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IAI Actuarial Core Principles · Business Economics · Balance of payments and exchange rates

Which of the following events would most directly worsen the balance of trade in goods for India, other things equal?

Rising domestic incomes that raise demand for imported electronics worsen the trade balance, because import payments, which are debits, increase. Greater foreign demand, cheaper exports, lower oil prices and export subsidies all tend to improve the balance.

  1. AA rise in demand abroad for Indian textiles
  2. BA fall in the price of Indian exports in foreign currency terms due to productivity gains
  3. CRising domestic incomes that raise demand for imported electronicsCorrect
  4. DA fall in global crude oil prices
  5. A subsidy that lowers production costs of exporters

Explanation

Higher domestic income raises import spending, increasing debits and widening the trade deficit. The other options raise exports or reduce import costs, improving the trade balance.

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