Option 1: Importing new items in place of old items of import. This option suggests that import substitution involves replacing the old imported goods with new imported goods. However, this is not the correct explanation for import substitution. Import substitution focuses on replacing imported goods with domestic production, rather than simply replacing one imported item with another.

Option 2: Gradual reduction of imported goods to save foreign exchange. This option is not a comprehensive explanation of import substitution. While import substitution does aim to reduce reliance on imported goods, its primary goal is to promote domestic production and reduce imports to boost the domestic economy, rather than solely to save foreign exchange.

Option 3: Increasing domestic supply of goods by imposing import restrictions. This option partially captures the essence of import substitution. Import restrictions can be one strategy to promote domestic production and increase the availability of goods within the country. However, import substitution is a broader concept that involves various measures to stimulate domestic production, including import restrictions but also other policies such as domestic subsidies and incentives.

Option 4: Replacing import items by domestic production of such items. This is the correct explanation of import substitution. It means replacing imported goods with domestic production of the same or similar goods. The aim is to reduce dependence on imports and boost the domestic economy