economics errors

Hedging is a technique for avoiding a risk by making a counteracting transaction. For example, if a farmer produces wheat that will be harvested in the fall, the risk of price fluctuations can be hedged, by selling in the spring or summer the quantity of wheat that will be produced.

· Exporting products at a price below its home market or below its cost of production is dumping.

Arbitrage is the practice of taking advantage of a price difference between two or more markets.

· In finance, diversification is the process of allocating capital in a way that reduces the exposure to any

one particular asset or risk.

Rashtriya Mahila Kosh (RMK) is an autonomous organization under the Ministry of Women & Child Development (MWCD). It an apex micro-finance organization. The main objective of setting up of RMK was to provide micro-credit to poor.

· The government has made the Women and Child Development (WCD) Ministry the nodal agency for

the Nirbhaya Fund in place of Home Ministry.

Nominal and real exchange rate

The price of foreign currency in terms of domestic currency is the bilateral 'nominal exchange rate'.

· The 'real exchange rate' is the ratio of foreign to domestic prices, measured in the same currency.

· It is defined as, Real exchange rate = ePf/P, where P and Pf are the price levels here and abroad,

respectively, and e is the rupee price of foreign exchange (the nominal exchange rate). The numerator expresses prices abroad measured in rupees, the denominator gives the domestic price level measured in rupees, so the real exchange rate measures prices abroad relative to those at home.

· If the real exchange rises above one, this means that goods abroad have become more expensive than goods at home. The real exchange rate is often taken as a measure of a country‟s international competitiveness.

Factors influencing the Exchange rate

· A rise in the interest rates at home often leads to an appreciation of the domestic currency.

· When income increases, consumer spending increases. Spending on imported goods is also likely to increase.

· According to PPP theory, over the long run, exchange rates between any two national currencies adjust to reflect differences in the price levels in the two countries.(i.e inflation)

The marginal propensity to import (MPM) is the amount by which imports increase or decrease with each unit rise or decline in disposable income. The marginal propensity to import is thus the change in imports induced by a change in income.

Paradox of Thrift states that individuals try to save more during an economic recession, which essentially leads to a fall in economic growth. It was popularized by the renowned economist John Maynard Keynes.

· It states that individuals try to save more during an economic recession, which essentially leads to a fall in aggregate demand and hence in economic growth. Such a situation is harmful for everybody as investments give lower returns than normal.

· Keynes further said that such a mass increase in savings eventually hurts the economy as a whole.

· This theory was heavily criticized by non-Keynesian economists on the ground that an increase in savings allows banks to lend more. This will make interest rates go down and lead to an increase in lending and, therefore, spending.

In the absence of indirect taxes or subsidies, the sum total of aggregate factor payments in the economy is equal to:

(a) Total investment in the economy

(b) National Income

(c) Total consumption in the economy

(d) Aggregate demand

In the absence of a government imposing indirect taxes or disbursing subsidies, the value of the total output of final goods or GDP is equal to National Income. The production of final goods employs factors such as labour, capital, land and entrepreneurship. In the absence of indirect taxes or subsidies, the total value of the final goods output is disbursed among different factors of production – wages to labour, interest to capital, rent to land etc. Whatever is left over is appropriated by the entrepreneur and is called profit. Thus the sum total of aggregate factor payments in the economy, National

Income, is equal to the aggregate value of the output of final goods, GDP.

Duty Inversion: A duty structure in which the import duty on a finished product is lower than that on the raw material or intermediate product, which discourages domestic value addition.

· In Budget 2016-17, manufacturing sector received a boost with Finance Minister proposing to rectify an inverted duty structure, making it cheaper to import inputs to domestically produce goods at competitive prices

The decrease in official reserves of a country equals its:

(a) Trade deficit

(b) Current Account deficit

(c) Capital Account deficit

(d) Balance of payments deficit

A country that has a deficit in its current account (spending more abroad than it receives from sales to the rest of the world) must finance it by selling assets or by borrowing abroad. Thus, any current account deficit is of necessity financed by a net capital inflow.

· Alternatively, the country could engage in official reserve transactions, running down its reserves of foreign exchange, in the case of a deficit by selling foreign currency in the foreign exchange market. The decrease (increase) in official reserves is called the overall balance of payments deficit (surplus).

Which among the following are included in monetary base or high powered money of The Reserve Bank of India?

1. Notes in circulation with the public

2. Vault cash of Commercial banks

3. Deposits held by Government of India

4. Deposits held by commercial banks with RBI

Select the correct answer using the code given below.

(a) 1, 2 and 3 only

(b) 1, 2 and 4 only

(c) 3 and 4 only

(d) 1, 2, 3 and 4

Preferential Trade Agreement (PTA): In a PTA, two or more partners agree to reduce tariffs on agreed number of tariff lines. The list of products on which the partners agree to reduce duty is called positive list. India MERCOSUR PTA is such an example. However, in general PTAs do not cover substantially all trade.

\between the partner countries; however each maintains individual tariff structure for nonmembers.  India Sri Lanka FTA is an example. The key difference between an FTA and a PTA is that while in a PTA there is a positive list of products on which duty is to be reduced; in an FTA there is a negative list on which duty is not reduced or eliminated. Thus, compared to a PTA, FTAs are generally more ambitious in coverage of tariff lines (products) on which duty is to be reduced.

· Comprehensive Economic Cooperation Agreement (CECA) and Comprehensive Economic

Partnership Agreement (CEPA): These terms describe agreements which consist of an integrated package on goods, services and investment along with other areas including IPR, competition etc. The India Korea CEPA is one such example and it covers a broad range of other areas like trade facilitation and customs cooperation, investment, competition, IPR etc.

· Custom Union: In a Customs union, partner countries may decide to trade at zero duty among themselves, however they maintain common tariffs against rest of the world. An example is Southern African Customs Union (SACU) amongst South Africa, Lesotho, Namibia, Botswana and Swaziland. European Union is also an outstanding example.

· Common Market: Integration provided by a Common market is one step deeper than that by Customs Union. A common market is a Customs Union with provisions to facilitate free movements of labour and capital, harmonize technical standards across members etc. European Common Market is an example.

· Economic Union: Economic Union is a Common Market extended through further harmonization of fiscal/monetary policies and shared executive, judicial & legislative institutions. European Union (EU) is an example