BBA 3rd Year Foreign Trade And Economic Growth Long Question Answer Notes

Table : Blance of Payments Under Current Account

S.No Credits Debits
1. 2.   Merchandise exports (sale of goods) Invisible exports (sales of services) Transport service sold abroad.Insurance services sold abroad.Foreign tourists expenditure in the country.Other services sold abroad.Incomes received on Loans and investments abroad. Merchandise imports (purchases of goods) Invisible imports (purchase Service) Transport services purchased from abroad.Insurance services purchased from abroad.Tourists expenditure abroad.Other services purchased from abroad.\Income paid on Ioans ans investments in the home country.
Table : Blance of Payments under Unilateral Transfers Account
S.No. Credits Debits
1. Private remittances received from abroad. Private remittances abroad.
2. Pension payment received from abroad. Pension payments abroad.
3. Government grants received from abroad. Government grants abroad.

2. Capital Account : According to the IMF’s definition, the capital account “records the international flows of transfer payments relation to capital items”. It therefore records a country’s inflows and outflows of payments and transfer of ownership of fixed assets (capital goods). Examples of such goods could be factories or heavy machinery transferred to or from abroad and so on. To sum up, the capital account accounts for the transfer of capital goods.

In economics, the term capital account usually refers to what the IMF calls the financial account and capital account, combined.

3. Financial Account (IMF)/ Capital Account: According to the IMF’s definition, the financial account is the net change in foreign ownership of investment assets. In economics, the term capital account has historically been used to refer to the IMF’s definition of the capital and financial accounts.

Financial Account = Increase of domestic ownership of domestic assets.

= Increase of domestic ownership of foreign assets

= Increase of domestic ownership of foreign assets

= Foreign direct investment + Foreign portfolio investment

+ Other investment

The accounting entries in the financial account record the purchase and sale of domestic and foreign investment assets. These assets are divided into categories such as FDI, (which includes trade in stocks bonds) and other investments (which includes transaction in currency and bank deposits).

BBA 3rd Year Foreign Trade And Economic Growth Long Question  Answer Notes
BBA 3rd Year Foreign Trade And Economic Growth Long Question Answer Notes

If foreign ownership of domestic financial assets has increased more quickly than domestic ownership of foreign assets in a given year, then the domestic country has a financial account deficit.

The United States persistently has the largest capital and financial) surplus in the world. The United States receives roughly twice the rate of return on all foreign investment than domestic investment by foreigners.

Q.3. Describe the impact of foreign trade on the economic growth of a country. (2015)

Or Examine the scope of effectiveness of foreign trade as an instrument of economie  development of under-developed countries. (2014)

Ans. In modern economic scenario foreign trade plays a vital role in the economy of any country, The developing countries can enrich their economy through foreign trade. Foreign trade has vast utility in shaping a country and its people. Following points are enough proof to show the impact of foreign trade on the economy of a country.

Foreign trade plays a vital role in the economic development of a country. Its importance can be judged from the following points :

1. Specialisation in Production : Foreign trade leads to specialisation in the production of those goods which a country can produce at lower cost. This situation improves the overall welfare of the people.

2. Quality Goods at Lower Rates : If a country cannot produce a specific commodity, then it can import that commodity at lower rates from international market in the presence of foreign trade.

3. Flow of Capital Goods and Technical Know-How : In the presence of foreign trade, flow of capital goods and technical know-how take place which increase the rate of economic growth and development of country.

4. Removal of Shortage of Goods: Foreign trade is helpful for the removal of shortage of goods. If there is shortage of any commodity then that commodity can be imported from the international market which will eliminate shortage of goods.

5. Industrial and Agricultural Development: Foreign trade brings improvement in industrial and agricultural sectors of the economy. The necessary inputs of industrial and agricultural sector can be imported which will develop both the sectors of the economy.

6. Discourage the Formation of Monopolies: Foreign trade discourages the formation of local monopolies. The local producers cannot exploit the consumers because of fear of cheap imports. In the absence of imports, some local firms may create monopoly and charge very high prices.

7. Quality Importance of Local Products: The foreign competition helps to improve the quality of local products. If Pakistani government allows cycles to be imported, the quality of Pakistani cycles will definitely improve.

8. Optimum Utilisation of Resources: International trade helps in the optimum utilisation of resources. A country specialises in the production of those goods for which its resources are more suitable and as a result the resources are properly utilised.

9. Price Stability : Foreign trade helps in the price stability of a country. If the price level is very high of a commodity then that commodity can be imported which will keep price in stable position.

10. World Peace : Foreign trade promotes peace in the entire world because in the presence of international trade people of different countries come close together and they become interdependent.

11. Increase in National Income : In the presence of international trade the resources are properly utilised which increases exports of the country and as a result per capita income and national income increases.

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