5. What are the assumptions and criticism relating to the theory of comparative advantage?
ASSUMPTIONS OF THE THEORY
The comparative cost theory is based on the following assumptions:
i. labour is regarded as the sole factor of production and the cost of production only consists of labour cost.
ii. Production is subject to the law of constant returns.
iii. Factors of production are assumed to the perfectly modile within a country but immobile between countries.
CRITICISM
The theory of comparative cost is criticized on the following grounds.
Assumption of Constant Cost
The classical economists were of the opinion that additional quantities & a commodity could be obtained with the same expenditure of cost per unit us previously But this is not valid assumptions lost ratios are subject to change where specialization between the two countries has gone a pace.
Some Static Assumptions
The comparative cost theory in a number of static assumptions of fixed costs industrial production functions between trading countries and fixed supply of land, labour, capital etc. It cannot be applied 100% to the real world.
Assumption of perfect mobility inside and immobility outside a country
This assumptions seems to be un-applicable to todays modern world of communication and technology the development of cheap quick and safe means of transport and communication has broken down this immobility to a great extent.
Theory of Comparative Costs
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Q.34. Explain in detail the theory of Comparative Costs.
INTRODUCTION
The classical theory of International trade commonly known as the principle of comparative cost was first enunciated by David Ricardo. The theory went through many additions improvements and refinements at the hands of economists like Mill, Cairns & Bastable.
An individual is able to perform many tasks but he does not perform them all. He selects that work which pays him the most. A doctor can also do the work of a dispenser but he does not do it. The same principle works in international trade. Considering the climatic conditions, distribution of material resources, geographical concern etc. Every country seems to be better suited for the production of certain articles rather than for others to employ its resources more remuneratively it will be to the advantages of each country as well as to the world.
THEORY
In its simplest form the theory may be stated as, ‘’It pays countries to specialize in the production of those goods in which they possess the greatest comparitve disadvantage.’’
EXPLANATION
Ricardo argued that two countries can gain very well by trading even if one the countries is having an absolute advantage in the production of both the commodities over the country. The condition is ‘’Provided the extent of absolute advantage is different in the two commodities in question’’ i.e. the comparative advantage is greater or comparative is lesses in respect of one good than in that of the other. In this connection we compare not the cost of production of one commodity with the other rather we compare the ratio between the cost of production of the two commodities concerned in one country with the ratio of their cost of production in the other country.
EXAMPLE
Suppose there are two countries A and B and there are two commodities wheat and rice. Suppose a unit of labour produces 10 tons of wheat or 20 tons of rice in country A. The same unit can produce 6 tons of wheat and 18 tons of rice in country B. According to this situation country A is having an absolute advantage in the production of both commodities over B. But she is at a greater comparative advantage in the production of wheat country B is at a disadvantage in both. Commodities the comparative disadvantage is less than case of rice. Hence the ratio would be
In A it is 10 : 20 i.e. 1 : 2
In B it is 06 : 18 i.e. 1 : 3
Therefore, A will specialize in wheat and B in rice and international trade will become possible and profitable. This is the law of comparative advantage or costs.
Q.33. What are the advantages of International trade? Also discuss its disadvantages.
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Various advantages are named for the countries entering into trade relations on a international scale such as:
Question 30 - Adverse Balance of Payments
INTRODUCTION
The classical theory of International trade commonly known as the principle of comparative cost was first enunciated by David Ricardo. The theory went through many additions improvements and refinements at the hands of economists like Mill, Cairns & Bastable.
An individual is able to perform many tasks but he does not perform them all. He selects that work which pays him the most. A doctor can also do the work of a dispenser but he does not do it. The same principle works in international trade. Considering the climatic conditions, distribution of material resources, geographical concern etc. Every country seems to be better suited for the production of certain articles rather than for others to employ its resources more remuneratively it will be to the advantages of each country as well as to the world.
THEORY
In its simplest form the theory may be stated as, ‘’It pays countries to specialize in the production of those goods in which they possess the greatest comparitve disadvantage.’’
EXPLANATION
Ricardo argued that two countries can gain very well by trading even if one the countries is having an absolute advantage in the production of both the commodities over the country. The condition is ‘’Provided the extent of absolute advantage is different in the two commodities in question’’ i.e. the comparative advantage is greater or comparative is lesses in respect of one good than in that of the other. In this connection we compare not the cost of production of one commodity with the other rather we compare the ratio between the cost of production of the two commodities concerned in one country with the ratio of their cost of production in the other country.
EXAMPLE
Suppose there are two countries A and B and there are two commodities wheat and rice. Suppose a unit of labour produces 10 tons of wheat or 20 tons of rice in country A. The same unit can produce 6 tons of wheat and 18 tons of rice in country B. According to this situation country A is having an absolute advantage in the production of both commodities over B. But she is at a greater comparative advantage in the production of wheat country B is at a disadvantage in both. Commodities the comparative disadvantage is less than case of rice. Hence the ratio would be
In A it is 10 : 20 i.e. 1 : 2
In B it is 06 : 18 i.e. 1 : 3
Therefore, A will specialize in wheat and B in rice and international trade will become possible and profitable. This is the law of comparative advantage or costs.
Q.33. What are the advantages of International trade? Also discuss its disadvantages.
ADVANTAGES OF INTERNATIONAL TRADE
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Various advantages are named for the countries entering into trade relations on a international scale such as:
A country may import things which it cannot produce
International trade enables a country to consume things which either
cannot be produced within its borders or production may cost very high.
Therefore it becomes cost cheaper to import from other countries through
foreign trade.
Maximum utilization of resources
International trade helps a country to utilize its resources to the
maximum limit. If a country does not takes up imports and exports then
its resources remain unexplorted. Thus it helps to eliminate the wastage
of resources.
Benefit to consumer
Imports and exports of different countries provide opportunities to the
consumer to buy and consume those goods which cannot be produced in
their own country. They therefore get a diversity in choices.
Reduces trade fluctuations
By making the size of the market large with large supplies and extensive
demand international trade reduces trade fluctuations. The prices of
goods tend to remain more stable.
Utilization of Surplus produce
International trade enables different countries to sell their surplus products to other countries and earn foreign exchange.
Fosters International trade
International trade fosters peace, goodwill and mutual understanding
among nations. Economic interdependence of countries often leads to
close cultural relationship and thus avoid war between them.
DISADVANTAGES OF INTERNATIONAL TRADE
International trade does not always amount to blessings. It has certain drawbacks also such as:
Import of harmful goods
Foreign trade may lead to import of harmful goods like cigarettes, drugs
etc. Which may run the health of the residents of the country. E.g. the
people of China suffered greatly through opium imports.
It may exhaust resources
Internation trade leads to intensive cultivation of land. Thus it has
the operations of law of diminishing returns in agricultural countries.
It also makes a nation poor by giving too much burden over the
resources.
Over Specialization
Over Specialization may be disasterous for a country. A substitute may appear and ruin the economic lives of millions.
Danger of Starvation
A country might depend for her food mainly on foreign countries. In
times of war there is a serious danger of starvation for such countries.
One country may gain at the expensive of Another
One of the serious drawbacks of foreign trade is that one country may
gain at the expense of other due to certain accidental advantages. The
Industrial revolution is Great Britain ruined Indian handicrafts during
the nineteenth century.
It may lead to war
Foreign trade may lead to war different countries compete with each
other in finding out new markets and sources of raw material for their
industries and frequently come into clash. This was one of the causes of
first and second world war.
International Trade
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Q.32. Why do International trade take place?
OR
What are the bases for international trade?
Some of the reasons that why do trade between different countries occur are discussed under the following heads.
NATURAL ENDOWMENTS
Differences in advantages of trade to different countries may arise
because of natural reasons like geographical and climatic conditions.
This lead to territorial division of labour and localization of
industry. This different countries specialize in the production of
different things.
HUMAN CAPABILITIES
People in some countries are physically more sturdy where as in others
they are intellectually superior. Some have greater skill and dexterity
thus the countries. Which do not possess these qualities try to share
with them.
STOCK OF CAPITAL
Some countries have large stock of capital goods like U.K, U.S.A, etc.
These gives an opportunity to the underdeveloped countries or those
which lack these capital goods to exchange or trade them through the
channel of distribution internationally.
SPECIALIZATION IN PRODUCTION
A country may have a comparative cost advantage in production in more than one commodity over other countries but produces only one commodity for the sake of specialization. It helps in improving the quality of production to a great extent
Short Notes
Q.1. Define the following terms:
INTERNATIONAL TRADE
International trade refers to that trade that take place between a
country and a number of countries of the world. In other words we can
say that all the trading activities that take place across the national
boundaries is called International or Foreign trade. It is effect is
called balance of payments.
INTERNAL TRADE
Internal or Domestic or inter-regional trade is the trade between
different regions in the same country. We can also say that all the
trading activities that take place within a country is called Internal
trade.
ABSOLUTE ADVANTAGE
A country due to its most favourable geographical conditions may have an
advantage in the production of a particular commodity over other
countries. This advantage is known as absolute advantage for that
country over rest of the world. The absolute advantage results in a
regular inflow and outflow of goods which gives rise to International
Trade.
COMPARATIVE ADVANTAGE
When a country has an advantage of production and move than one
commodity it prefers to produce only one commodity that is more
advantageous for other. This advantage is calculated by comparing the
different commodities that how much they paying commodity is selected
and the country goes for specializing. This is known as comparative
advantage.
Question 30 - Adverse Balance of Payments
Q.30. Explain in detail that how are adverse balance of payments can be corrected?
METHODS OF CORRECTING AN ADVERSE BALANCE OF PAYMENTS
Following are same of the methods adopted for correcting and adverse balance of payments.
Improving the balance of trade through import restrictions & measures of export promotions
Since balance of payments becomes adverse because of excess imports over
exports, so a country having such a problem must try to check imports
either by total prohibition or by levying import duties so by a quota
system. Another method may be import substitution i.e. trying to produce
in the country what it currently imports. Exports can be stimulated by
measures of export promotion granting subsidies or other concessions to
industrialists and exports.
Depreciation of the currency
If a country depreciates its currency it proves very helpful in
increasing the exports of goods. The value of the home currency fall
relatively to foreign currency hence the foreigners are able to buy move
goods with the same amount of their own currency or for the same amount
of goods they have to pay less in terms of their own currency than
before.
Devaluation
A country can turn the balance of payments in its favour by devaluating
her currency. In this case also the devalued currency will become
cheaper in terms of the foreign currency and the foreigners will be able
to buy move goods by paying the same amount of their own currency. The
effect is the same as in the case of depreciation.
Deflation
Deflation means construction of currency. If currency is contracted then
according to the quantity theory of money the value of the currency
will rise or the prices will fall. When prices fall the country becomes a
good country to buy in and not a good country to sell into Exports will
also thus increase and imports will be checked and hence the balance of
trade will become favourable.
Exchange Control
Under a system of exchange control, all exporters are asked to surrender
their claims or foreign currencies to the central bank which pays in
return the home currency, which the exporters really want. This
available foreign exchange is rationed by the central bank among the
licenced importers. Thus imports are restricted to the foreign exchange
available. There is no danger of more goods being imported than
exported.
Question 29 - Balance of Payment
Q.29. Write a detailed note on Balance of Payments.
BALANCE OF PAYMENTS
Each nation periodically publishes a set of statistics that summarize for a given period all economic transactions between its residents and the outside world. This statistical statement is referred to as balance of payments. The accounts show how a nation has financed its internation activities during the reporting period. They also show that what changes have taken place in the nations financial claims and obligations with the rest of the world.
STANDARD PRESENTATION
The IMF has significantly worked with success to standardize the system and the form of presentation.
B.O.P – DOUBLE ENTRY ACCOUNT
The B.O.P used double entry accounting. Transactions are recorded as credits of the yield receipts from or claims against foreign owners. Credits are received for example by exports of merchandise, sale of securities overseas and rendering services to foreigners. Similarly, debits are recorded of transactions cause payments to foreigners e.g. importing goods, tourist expenses abroad, purchase of foreign bonds.
B.O.P – CURRENT ACCOUNT
The Current Account uncludes merchandise trade in good and International Services are termed as Invisible trade. There are four basic service components. Tourism, Investment, Private Sector, Services such as royalties, rent, consulting and engineering fees etc and Government services such as diplomatic and buildings and membership fees in international organizations.
B.O.P – CAPITAL ACCOUNT
The capital account has a long term and a short term sector. The long term amount shows the inflow and outflow of capital commitments which have a maturity longer than a year. Short term capital movement frequently have a maturity date from 30-90 days. Long term capital items generally include loans to and from other governments, financial support for development. Projects abroad and export financing. Short term capital include paying for international services, selling accounts etc.
Q.29. Write a detailed note on Balance of Payments.
BALANCE OF PAYMENTS
Each nation periodically publishes a set of statistics that summarize for a given period all economic transactions between its residents and the outside world. This statistical statement is referred to as balance of payments. The accounts show how a nation has financed its internation activities during the reporting period. They also show that what changes have taken place in the nations financial claims and obligations with the rest of the world.
STANDARD PRESENTATION
The IMF has significantly worked with success to standardize the system and the form of presentation.
B.O.P – DOUBLE ENTRY ACCOUNT
The B.O.P used double entry accounting. Transactions are recorded as credits of the yield receipts from or claims against foreign owners. Credits are received for example by exports of merchandise, sale of securities overseas and rendering services to foreigners. Similarly, debits are recorded of transactions cause payments to foreigners e.g. importing goods, tourist expenses abroad, purchase of foreign bonds.
B.O.P – CURRENT ACCOUNT
The Current Account uncludes merchandise trade in good and International Services are termed as Invisible trade. There are four basic service components. Tourism, Investment, Private Sector, Services such as royalties, rent, consulting and engineering fees etc and Government services such as diplomatic and buildings and membership fees in international organizations.
B.O.P – CAPITAL ACCOUNT
The capital account has a long term and a short term sector. The long term amount shows the inflow and outflow of capital commitments which have a maturity longer than a year. Short term capital movement frequently have a maturity date from 30-90 days. Long term capital items generally include loans to and from other governments, financial support for development. Projects abroad and export financing. Short term capital include paying for international services, selling accounts etc.
Question 28 - Balance of Trade
Q.28. Define Balance of Trade
BALANCE OF TRADE
Balance of trade refers to the difference in the value of imports and exports of commodities only i.e. visible items only. Movements of goods between countries is known as visible trade because the movement is open and can be verified by the custom officials with respect to balance of trade the following terminologies are important.
Balanced Balance of Trade
If during a given years exports and imports of the country are equal the balance of trade is said to be Balanced.
Favourable Balance of Trade
If the value of exports exceeds the value of imports the country is said to experience an export surplus or favourable balance of trade.
Un-Favourable Balance of Trade
If the value of imports exceeds the value of its exports the country is said to have a deficit or an adverse balance of trade.
Q.28. Define Balance of Trade
BALANCE OF TRADE
Balance of trade refers to the difference in the value of imports and exports of commodities only i.e. visible items only. Movements of goods between countries is known as visible trade because the movement is open and can be verified by the custom officials with respect to balance of trade the following terminologies are important.
Balanced Balance of Trade
If during a given years exports and imports of the country are equal the balance of trade is said to be Balanced.
Favourable Balance of Trade
If the value of exports exceeds the value of imports the country is said to experience an export surplus or favourable balance of trade.
Un-Favourable Balance of Trade
If the value of imports exceeds the value of its exports the country is said to have a deficit or an adverse balance of trade.
Question 27 - Direct and Indirect Methods Adopted of Exchange Control
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Q.27. Compare the direct and Indirect methods adopted of exchange control.
COMPARISON OF DIRECT & INDIRECT METHODS
These methods of exchange control are known as indirect methods because they do not control the exchange rate but only influence it. On the others hands the direct methods of intervention, restriction and exchange clearing agreements have the effect of directly controlling the exchange rate or the foreign exchange market.
Q.27. Compare the direct and Indirect methods adopted of exchange control.
COMPARISON OF DIRECT & INDIRECT METHODS
These methods of exchange control are known as indirect methods because they do not control the exchange rate but only influence it. On the others hands the direct methods of intervention, restriction and exchange clearing agreements have the effect of directly controlling the exchange rate or the foreign exchange market.
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Q.27. Compare the direct and Indirect methods adopted of exchange control.
COMPARISON OF DIRECT & INDIRECT METHODS
These methods of exchange control are known as indirect methods because they do not control the exchange rate but only influence it. On the others hands the direct methods of intervention, restriction and exchange clearing agreements have the effect of directly controlling the exchange rate or the foreign exchange market.
Question 27 - Direct and Indirect Methods Adopted of Exchange Control
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Q.27. Compare the direct and Indirect methods adopted of exchange control.
COMPARISON OF DIRECT & INDIRECT METHODS
These methods of exchange control are known as indirect methods because they do not control the exchange rate but only influence it. On the others hands the direct methods of intervention, restriction and exchange clearing agreements have the effect of directly controlling the exchange rate or the foreign exchange market.
Question 26 - Foreign Exchange
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Q.26. How does a country controls its foreign exchange?
METHODS OF EXCHANGE CONTROL
Paul Einzig is his book exchange controls has mentioned as many as 41 different methods of exchange control. They can be categorized as
1. Direct Method
2. Indirect Method
They are discussed here as under.
1. DIRECT METHOD
The direct method are further classified as:
Intervention
For an effective control of foreign exchange rates and the foreign exchange market the government usually have a central authority i.e. the Central Bank that has the complete power to control and regulate the foreign exchange market. Under this method any body who either wants to purchase or sell foreign exchange he has to deal with the central bank. All the selling and purchasing transactions of foreign exchange is controlled by the central bank which helps it to adjust demand and supply of foreign exchange according to the need of the country.
Restriction
Exchange restriction is another powerful weapon of exchange control. It refers to the policy by which the government restricts the supply of its currencies coming into the exchange market. It is achieved either by one of the following methods.
i. By centralizing all trading in foreign exchange with central bank of the country.
ii. To prevent the exchange of national currency against foreign currency with the permission of the government.
iii. By making all foreign exchange transactions through the agency of the government.
Exchange Clearing Agreement
Under this method the countries engaged in trade pay to their respective central bank the amounts payable to their respective foreign creditors. The central banks they use the money in off setting the corresponding claims after fixing the value of the foreign currencies by common agreement. The basic principle is to offset international payments so that they have not to be settled through the medium of the foreign exchange market.
INDIRECT METHODS
The most commonly used direct method or tool of exchange control is the use of tariff duties and quotes and other quantative restrictions on the volume of international trade. By imposing tariff and quotes the demand for the foreign currency falls down in the case of restricting the imports.
Rate of Interest
Another method of indirect exchange is the rate interest. The rate of exchange is the result of demand and supply of each other currencies arising out of trade and capital movement. A high rate of interest in a country attracts short term capital from other countries that leads to a exchange rate for the currency in terms of other currencies goes up.
Q.25. Identify the objectives of exchanges control?
OBJECTIVES OF EXCHANGE CONTROL
The following are some of the objectives of exchange control.
To restore Equilibrium
The chief objective of exchange control is to restore equilibrium in its balance of payments. If a country finds that its balance of trade has been persistently unfavourable then it must do something set it right. The balance of payment must ultimately be made to balance.
To Protest Home Industries
Another objective of exchange control is to protect the home industry from unfettered competition from abroad if the people at home are more interested in purchasing foreign goods it will ultimately discourage the local producers to produce more. It will directly affect the National Income and the domestic Gross Product of the country.
To Conserve Foreign Reserves
To conserve foreign reserve is another major objective of exchange control. Every Country needs foreign exchange in order to maintain its stability monetarily in the present age. Also the countries need foreign exchange to make payments for their imports and to pay back their debts obligation. For this a country must have foreign currencies on their hand. If there is a deficiency of the foreign exchange it is going to affect its liquidity position internationally and its credit rating.
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Q.26. How does a country controls its foreign exchange?
METHODS OF EXCHANGE CONTROL
Paul Einzig is his book exchange controls has mentioned as many as 41 different methods of exchange control. They can be categorized as
1. Direct Method
2. Indirect Method
They are discussed here as under.
1. DIRECT METHOD
The direct method are further classified as:
Intervention
For an effective control of foreign exchange rates and the foreign exchange market the government usually have a central authority i.e. the Central Bank that has the complete power to control and regulate the foreign exchange market. Under this method any body who either wants to purchase or sell foreign exchange he has to deal with the central bank. All the selling and purchasing transactions of foreign exchange is controlled by the central bank which helps it to adjust demand and supply of foreign exchange according to the need of the country.
Restriction
Exchange restriction is another powerful weapon of exchange control. It refers to the policy by which the government restricts the supply of its currencies coming into the exchange market. It is achieved either by one of the following methods.
i. By centralizing all trading in foreign exchange with central bank of the country.
ii. To prevent the exchange of national currency against foreign currency with the permission of the government.
iii. By making all foreign exchange transactions through the agency of the government.
Exchange Clearing Agreement
Under this method the countries engaged in trade pay to their respective central bank the amounts payable to their respective foreign creditors. The central banks they use the money in off setting the corresponding claims after fixing the value of the foreign currencies by common agreement. The basic principle is to offset international payments so that they have not to be settled through the medium of the foreign exchange market.
INDIRECT METHODS
The most commonly used direct method or tool of exchange control is the use of tariff duties and quotes and other quantative restrictions on the volume of international trade. By imposing tariff and quotes the demand for the foreign currency falls down in the case of restricting the imports.
Rate of Interest
Another method of indirect exchange is the rate interest. The rate of exchange is the result of demand and supply of each other currencies arising out of trade and capital movement. A high rate of interest in a country attracts short term capital from other countries that leads to a exchange rate for the currency in terms of other currencies goes up.
Question 25 - Objectives of Exchanges Control
Q.25. Identify the objectives of exchanges control?
OBJECTIVES OF EXCHANGE CONTROL
The following are some of the objectives of exchange control.
To restore Equilibrium
The chief objective of exchange control is to restore equilibrium in its balance of payments. If a country finds that its balance of trade has been persistently unfavourable then it must do something set it right. The balance of payment must ultimately be made to balance.
To Protest Home Industries
Another objective of exchange control is to protect the home industry from unfettered competition from abroad if the people at home are more interested in purchasing foreign goods it will ultimately discourage the local producers to produce more. It will directly affect the National Income and the domestic Gross Product of the country.
To Conserve Foreign Reserves
To conserve foreign reserve is another major objective of exchange control. Every Country needs foreign exchange in order to maintain its stability monetarily in the present age. Also the countries need foreign exchange to make payments for their imports and to pay back their debts obligation. For this a country must have foreign currencies on their hand. If there is a deficiency of the foreign exchange it is going to affect its liquidity position internationally and its credit rating.
Question 24 - Fluctuation in Rate of Exchange
Q.24. What are the causes of fluctuation in the rate of exchange of a country?
The rate of exchange fluctuates in the market due to interplay of demand and supply of currency of a particular country. This is the result of some of the following transactions.
BALANCE OF TRADE
The main reason for fluctuations in the rate of exchange of the currency is the value of imports and exports of a country. If the value of imports exceeds the value of exports the rate of exchange will lend downwards and vice versa.
FOREIGN INVESTMENT
Foreign capital investment in a country necessities the payment of dividends or interest to the investing countries. If the capital absorbing country is not in a position to pay such claims in foreign currency, the rate of exchange of that country will definitely fall down.
SERVICE CHARGES
Freight and Insurance expenses also fluctuates the rate of exchange of a country. If the importing country does not have her own shipping companies the transportation charges are to be paid to foreign ships. So the insurance premium in case is to be paid to foreign companies. This creates a demand of foreign currency and if the supply is limited the rate of exchange will fall.
Q.24. What are the causes of fluctuation in the rate of exchange of a country?
The rate of exchange fluctuates in the market due to interplay of demand and supply of currency of a particular country. This is the result of some of the following transactions.
BALANCE OF TRADE
The main reason for fluctuations in the rate of exchange of the currency is the value of imports and exports of a country. If the value of imports exceeds the value of exports the rate of exchange will lend downwards and vice versa.
FOREIGN INVESTMENT
Foreign capital investment in a country necessities the payment of dividends or interest to the investing countries. If the capital absorbing country is not in a position to pay such claims in foreign currency, the rate of exchange of that country will definitely fall down.
SERVICE CHARGES
Freight and Insurance expenses also fluctuates the rate of exchange of a country. If the importing country does not have her own shipping companies the transportation charges are to be paid to foreign ships. So the insurance premium in case is to be paid to foreign companies. This creates a demand of foreign currency and if the supply is limited the rate of exchange will fall.