Iii) Two merits of free trade

Here are the answers to the questions:

iii) Two merits of free trade

1. Increased efficiency and specialization: Countries can specialize in producing goods where they have a comparative advantage, leading to higher global output and lower production costs.
2. Greater variety and lower prices for consumers: Consumers gain access to a wider range of goods and services from around the world at competitive prices due to increased competition.

iv) Income term of trade
The income term of trade (ITOT) measures a country's capacity to import goods based on its export earnings. It is calculated by multiplying the commodity terms of trade by the volume of exports.

$$ITOT = \frac{P_x}{P_m} \times Q_x$$

where $P_x$ is the export price index, $P_m$ is the import price index, and $Q_x$ is the export volume index.

v) Two main features of India's foreign trade

1. Increasing volume of trade: India's total foreign trade (exports and imports) has significantly expanded over the years, especially after economic liberalization.
2. Diversification of trade partners and commodities: India now trades with a broader range of countries and deals in a more diverse basket of goods, moving beyond traditional items.

vi) Import substitution
Import substitution is an economic policy that encourages replacing foreign imports with domestic production. Its primary goals are to reduce a country's reliance on foreign goods, protect nascent domestic industries, and foster industrial growth within the nation.

vii) Foreign Trade Multiplier
The foreign trade multiplier (or export multiplier) illustrates how an initial change in exports or imports can lead to a larger change in a country's national income. It operates on the principle that an increase in exports (or a decrease in imports) boosts aggregate demand, triggering a chain reaction of increased spending and income throughout the economy.

$$K_f = \frac{1}{MPS + MPM}$$

where $K_f$ is the foreign trade multiplier, $MPS$ is the marginal propensity to save, and $MPM$ is the marginal propensity to import.

viii) Features of FEMA
The Foreign Exchange Management Act (FEMA), 1999, is an Indian law that facilitates external trade and payments and promotes the orderly development and maintenance of the foreign exchange market.

1. Liberalized approach: FEMA adopts a more liberal and management-oriented approach to foreign exchange compared to its predecessor, FERA.
2. Focus on current account transactions: It allows for free current account transactions while requiring Reserve Bank of India (RBI) approval for most capital account transactions.
3. Civil offenses: Violations under FEMA are treated as civil offenses, with monetary penalties, rather than criminal offenses.