(i) The balance between the values of goods and services exchanged between two countries.
(ii) It is a trade in both visible and non visible items.

The rate at which goods of one country are exchanged for that of another country i.e. ratio of export price and import price.

(i) According to Adam Smith, the basis of international trade was absolute cost advantage.
(ii) To Ricardo the basis of trade is comparative cost advantage.
(iii) Trade can take place even if the absolute cost difference is absent but there is comparative cost difference.

(i) The Central Bank purchases and sells Government securities and proper eligible securities like bills and securities of private concerns.
(ii) This is called Open Market operation.

(i) SLR is the amount which a bank has to keep with itself in the form of cash, gold or approved securities.
(ii) CRR is the proportion of deposits which the bank has to keep with RBI in the form of cash.

(i) Central bank is the monetary authority that manages a state's currency, money supply, and interest rate
(ii) It oversees the commercial banking system

(i) It is a trade restriction that sets a limit on the quantity of a good that can be imported into a country in a given period of time.
(ii) Quotas are used to benefit the producers of good in that economy.

Net Barter Terms of Trade
1. This was developed by Taussig in 1927.
2. The ratio between the prices of exports and of imports is called net barter terms of trade.
3. Viner calls it commodity terms of trade.
4. \(\mathrm{T}_{\mathrm{n}}=\left(\mathrm{P}_{\mathrm{x}} / \mathrm{P}_{\mathrm{m}}\right) \times 100\)
5. Tn is Net Barter Terms of Trade
6. Px is Index number of export prices
7. Pm is Index number of import prices
8. This measures the gain from International Trade.
9. If T_n is greater than 100, it is terms of trade which means that for a rupee of export, more of imports can be received by a country.
Gross Barter Terms of Trade
1. Developed by Taussig in 1927 as an improvement over the net terms of trade.
2. It is an index of relationship between total physical quantity of imports and the total physical quantity of exports.
\(\mathrm{Tg}=\left(\mathrm{Q}_{\mathrm{m}} / \mathrm{Q}_{\mathrm{x}}\right) \times 100\)
3. Q_m is Index of import quantities
4. Q_x is Index of export quantities
5. If for a given quantity of export, more quantity of import can be consumed by a country, the terms of trade are favourable.

Pure Theory of Trade
(i) This component explains the causes for foreign trade, composition, direction and volume of trade, determination of the terms of trade and exchange rate, issues related to balance of trade and balance of payments.
Policy Issues
(i) Policy issues such as free trade vs. protection, methods of regulating trade, capital and technology flows, use of taxation, subsidies and dumping, exchange control and convertibility, foreign aid, external borrowings and foreign direct investment, measures of correcting disequilibrium in BoP are covered.
International Cartels and Trade Blocs
(i) Economic integration, cartels, customs unions, monetary unions, trade blocs, economic unions and multinational corporation are covered
International Financial and Trade Regulatory Institutions
(i) Financial institutions like IMF, IBRD, WTO are part of International Economics.

Objectives of Demonetisation :
(i) Removing Black Money from the country.
(ii) Stopping of corruption.
(iii) Stopping terror funds.
(iv) Curbing fake note

S. No.	Money Market	Capital Market
(1)	Short term funds are loaned and borrowed	Long term funds are loaned and borrowed
(2)	It deals with purchase, sale and transfer of short term credit instruments.	It raises capital by dealing in shares, bonds mortgages and other long term investments.
(3)	Commercial banks, acceptance houses, Non Banking Financial Institutions and the Central Bank deals with short term funds	Instruments traded in capital market comprise of equity shares, preference. shares, Debentures, bonds and other long term securities.

Quantitative methods
1) Bank Rate Policy:
(i) It is the rate at which the Central Bank rediscount the first class.
(ii) The bank advances loans on approved securities to its member banks.
(iii) If the Central Bank wants to control credit, it will raise the bank rate.
(iv) So deposit rate and other lending rates rise, borrowing is discouraged.
2) Open Marker Operation:
(i) The Central Bank purchases and sells Government securities in the money market.
(ii) When banks or public buy these securities they have to pay to the Central Bank.
3) Variable Cash Reserves Ratio:
(i) The Central Bank controls credit by changing the Cash Reserve Ratio.
(ii) If Commercial Banks have excessive cash reserves and create too much credit, the central bank will raise the CPR.
(iii) If CRR is high, commercial bank's capacity to create credit will be less.
Qualitative Methods
1) Rationing of Credit:
(i) It controls and regulates the purposes for which credit is granted by commercial banks.
(ii) It is of 2 types - variable portfolio ceiling and variable capital asset ratio
2) Direct Action:
(i) Direct action is taken against erring banks
3) Moral Suasion:
(i) Central Bank gives advice, then requests and persuades the Commercial Banks to co-operate with the Central Bank in implementing its credit policies.
4) Publicity:
(i) A policy can be effectively successful only when an effective public opinion is created in its favour.
5) Regulation of Consumer's Credit:
(i) The down payment is raised and the number of installments reduced for credit sale.
6) Changes in the Marginal Requirements on Security Loans:
(i) The margin requirements can be increased to prevent excessive use of credit for stock exchange speculation

Introduction
1. Modern theory of international trade was developed by Heckscher and Bertil Ohlin.
2. This theory says that basis for international trade is the differences in factor endowments.
3. So this theory is also called Factor Endowment Theory.
Theory
1. International differences in comparative costs is due to:
(i) Difference in the endowments of factors of production between countries.
(ii) Differences in the factor proportions required in production.
Assumptions
1. There are two countries, two commodities, two factors (2 x 2 x 2 model).
2. Countries differ in factor endowments.
3. Commodities are categorized in terms of factor intensity.
4. Countries use same production technology.
5. Countries have identical demand conditions.
6. There is perfect competition in product and factor markets in both the countries.
Explanation
1. According to Heckscher-Ohlin, "a capital abundant country will export the capital intensive goods, while labour abundant country will export the labour intensive goods".
2. A factor is regarded abundant or scarce in relation to the quantum of other factors.
3. A country is richly endowed with capital only if the ratio of capital to other factors is higher than other countries.
Particulars India America Supply of Labour 50 24 Supply of Capital 40 30 Capital-Labour Ratio 40/50 = 0.8 30/24 = 1.25 4. Even though India has more capital (40) compared to America (30) in absolute terms, yet America is more richly endowed with capital because the ratio of capital in India is $0.8$ which is less than that in America (1.25).
Criticism
1. Factor endowment of a country may change over time.
2. The efficiency of the same factor (labour) may differ in the two countries.

S.No	Internal Trade	International Trade
1	Trade takes place between different individual and firms within the same nation.	Trade takes place between different individual and firms in different countries.
2	Labour and capital move freely from one region to another.	Labour and capital do not move easily from one nation to another.
3	Free flow of goods and services since there are no restrictions.	Goods and services do not easily move from one country to another because of tariff and quota.
4	There is only one common currency.	There are different currencies.
5	Physical and geographical conditions of a country are similar.	There are differences in physical and geographical conditions of the two countries.
6	Trade and financial regulations are same.	Trade and financial regulations, interest rate, trade laws differ between countries.
7	No difference in political affiliations, customs and habits of the people and government policies.	There are lot of differences in political affiliation, habits, customs of the people and government policies.

Introduction
(i) Monetary Policy is the macroeconomic policy laid down by the Central Bank towards the management of money, supply and interest rate. It is associated with Milton Friedman
1) Neutrality of Money
(i) Wicksteed, Hayek and Robertson are the chief exponents of neutral money.
(ii) They say that the monetary authority should aim at neutrality of money in the economy.
(iii) Monetary changes cause distortion and disturbances in the proper functioning of the economic system of the leading to all economic fluctuations.
2) Exchange Rate Stability
(i) It is a traditional objective from the Gold Standard period
(ii) When there was disequilibrium in the balance of payment, it was automatically corrected by movements.
(iii) It was popularly known as "Expand Currency and Credit when gold is coming in; Contract currency and credit when gold is going out."
(iv) If there is instability in the exchange rates, it would result in outflow or inflow of gold resulting in unfavorable balance of payments.
3) Price Stability
(i) Crustave Cassel and Keynes suggested price stabilization as a main objective of monetary policy.
(ii) Stable Price creates public confidence, promotes business activity and ensures equitable distribution of income and wealth leading to prosperity and welfare
(iii) Price stability does not mean price rigidity or price stagnation.
(iv) A mild increase in the price level provides a tonic for economic growth.
4) Full Employment
(i) Unemployment was socially dangerous, economically wasteful and morally deplorable.
(ii) Both Keynes' General Theory of Employment, Interest and Money in 1936, the objective of full employment became very important
5) Economic Growth
(i) Economic growth is the process whereby the real per capita income of a country increases
(ii) There is increase in the total physical or real output
(iii) Monetary policy should promote sustained and continuous economic growth by maintaining equilibrium between the total demand for money and total production capacity for creating increase in saving and investment.
(iv) Flexible monetary policy is the best solution.
6) Equilibrium in the Balance of Payments (BoP)
(i) World trade was faster than world liquidity.
(ii) Increasing deficit in BoP reduces the ability of an economy to achieve other objectives.
(iii) Many less developed countries reduce their imports which adversely affects development activities, so monetary authority should make efforts to bring equilibrium in the BoP.

Introduction
The functions of commercial banks are broadly classified into primary, and secondary functions
1) Primary Functions:
Accepting Deposits
Demand Deposits
1. It refers to deposits that can be withdrawn by individuals without any prior notice to the bank.
2. Depositors can withdraw money at any time by writing a withdrawal slip or a cheque or from ATM centres
Time Deposits
1. It refers to deposits that are made for certain committed period of time.
2. It has higher interest.
3. Deposits can be withdrawn only after a specific time period
Advancing Loans
1. Banks grant loans to individuals and businesses in the form of overdraft, cash credit and discounting bills of exchange.
2) Secondary Functions
Agency Functions
1. Commercial banks act as agents of customers by performing various functións.
Collecting Cheques
1. Banks collect cheques and bills of exchange on behalf of their customers through clearing house facilities provided by the central bank.
Collecting Income
1. Banks collect dividends, pension, salaries, rents and interests on investment on behalf of their customers.
2. A credit voucher is sent to customers for information when any income is collected by the bank.
Paying Expenses
1. Telephone bills, insurance premium, school fees and rents can be paid through banks.
2. A debit voucher is sent to customers for information when expenses are paid by the bank.
3) General Utility Functions
Providing Locker Facilities
1. Locker is provided for safe custody of jewellery, shares, debentures and other valuable items.
2. This minimizes the risk of loss due to theft at home.
Issuing Traveller's Cheques
1. Banks issue traveller's cheques to individuals for travelling outside the country.
2. These cheques are safe and easy way to protect money.
Dealing in Foreign Exchange
1. Banks provide foreign exchange to businessmen dealing in exports and imports.
2. But they need to take the permission of the Central Bank for dealing in foreign exchange.
4) Transferring Funds
1. Funds are transferred by means of draft, telephonic transfer and electronic transfer.
5) Letter of Credit
1. Commercial banks issue letters of credit to their customers to certify their credit worthiness.
Underwriting Securities
1. As public have full faith in the credit worthiness of banks, public do not hesitate in buying the securities underwritten by banks.
Electronic Banking
1. It includes services, such as debit cards, credit cards and Internet banking.
6) Other Functions
Money Supply
E.g: A bank lends Rs.5 lakh to an individual and opens a demand deposit in the name of that individual.
1. Bank makes a credit entry of 25 lakh in that account.
2. This leads to creation of demand deposits in that account.
3. Thus, without printing additional money, the supply of money is increased.
Credit Creation
1. It means the multiplication of loans and advances
2. Banks receive deposits from the public and use these deposits to give loans.
3. However, loans offered are many times more than the deposits received by banks.
Collection of Statistics
1. Banks collect and publish statistics relating to trade, commerce and industry and advice customers and public authorities on financial matters.