| Consider the following statements: |
| 1. Gold import is a major factor in Current Accounts Deficit (CAD) of India. |
| 2. CAD occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers. |
| 3. A short term and small CAD can boost economic growth. Which of the above statements is/are correct? |
A) 1, 2, 3
B) 2, 3
C) 1, 2
D) 1, 3
Correct Answer: A
Solution :
[a] A current account deficit occurs when the value of imports (of goods, services and investment incomes) is greater than the value of exports. Some of the factors which could cause a current account deficit: 1. If the currency is overvalued, imports will be cheaper and therefore there will be a higher Q of imports. Exports will become uncompetitive and therefore there will be a fall in the quantity of exports. 2. If there is an increase in national income, people will tend to have more disposable income to consume goods. If domestic producers cannot meet the domestic demand, consumers will have to import goods from abroad. 3. Higher inflation makes exports less competitive and imports more competitive. 4. Recession in other countries. Quantitative curbs and enhanced tariffs on gold imports was an important factor in bringing India's current account deficit (CAD) under control in 2013-14. At the same time, up to three tonnes of gold are probably smuggled in every month. Gold smuggled in has to be paid for in foreign currency, which means that it is flowing out of India through fictitious accounts. This inconsistency is a reason why import restrictions on a scale that encourage smuggling are counterproductive.
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