UPSC Prelims 2015 Q94: Indian Economy – External Sector & Balance Of Payments
The problem of international liquidity is related to the non - availability of
- (a) goods and services
- (b) gold and silver
- (c) dollars and other hard currencies
- (d) exportable surplus
Answer: (c) dollars and other hard currencies
Explanation
Problem of international liquidity
International liquidity means the stock of assets that countries accept for settling payments with each other.
The problem arises when there are not enough dollars and other hard currencies.
| Component of international liquidity | Detail |
|---|---|
| Hard currencies | Dollar, euro, pound, yen |
| Gold held by central banks | Official reserves |
| Special Drawing Rights | Created by the IMF in 1969 to add to liquidity |
| Reserve position in the IMF | A country's claim on the Fund |
The options checked:
| Option | Verdict |
|---|---|
| (a) Goods and services | Incorrect; that is a supply shortage |
| (b) Gold and silver | Incorrect; silver is not a reserve asset now |
| (c) Dollars and other hard currencies | Correct |
| (d) Exportable surplus | Incorrect; that is a trade problem |
Answer: (c) dollars and other hard currencies.
Why each option is right or wrong
- (a) Incorrect. A lack of goods and services is a supply problem, not a liquidity one.
- (b) Incorrect. Gold and silver are not what countries mainly need to pay each other today.
- (c) CORRECT. International liquidity is about the availability of dollars and other hard currencies.
- (d) Incorrect. Lack of an exportable surplus is a trade problem.
Key point
International liquidity: hard currencies, gold, SDRs and IMF reserve position used to settle international payments; SDRs created in 1969 to add to it.
Remember
International liquidity = hard currency reserves.
Common mistakes
- Thinking liquidity means gold alone, as under the gold standard.
- Confusing a liquidity problem with a trade deficit.
- Forgetting why the IMF created SDRs.
Exam tip
Liquidity = means of payment. Between countries that means hard currency.
Sources
- International Monetary Fund — Special Drawing Rights (SDRs): factsheet
- NCERT Class XII — Introductory Macroeconomics, Ch 6 (Open Economy Macroeconomics)