Question

Explain the likely impact of implementation of “Exports Promotion Scheme” of Government of India on the Balance of Payment (BoP) of the country. (Keeping other factors constant)
State the meaning of Trade Surplus.

Hint:

Exports ↑ → BoP improves
Exports>Imports → Trade Surplus

Answer 1

(a) Impact of Export Promotion Scheme on BoP
Concept: Balance of Payments (BoP)
BoP is a systematic record of all economic transactions between residents of a country and the rest of the world. It consists mainly of:

• Current Account (exports and imports of goods and services)
• Capital Account

Step 1:Understanding Export Promotion Scheme
Export promotion schemes include:

• Subsidies to exporters
• Tax concessions
• Improved infrastructure and incentives

These measures are aimed at increasing the volume and value of exports.
Step 2:Effect on Exports

• Exports of goods and services increase
• Foreign exchange earnings rise

Step 3:Impact on Current Account

• Increase in exports improves the trade balance
• Current account deficit may reduce or surplus may increase

Step 4:Overall BoP Effect

• Inflow of foreign currency increases
• Pressure on exchange rate reduces
• BoP position improves

Step 5:Conclusion
\[ \text{Export promotion leads to improvement in BoP by increasing foreign exchange earnings} \] (b) Meaning of Trade Surplus
Concept: Trade Balance
\[ \text{Trade Balance} = \text{Exports} - \text{Imports} \] Definition:
Trade surplus occurs when: \[ \text{Value of exports}>\text{Value of imports} \] Explanation:

• Country earns more from exports than it spends on imports
• Indicates a favourable balance of trade

Conclusion: \[ \text{Trade Surplus = Excess of exports over imports} \]