International Economics

📘 CDS Economics · ECC07 📑 CDS Level : High Priority

International Economics tests Balance of Payments components, currency movements, and WTO agreements. These are high-value, distinct questions in CDS — a correct understanding of Current Account vs Capital Account and Depreciation vs Devaluation will earn direct marks.

📌 CDS Pattern: BoP: Current vs Capital Account • Trade deficit • Devaluation (fixed) vs Depreciation (flexible) • Appreciation • Exchange rate systems • WTO: TRIPS, TRIMS • FDI vs FPI

1. Balance of Payments (BoP)

Balance of Payments (BoP): Systematic record of all economic transactions between residents of a country and the rest of the world during a given period. Always balances (accounting identity). Two main accounts: Current Account + Capital Account.
Current Account:
- Merchandise trade (exports − imports of goods) = Trade Balance / Trade Account
- Services trade (software exports, tourism, shipping)
- Factor income (salaries, dividends, interest across borders)
- Transfer payments (remittances, foreign aid — NO quid pro quo)
Capital Account: Records investment flows between countries.
- FDI (Foreign Direct Investment) — long-term, managerial control
- FPI (Foreign Portfolio Investment) — short-term, stocks/bonds, “hot money”
- External loans, banking capital, RBI reserve changes
Current Account Deficit (CAD): India’s imports > exports (mostly in goods). Services surplus partially offsets goods deficit. Financed by Capital Account surplus (FDI, FPI inflows).
Trade Deficit = Goods Imports − Goods Exports. India typically runs a trade deficit (imports crude oil, gold, electronics). India’s trade deficit: ~USD 240 billion (FY24).

2. Exchange Rate Systems

Fixed Exchange Rate: Government/central bank fixes currency value against another currency (or gold). Devaluation = Official reduction in the fixed rate of a currency by the government (deliberate policy). E.g., India devalued rupee in 1966 and 1991. Revaluation = Official increase in fixed rate.
Flexible (Floating) Exchange Rate: Currency value determined by demand and supply in foreign exchange market. Depreciation = Decrease in value of currency due to market forces (not government decision). Appreciation = Increase in value due to market forces.
India’s System: Managed Float (Dirty Float) — exchange rate is market-determined BUT RBI intervenes occasionally to prevent excessive volatility.
Effect of Depreciation: Rupee depreciates → exports become cheaper (competitive) → imports become expensive (inflation). CAD may improve if exports respond (J-curve effect in short run).

3. WTO & Trade Agreements

WTO (World Trade Organisation): Established 1 January 1995 (replaced GATT — General Agreement on Tariffs and Trade, 1947). HQ: Geneva, Switzerland. 164 member nations. India = founding member. DG: Dr Ngozi Okonjo-Iweala (Nigeria; first woman + first African).
TRIPS (Trade-Related Intellectual Property Rights): WTO agreement protecting patents, copyrights, trademarks internationally for 20 years. India contested compulsory licensing of medicines under TRIPS (public health exception). Doha Declaration (2001) allowed developing nations to produce generic medicines for public health emergencies.
TRIMS (Trade-Related Investment Measures): WTO agreement preventing trade-distorting investment conditions (e.g., countries cannot require foreign investors to use local components as condition for FDI — local content requirements restricted).
FDI vs FPI: FDI = Foreign Direct Investment; investor acquires managerial control (typically ≥10% ownership); long-term; stable. FPI = Foreign Portfolio Investment; passive investor in stocks/bonds; short-term; volatile (“hot money” can leave quickly).

📝 CDS PYQInternational Economics — CDS Pattern

Q1. When the value of a currency falls due to market forces in a floating exchange rate system, it is called: (CDS I 2024)

(a) Devaluation (b) Revaluation (c) Depreciation (d) Deflation

Answer: (c) Depreciation
Depreciation = market-driven fall in currency value (flexible/floating system). Devaluation = government-decided reduction in fixed exchange rate. India devalued the rupee officially in 1966 (by ~36%) and 1991 (by ~22–25%) under fixed/managed system. Today India operates managed float — so the rupee “depreciates” not “devalues.”

Q2. Remittances sent by Indian workers abroad are recorded in which component of the Balance of Payments? (CDS II 2023)

(a) Capital Account — FDI (b) Current Account — Transfer payments (c) Capital Account — FPI (d) Current Account — Services trade

Answer: (b) Current Account — Transfer payments
Remittances = money sent by workers abroad to family in home country. These are unilateral transfers (no quid pro quo = no goods/service received in return) → recorded under Transfer Payments in Current Account. India is world’s largest recipient of remittances (~USD 125 billion in 2023). This helps reduce India’s Current Account Deficit.

Q3. TRIPS agreement under WTO primarily deals with: (CDS I 2023)

(a) Investment conditions for FDI (b) Intellectual property rights protection (patents, copyrights) (c) Agricultural subsidies reduction (d) Tariff reduction on manufactured goods

Answer: (b) Intellectual property rights — patents, copyrights, trademarks
TRIPS = Trade-Related Intellectual Property Rights. Provides 20-year patent protection globally. India’s pharma industry was affected (generic medicines). Doha Declaration 2001 allowed “compulsory licensing” for public health emergencies. TRIMS = investment measures. GATS = services trade. AoA = agriculture under WTO.

Q4. FDI differs from FPI primarily in that: (CDS II 2022)

(a) FDI is short-term and volatile; FPI is long-term (b) FDI involves managerial control; FPI is passive investment in securities (c) FDI comes only from developed countries (d) FPI creates more jobs than FDI

Answer: (b) FDI involves managerial control; FPI is passive investment in stocks/bonds
FDI: typically ≥10% ownership; investor has managerial control; long-term; builds productive capacity. FPI: passive investor in stocks/bonds; no managerial role; short-term; can exit quickly (“hot money”). India’s FDI in FY24: USD 71 billion. High FPI can cause volatility in exchange rate when foreign investors suddenly exit.

📝 Rapid Revision — ECC07

🌎 BoP Accounts

Current Account = goods + services + factor income + transfers
Capital Account = FDI + FPI + loans + banking capital
Remittances = Current Account (transfer payments)
India’s Trade Deficit: ~USD 240 bn (FY24)

📈 Exchange Rates

Fixed system: Devaluation (govt reduces) / Revaluation (govt increases)
Flexible system: Depreciation (market reduces) / Appreciation (market increases)
India = Managed Float (market + RBI intervention)
Depreciation: exports cheaper; imports costlier

🏘 WTO

WTO est. 1 Jan 1995; HQ Geneva; 164 members
Replaced GATT (1947)
TRIPS = IP rights (20-yr patent protection)
TRIMS = no local content requirements for FDI
DG: Ngozi Okonjo-Iweala (Nigeria)

🚫 CDS Traps

Devaluation (fixed) ≠ Depreciation (floating)
Remittances = Current Account (NOT capital)
FDI = control; FPI = passive hot money
TRIPS ≠ TRIMS (different agreements)

📝 Mock Tests 🎯 Economics Quiz ✈️ Telegram