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External Sector

Perhaps the more confusing questions from Economics section in UPSC have been asked from here. The questions might look straight-forward, but have often created enough doubt with its “rather too difficult to choose from options”.Here, the basic concept of balance of payments and its components has found favor with the question makers. Also, questions related to currency, its valuation and convertibility have been asked. The world bank is also an area one needs to be familiar with. The questions here require a little bit of thinking and are a mix of direct and applied ones.

Foreign Currency Market

  1. Fixed
  2. Float
  3. Managed Float

Balance Of Payments

  1. Current Account
  2. Capital Account

Foreign Portfolio Investment

  1. FII
  2. FDI

Exchange Market

  1. LERMS
  2. NEER
  3. REER
  4. EFF
  5. Purchasing Power

Important Terms

  1. Depreciation
  2. Devaluation
  3. Revaluation
  4. Appreciation
  5. Hard And Soft Currency
  6. Hot And Heated Currency
  7. Cheap And Dear Currency
  8. Foreign currency Reserves of India
  9. GAAR
  10. DTAA
  11. FTA
  12. RCEP
  13. TPP
  14. Gold Imports
  15. Rupee Convertibility
  16. Foreign Trade Policy 2015-2020
  • NCERT Introduction to Macro Economics Class XII- Chapter 6
  • Sanjeev Verma : Chapter 22,23,24 26, 27, 28, 29.
  • Ramesh Singh 5th Edition : Chapters 15

[2011 Prelims]

1)Consider the following actions which the Government can take:

  1. Devaluing the domestic currency
  2. Reduction in the export subsidy
  3. Adopting suitable policies which attract greater FDi and more funds from FIIs

Which of the above action/actions can help in reducing the current account deficit?

a. 1,2

b. 2,3

c. 3 only

d. 1,3

2)A closed economy is an economy in which

a. The money supply is fully controlled

b. Deficit financing takes place

c. Only exports takes place

d. Neither exports nor imports take place

3)Both FDI and FII are related to investment in a country. Which one of the following statements best represents an important difference between the two?

a. FII helps bring better management skills and technology, while FDI brings only capital.

b. FII helps in increasing capital availability in general, while FDI only targets specific sectors.

c. FDI flows only into the secondary market, while FII targets primary market.

d. FII is considered to be more stable than FDI

[2012 Prelims]

1)Which of the following would include Foreign direct Investment in India?

  1. Subsidiaries of companies in India foreign companies in India
  2. Majority foreign equity holding Indian companies
  3. Companies exclusively financed by foreign companies
  4. Portfolio investment

Select the correct answer using the codes given below :

a. 1, 2, 3, and 4

b. 2 and 4 only

c. 1 and 3 only

d. 1, 2 and 3 only

2) Consider the following statements: The price of any currency in international market is decided by the

  1. World Bank
  2. demand for goods/services provided by the country concerned
  3. stability of the government of the concerned country
  4. Economic potential of the country in question

Which of the statements given above are correct?

a. 1,2,3, 4

b. 2,3

c. 3,4


[2013 Prelims]

1)The balance of payments of a country is a systematic record of

a. All import and export transactions of a country during a given period of time, normally a year.

b.Goods exported from a country during a year

c. Economic transaction between the governments of one country to another.

d. Capital movements from one country to another.

2) Which of the following constitute Capital Account?

  1. Foreign Loans
  2. Foreign Direct Investment
  3. Private remittances
  4. Portfolio Investment

Select the correct answer using codes given below

a. 1,2,3

b. 1,2,4

c. 2,3,4

d. 1,3,4

3)Which one of the following groups of items is included in India’s foreign-exchange reserves?

a. Foreign- currency assets, Special Drawing rights and loans from foreign countries

b.Foreign- currency assets, Special Drawing rights and gold holdings of RBI

c. Foreign- currency assets, Special Drawing rights, Loans from World Bank

d. Foreign- currency assets, gold holdings of the RBI and loans from World Bank.

[2014 Prelims]

1)With reference to Balance of Payments, which of the following constitutes/constitute the Current Account?

  1. Balance of trade
  2. Foreign assets
  3. Balance of Invisibles
  4. Special Drawing Rights

Select the correct answer using codes given below.

a. 1 only

b. 2,3 

c. 1,3

d. 1,2,4

[2015 Prelims]

1)Convertibility of rupee implies

a. Being able to convert rupee notes into gold

b. Allowing the value of rupee to be fixed by market forces

c. Freely permitting the conversion of rupee to other currencies and vice versa

d. Developing an international market for currencies in India.

2)The problem of international liquidity is related to the non-availability of

  1. Goods and services
  2. Gold and silver
  3. Dollars and other hard currencies
  4. Exportable surplus

[2017 Prelims]

1) Consider the following statements:

  1. India has ratified the Trade Facilitation Agreement (TFA) of WTO.
  2. TFA is a part of WTO’s Bali Ministerial Package of 2013.
  3. TFA came into force in January 2016.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 1 and 3 only

(c) 2 and 3 only

(d) 1, 2 and 3

Answer : A

2) Which of the following has/have occurred in India after its liberalization of economic policies in 1991?

  1. Share of agriculture in GDP increased enormously.
  2. Share of India’s exports in world trade increased.
  3. FDI inflows increased.
  4. India’s foreign exchange reserves increased enormously.

Select the correct answer using the codes given below :

(a) 1 and 4 only

(b) 2, 3 and 4 only

(c) 2 and 3 only

(d) 1, 2, 3 and 4

Answer: B