Question

Explain the likely impact of implementation of “Exports Promotion Scheme” of Government of India on the Balance of Payment (BoP) of the country. (Keeping other factors constant)
State the meaning of Trade Surplus.

Hint:

Exports ↑ → BoP improves
Exports>Imports → Trade Surplus

Answer 1

Step 1: Understanding the Concept:
The Balance of Payments (BoP) is a record of all economic transactions between residents of a country and the rest of the world.
Step 2: Detailed Explanation:
1. Rise in Exports: An "Exports Promotion Scheme" provides incentives (like tax breaks or subsidies) to exporters, making domestic goods cheaper and more competitive in international markets.
2. Inflow of Foreign Exchange: As exports increase, the demand for Indian goods rises, leading to a greater inflow of foreign currency into the country.
3. Current Account Impact: Exports are recorded as a credit item in the Current Account of the BoP.
4. BoP Improvement: Increased credit entries (inflows) help in reducing a BoP deficit or increasing a BoP surplus, thereby strengthening the overall BoP position.
Step 3: Final Answer:
The scheme will increase foreign exchange inflows, leading to a surplus or a reduced deficit in the Current Account of the BoP.
B
Step 1: Understanding the Concept:
Trade balance (Balance of Trade) only accounts for the export and import of physical (visible) goods.
Step 2: Detailed Explanation:
A Trade Surplus refers to a situation in which a country sells more goods to the rest of the world than it buys from them during a given period.
It is calculated as:
\[ \text{Balance of Trade} = \text{Value of Export of Goods} - \text{Value of Import of Goods} \]
If $\text{Exports}>\text{Imports}$, it is a Surplus.
Step 3: Final Answer:
A trade surplus is a positive balance of trade, where visible exports are greater than visible imports.