IGCSE Economics Paper-2: Specimen Questions with Answers 18 - 19 of 100

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Passage

Total of credit side of the balance of payment should always equal the debit side.

Question 18 (2 of 5 Based on Passage)

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Explain the merits of MNC to the host country.

Explanation

According to ILO The essential nature of multinational enterprises lies in the fact that its managerial headquarters are in one country referred to as home country while the enterprise carries out operations in a number of other countries as well (host countries)

The Benefits of MNC to the Host Country Are

  • MNCs help increase the investment level and thereby income and employment in host country.
  • The transnational corporations have become vehicles of or the transfer technology, especially to the developing countries.
  • They also kindle a managerial revolution in the host countries through professional management and the employment of highly sophisticated management techniques.
  • The MNCs enable the host countries to increase their exports and decrease their imports requirements.
  • They work to equalize the cost of factors of production around the world.

Question 19 (3 of 5 Based on Passage)

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Reason for disequilibrium in balance pf payment.

Explanation

Balance of payment will always be in equilibrium because two sides of the balance of payment are based on double entry system accountancy. In economic sense balance of payment will be in disequilibrium when a country borrows from abroad or depletes its foreign currency reserves unwillingly. If on the other hand the country՚s reserves of foreign currency were plentiful and the depletion of these reserves were a consequence of a deliberate policy, then it is not the case of a deficit in its balance of payment.

Nature of International Capital Flows

  • Autonomous capital flows: it is influenced by rate of interest in the economy, taxation policy and political comate change of the country. These capital flows do not have connection with balance of payment of situation.
  • Accommodating capital flows: They are planned and unforeseen capital flows. They are ex-post in nature. Only at the end of the period can one discover whether accommodating capital flow or inflow is needed. It takes place to equalize the balance of payments book keeping
  • Economic policy: to balance the balance of payment the country can either concentrate on capital or current account l. To reduce deficit on current account, government may devalue its currency which will increase price of imports and decrease price of exports. Government can increase capital flow by increasing rate of interest.
Nature of International Capital Flows

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