Macro

Balance of Payments

Medium

Comprehension:

Read the passage carefully and answer the questions based on the passage:

Income and the Exchange Rate

When income of a country increases, consumer spending increases. Spending on imported goods is also likely to increase. When imports increase, the demand curve for foreign exchange shifts to the right. There is a depreciation of the domestic currency. If there is an increase in income abroad as well, domestic exports will rise and the supply curve of foreign exchange shifts outward. On balance, the domestic currency may or may not depreciate. What happens will depend on whether exports are growing faster than imports. In general, other things remaining equal, a country whose aggregate demand grows faster than the rest of the world’s normally finds its currency depreciating because its imports grow faster than its exports. Its demand curve for foreign currency shifts faster than its supply curve.

If the volume of imports of a country are growing faster than its volume of exports, its gross domestic product _______.

Will Fall.

Will Rise.

Remains unaffected.

May rise or fall.

✅ Correct Option: 1

Option 1 -> If imports grow faster than exports, net exports (X-M) decline, reducing GDP.

Option 2 -> Rising imports relative to exports would reduce, not increase, GDP through the net exports component.

Option 3 -> Net exports (X-M) is a component of GDP, so changes in relative import/export growth affect GDP.

Option 4 -> While other GDP components could theoretically offset the impact, the direct effect of imports growing faster than exports is a decline in GDP.

Hence, Option 1: Will Fall -> GDP is calculated as C + I + G + (X - M), where C is consumption, I is investment, G is government spending, X is exports, and M is imports. When imports grow faster than exports, the net exports component (X - M) becomes increasingly negative or less positive. This directly reduces GDP, assuming other components remain constant. The faster growth of imports relative to exports creates a larger trade deficit or smaller trade surplus, which pulls down the overall GDP figure. -> correct

Question 42

Other things remaining same, if the income abroad increases, what is the likely effect of the same on national income of the domestic economy?

Question 43

A decrease in income of a country leads to?

Question 44

A country whose aggregate demand grows faster than the rest of the world's normally finds its currency______.

Question 45

If the income of the country and income abroad increase simultaneously, then the domestic currency will.............

If the volume of imports of a country are growing faster than its volume of exports, its gross domestic product _______.

Solution

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