Exams › SSC CGL (Prelims) › General

Consider the following statements about the impact of foreign trade on aggregate demand in India: Statement 1: Imports by Indian consumers act as a leakage from the circular flow of income, hence reducing aggregate demand. Statement 2: Exports from India to foreign markets act as an injection into the circular flow, increasing aggregate demand. Which of the following is correct?

1. Only Statement 1 is correct
2. Only Statement 2 is correct
3. Both Statement 1 and Statement 2 are correct
4. Neither Statement 1 nor Statement 2 is correct

Correct answer: Both Statement 1 and Statement 2 are correct

Solution

Imports are a leakage because domestic income is spent on foreign goods, so they reduce domestic aggregate demand. Exports are an injection because foreign spending on domestic goods adds income to the economy, increasing aggregate demand.

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