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International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services.
7b .
(i) Immobility of Factors of Production:
Labour and capital do not move freely from one country to another as they do within the same country. “Man”, declared Adam Smith, “is, of all forms of luggage, the most difficult to transport”. Much more so when a foreign frontier has to be crossed. Hence differences in the cost of production cannot be removed by moving men and money, the result is the movement of goods.
On the contrary, between regions within the same political boundaries, people distribute themselves more or less according to opportunities. Real wages and standard of living tend to seek a common level, though they are not wholly uniform. As between nations, however, these differences continue to persist for wages and check population movements. Capital also does not move freely from- one country to another. Capital is notoriously shy.
(ii) Different Currencies:
Each country has a different currency. India for instance, has the rupee, the U.S.A. the dollar, Germany the mark, Italy the lira, Spain the peso, Japan the yen, and so on. Hence, buying and selling between nations give rise to complications absent in internal trade.
(iii) Restrictions on Trade:
Trade between different countries is not free. Very often there are restrictions imposed by custom duties, exchange restrictions, fixed quotas or other tariff barriers. For example, our own country has imposed heavy duties on import of motor cars, wines and liquors and other luxury goods.
(iv) Ignorance:
Knowledge of other countries cannot be as exact and full as of one’s own country. Differences in culture, language and religion stand in the way of free communication between different countries. On the other hand, within the borders of a country, labour and capital freely move about. These factors, too, make internal trade different from international trade.
(v) Transport and Insurance Costs:
Then costs of transport and insurance also check- free international trade. The greater the distance between the two countries, the greater are these costs. Wars increase them still more.
[7/30, 8:41 AM] Solution: *NABTEB ECONOMICS*
(4a)
Deficit financing refers to the methods a government uses to fund its expenditures that exceed its revenues. Essentially, when a government spends more money than it earns through taxes and other income, it needs to cover this shortfall by borrowing money, printing new money, or finding other sources of funds.
(4b)
(PICK ANY FOUR)
(i) Borrowing from the public: Governments issue bonds, treasury bills or notes to raise funds from citizens, businesses, and institutions. This method allows the government to tap into domestic savings and spread the debt burden among the population.
(ii) Borrowing from banks: Central banks or commercial banks lend money to the government to finance its deficit. This method provides quick access to funds but can lead to inflation if the money supply increases too rapidly. Banks may also charge interest rates that add to the government’s debt burden.
(iii) Printing money: The central bank prints more money to finance the deficit, increasing the money supply. This method risks causing inflation, as excessive money circulation can erode the currency’s value. It can also lead to hyperinflation if not managed carefully.
(iv) Foreign borrowing: Governments borrow from foreign governments, institutions, or investors through foreign currency-denominated bonds or loans. This method allows access to global capital markets but exposes the government to exchange rate risks and potential currency fluctuations. Foreign borrowing can also increase the country’s reliance on external debt.
(v) Asset sales: Governments sell state-owned assets, such as land, buildings, or enterprises, to raise funds and reduce debt. This method provides a one-time influx of capital but can lead to loss of control over strategic assets. Asset sales can also be politically sensitive or controversial.
(vi) Drawdown of reserves: Governments use accumulated reserves or surpluses from previous years to finance the current deficit. This method provides a readily available source of funds but reduces the government’s safety net and may not be sustainable in the long term. It can also indicate a lack of fiscal discipline if relied upon too heavily.
