(i) Explain the effect of appreciation of domestic currency on imports of a nation. Provide an example to support your explanation. (ii) Explain any two components of Current Account under Balance of Payments. (i) ``A rise in price of foreign exchange leads to fall in demand for foreign exchange, other factors remaining constant.'' Do you agree with the given statement ? Give valid reasons in support of your answer. (ii) As per the statement given by the Governor of Reserve Bank of India (RBI) dated 10th August 2023 : ``The inflows from net commercial borrowings have been US $ 60 billion during April - June 2023.'' Identify, the sub-account and the side of Balance of Payments where the above stated transactions would be recorded. State valid reasons in support of your answer.

Question

Accepted Answer

(i) **Effect of Appreciation of Domestic Currency on Imports:**

When domestic currency appreciates (e.g., ₹81/$1 falls to ₹80/$1), it makes foreign goods relatively cheaper for domestic buyers. This is because one unit of domestic currency can now be exchanged for more foreign currency. With the same amount of domestic money, more foreign goods can be purchased.

*Example:* If ₹1 = $1/81 initially, and after appreciation ₹1 = $1/80, then Indian buyers can purchase more US goods with the same rupees, leading to increased imports.

(ii) **Two Components of Current Account:**

1. **Visible Trade:** Export and import of goods (merchandise). Payment for imports is debit item, receipts from exports are credit items.

2. **Invisible Trade:** Export and import of services like shipping, banking, insurance. Factor services (compensation of employees, investment income) and non-factor services.