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Free CA Business Economics Practice Questions & Answers
501 exam-style Business Economics questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 271
The current account of the balance of payments includes:
Select an option first.
Correct answer: A — Trade in goods, trade in services, income flows and current transfers
Explanation: The current account covers transactions in goods and services together with factor income and unilateral transfers such as remittances. Investment and borrowing belong to the CAPITAL and financial account, and reserve changes are the balancing item - keeping the three apart is the substance of this topic.
Question 272
The difference between devaluation and depreciation of a currency is that devaluation:
Select an option first.
Correct answer: D — Is a deliberate official reduction under a fixed exchange rate system
Explanation: Devaluation is a policy DECISION taken by the authorities under a fixed or pegged regime; depreciation is a fall brought about by MARKET forces under a floating regime. The economic effects on exports and imports are similar - what differs is the mechanism that produces the fall.
Question 273
The distribution of the gains from trade between two countries depends chiefly on:
Select an option first.
Correct answer: D — Where the terms of trade settle between the two countries' domestic cost ratios
Explanation: Trade is beneficial for both only if the terms of trade lie BETWEEN the two domestic cost ratios; the closer they settle to a country's own ratio, the smaller its share of the gain. Reciprocal demand - the strength of each country's demand for the other's goods - is what fixes the point.
Question 274
A depreciation of the domestic currency is likely to make:
Select an option first.
Correct answer: A — Exports cheaper in foreign currency and imports dearer in domestic currency
Explanation: Foreign buyers need less of their own currency to buy the country's goods, so exports become more competitive, while imports cost more at home. Whether the trade balance actually improves depends on the ELASTICITIES of demand for exports and imports, which is why the effect is not automatic.
Question 275
The imposition of an import tariff will normally:
Select an option first.
Correct answer: A — Raise the domestic price, reduce imports, increase domestic output and yield revenue
Explanation: The tariff raises the price faced by domestic buyers, so consumption falls, home production expands behind the protection, imports are squeezed from both sides, and the government collects duty on what still enters. Consumers bear the cost; producers and the exchequer share the benefit.
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Question 276
An appreciation of the domestic currency will make:
Select an option first.
Correct answer: B — Exports DEARER in foreign markets and imports CHEAPER at home
Explanation: Appreciation helps consumers and firms buying imported inputs but hurts exporters and those competing with imports. Whether the trade balance worsens depends on the elasticities of demand on both sides, which is why the effect is a tendency rather than an arithmetical certainty.
Question 277
Under a FLOATING exchange rate system, the exchange rate is determined by:
Select an option first.
Correct answer: C — The demand for and supply of the currency in the foreign exchange market
Explanation: A floating rate adjusts automatically to correct payment imbalances and frees monetary policy from defending a parity, at the cost of greater volatility for traders. A FIXED rate offers stability but requires reserves and intervention to sustain. Most economies, India included, operate a managed float between the two.
Question 278
An export subsidy is:
Select an option first.
Correct answer: B — A payment by government to exporters, lowering the price at which they can sell abroad
Explanation: The subsidy makes exports artificially competitive at the taxpayer's expense and may provoke countervailing duties from importing countries. WTO rules restrict such subsidies precisely because they distort competition rather than reflecting genuine comparative advantage.
Question 279
The factor price equalisation theorem holds that free trade will tend to:
Select an option first.
Correct answer: D — Equalise the returns to factors across trading countries, even without factor movement
Explanation: Because trade in goods is indirectly trade in the factors embodied in them, exporting labour-intensive goods raises the demand for labour and hence wages at home. The theorem is a corollary of Heckscher-Ohlin, and it is why trade and migration are partial substitutes.
Question 280
A country's terms of trade are said to have moved in its FAVOUR when:
Select an option first.
Correct answer: A — EXPORT prices rise relative to import prices
Explanation: A given quantity of exports then commands a larger quantity of imports, so real income improves. Note that favourable terms of trade do not guarantee a trade surplus - if higher export prices sharply reduce the volume sold, total earnings may even fall.
Question 281
According to the theory of comparative advantage, international trade benefits:
Select an option first.
Correct answer: A — Both trading countries, provided their opportunity costs differ
Explanation: Trade is mutually beneficial whenever relative costs differ, since each country specialises where its opportunity cost is lower and both consume beyond their own production possibility frontier. Only if the opportunity cost ratios were IDENTICAL would there be nothing to gain - which is the precise condition for no trade.
Question 282
The Heckscher-Ohlin theory explains international trade in terms of differences in:
Select an option first.
Correct answer: A — Factor endowments between countries
Explanation: A country exports goods that use intensively the factor with which it is abundantly endowed - so a labour-abundant country exports labour-intensive goods. It extends Ricardo by explaining WHY comparative costs differ in the first place, tracing them to relative factor abundance rather than taking them as given.
Question 283
The infant industry argument for protection holds that:
Select an option first.
Correct answer: C — A new industry needs temporary protection until it achieves the scale to compete
Explanation: A newly established industry may have costs above the world level simply because it has not yet reached efficient scale or acquired experience. The protection is justified only if it is TEMPORARY and the industry will eventually stand on its own - and the practical difficulty is that such protection tends to become permanent.
Question 284
International trade differs from internal trade chiefly because international trade involves:
Select an option first.
Correct answer: D — Different currencies, national policies and restricted factor mobility
Explanation: Within a country labour and capital move freely and one currency and one legal system prevail. Across borders, exchange rates, tariffs, quotas and immigration rules intervene, and factors are far less mobile - which is precisely why a separate theory of international trade is needed at all.
Question 285
A limitation of the theory of comparative advantage is that it:
Select an option first.
Correct answer: C — Ignores transport costs, assumes full employment, and treats factors as immobile between countries
Explanation: The theory also assumes constant costs, perfect competition and free trade, none of which holds exactly. Its conclusion that specialisation is mutually beneficial nonetheless survives, which is why it remains the foundation of trade theory despite the restrictive assumptions.
Question 286
Which of the following is a NON-TARIFF barrier to trade?
Select an option first.
Correct answer: C — An import quota or a technical standard applied to imports
Explanation: Non-tariff barriers restrict trade without levying a duty - quotas, licensing, health and technical standards, and administrative delays. They are harder to measure and negotiate away than tariffs, which is why they have grown in importance as tariff rates have generally fallen.
Question 287
Haberler restated the theory of comparative advantage in terms of:
Select an option first.
Correct answer: C — OPPORTUNITY COST, measured by the production possibility curve
Explanation: Restating comparative cost as opportunity cost freed the theory from the labour theory of value, allowing many factors and increasing costs. It is why the doctrine is now usually presented with production possibility curves rather than tables of labour hours.
Question 288
The most-favoured-nation principle of the WTO requires that a member:
Select an option first.
Correct answer: A — Extend to ALL members any trade advantage it grants to one
Explanation: MFN requires non-discrimination BETWEEN foreign suppliers; the companion principle of national treatment requires that imports, once inside, be treated no less favourably than domestic goods. Regional trade agreements are a recognised exception to MFN.
Question 289
The purchasing power parity theory holds that the exchange rate between two currencies is determined by:
Select an option first.
Correct answer: A — The ratio of their PRICE LEVELS, so that a given sum buys the same basket in both
Explanation: If prices double in one country while remaining stable in the other, its currency should halve in value to restore parity. The theory explains long-run trends better than short-run movements, since capital flows, expectations and non-traded goods dominate in the short term.
Question 290
A quota differs from a tariff in that a quota:
Select an option first.
Correct answer: B — Limits the QUANTITY of imports directly
Explanation: A quota fixes the physical volume that may be imported, so the resulting price rise is a consequence rather than the instrument. Because no tax is levied, the gain from the higher price accrues to whoever holds the import licence rather than to the exchequer - unless the licences are auctioned. That difference in who captures the gain is the point examiners test.
Question 291
An AD VALOREM tariff is one levied:
Select an option first.
Correct answer: B — As a PERCENTAGE of the value of the good
Explanation: A specific duty of Rs.50 per unit is simple to administer but its protective effect is eroded by inflation and it bears hardest on cheap varieties. An ad valorem duty keeps pace with prices and treats varieties proportionately, but requires the value to be assessed - which invites under-invoicing.
Question 292
The balance of payments is divided into:
Select an option first.
Correct answer: C — The current account and the capital and financial account
Explanation: The current account covers goods, services, income and current transfers; the capital and financial account covers investment, loans and reserve movements. Distractor B uses the terminology of GOVERNMENT budgeting, which is a different framework altogether.
Question 293
A tariff is:
Select an option first.
Correct answer: A — A tax levied on imported goods
Explanation: A tariff raises the price of the imported good, protecting domestic producers while yielding revenue to the government. Distractor B describes a QUOTA, which restricts quantity directly and yields no revenue unless licences are auctioned. Both are barriers to trade, but they work through different mechanisms.
Question 294
The terms of trade of a country refer to the ratio of:
Select an option first.
Correct answer: C — The index of export prices to the index of import prices
Explanation: A rise in the ratio means export prices have risen relative to import prices, so a given volume of exports now buys more imports - the terms of trade have moved in the country's favour. It measures the RATE at which goods exchange internationally, not the balance between them.
Question 295
The Leontief paradox refers to the finding that:
Select an option first.
Correct answer: D — The United States, a capital-abundant country, exported relatively LABOUR-intensive goods
Explanation: The finding appeared to contradict Heckscher-Ohlin, which predicts the opposite. Explanations offered include the high skill content of American labour, differences in technology and tastes, and natural resource intensity - so the paradox refined the theory rather than destroying it.
Question 296
The World Trade Organisation was established to:
Select an option first.
Correct answer: B — Provide a framework of rules for international trade and settle trade disputes
Explanation: The WTO succeeded GATT in 1995 and administers the trade agreements, provides a dispute settlement mechanism and conducts trade negotiations. Distractor C describes the INTERNATIONAL MONETARY FUND - the two institutions are frequently confused, and their functions are quite distinct.
Question 297
The principal argument for free trade is that it:
Select an option first.
Correct answer: C — Allows specialisation according to comparative advantage, raising world output and consumption
Explanation: Free trade also widens consumer choice, disciplines domestic monopolies through import competition, and transfers technology. The counter-arguments concern the distribution of the gains and the adjustment costs borne by displaced industries, not the aggregate gain itself.
Question 298
The theory of comparative advantage was propounded by:
Select an option first.
Correct answer: D — David Ricardo
Explanation: Ricardo showed that trade benefits both countries even where one is absolutely more efficient at everything, provided their relative efficiencies differ - each should specialise where its opportunity cost is lower. Adam Smith's earlier theory of ABSOLUTE advantage could not explain that case, which is precisely the gap Ricardo filled.
Question 299
A voluntary export restraint is an arrangement under which:
Select an option first.
Correct answer: A — The EXPORTING country agrees to limit its shipments, usually under pressure
Explanation: A VER achieves what a quota would while avoiding the formal appearance of protection, and the scarcity gain accrues to the exporters rather than to the importing government. It is the trade restriction whose voluntariness is largely nominal.
Question 300
The bank rate is the rate at which the central bank:
Select an option first.
Correct answer: B — Rediscounts eligible bills or lends long-term to commercial banks
Explanation: A rise in the bank rate raises the cost of funds for commercial banks, which pass it on, contracting credit. It is a quantitative instrument affecting the general cost of credit rather than its direction. The repo rate has become the more actively used policy rate in practice.
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