International Economics Flashcards
(121 cards)
Which committee set up to decide full cap A/C convertibility
SS Tarapore committee
Export competitiveness increases by
Depreciation of currency
Which account is fully convertible
Current Account
Appreciation and depreciation done by
Market prices
Devaluation and Revaluation done by
Govt
Three types of exchange rate systems XRS
Fixed
Floating
Fixed float/ dirty float
Mundell Fleming Trilemma
When making fundamental decisions about managing international monetary policy, a trilemma suggests that countries have three possible options from which to choose.
- Setting a fixed currency exchange rate
- Allowing capital to flow freely with no fixed currency exchange rate agreement
- Autonomous monetary policy
How to increase demand of USD
Increase Money supply/ Cent bank should buy USD
How to decrease demand of USD
Decrease Money supply of your currency
How to increase supply of USD
Sell from forex reserves
How to decrease supply of USD
Trade barriers, export bans.
Though has limited effect.
Balance of Payment is, what does it consist of
It is a statement of all transactions between a country and the outside world.
It consists of two accounts:
1. Current Account: Deals with the import and export of goods and services.
- Capital Account: Involves cross-border movement of capital via investments and loans.
Capital Account Convertibility (CAC) is
Freedom to convert currencies for investments i.e. conduct investment transactions without constraints.
CAC refers to the degree of freedom to convert foreign financial assets into domestic financial assets and vice versa at market-determined exchange rate.
No limits on converting rupees to foreign currency for asset acquisition.
No limits on NRIs bringing in foreign currency to acquire assets in India.
Current Account Convertibility
Freedom to convert rupees to other currencies for payments without restrictions.
refers to the degree of freedom to convert your rupees into other internationally accepted currencies and vice versa without any restrictions whenever payments are made.
In India, Current Account is today fully convertible since August 19, 1994.
Prior to this date, India had partial Current Account Convertibility.
It means that the full amount of foreign exchange required for current purposes will be available at the official exchange rate, allowing for an unrestricted outflow of foreign exchange.
Currency Convertibility means, its two components
That a country’s currency can be freely exchanged for foreign currency at an exchange rate, which is determined by the market forces i.e. demand for and supply of the currency.
It has two components:
- Current Account Convertibility
- Capital Account Convertibility
Current Account means
the account is settled and doesn’t include any future obligations.
Current Account constitutes
- Balance of trade and
- Balance of invisibles wh includes services, factor income, remittances.
Capital account means
that account which creates a future asset or liability. Has an unsettled transaction.
Private remittances are a part of which BoP account
Current Account.
Forex Reserves includes
Foreign currency assets (FCA)
Gold holdings of RBI
Special Drawing Rights (SDRs)
Reserve Tranche Position (RTPs) in IMF
Special Drawing Rights (SDRs)
Special drawing rights (SDRs, code XDR) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).[1] SDRs are units of account for the IMF, and not a currency per se.[2] They represent a claim to currency held by IMF member countries for which they may be exchanged.[3] SDRs were created in 1969 to supplement a shortfall of preferred foreign exchange reserve assets, namely gold and U.S. dollars.[3] The ISO 4217 currency code for special drawing rights is XDR and the numeric code is 960.
What are Foreign Exchange Reserves
They are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills and other government securities.
These assets serve many purposes but are most significantly held to ensure that the central bank has backup funds if the national currency rapidly devalues or becomes altogether insolvent.
Reserve Tranche Position
The reserve tranche is a segment of an International Monetary Fund member country’s quota that is accessible without fees or economic reform conditions.
Although reserve tranches are 25% of the member nations’ quota, this position can change according to IMF lending from its holdings of the member’s currency.
The reserve tranches with the IMF are considered their facilities of first resort, meaning they can tap into them before seeking a formal credit tranche that charges interest.
Reserve tranche is basically an emergency account that IMF members can access at any time without agreeing to conditions or paying a service fee. Tranche literally means a slice or a portion.
Each member of the IMF is assigned a quota (membership fee). A country’s Reserve Tranche Position (RTP) is the difference between IMF’s holdings of that country’s currency and the country’s IMF-designated quota.
Reserve Tranche Position is accounted for among a country’s foreign-exchange reserves. Part of the quota can be withdrawn from the IMF without any interest during critical situations of a country such as BOP crises.
