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Q18 (IAS/2016) Economy › External Sector & Trade › Foreign exchange management Official Key

Which of the following best describes the term 'import cover', sometimes seen in the news?

Result
Your answer: —  Âˇ  Correct: D
Explanation

Import cover refers to the number of months of imports that a country's foreign exchange reserves can finance. For example, if India's forex reserves are around $600 billion and monthly imports are around $60 billion, then these reserves provide import cover for 10 months.[1] The ratio of reserves to imports measures the number of months a country is able to finance its current level of imports.[2] The conventional rule of reserve cover of imports is 3 months.[3]

Options A, B, and C are incorrect as they represent different economic metrics[7] but are not the same as[4] 'import cover.'[6] Option A describes the import-to-GDP ratio, option B refers to total import value, and option C describes the trade balance ratio between countries. Import cover specifically relates to reserve adequacy and measures how long a country can sustain its imports using existing foreign exchange reserves without earning additional forex.

Sources
  1. [1] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.27 Balance of Payment (BoP) > p. 108
  2. [2] https://www.bankofcanada.ca/wp-content/uploads/2010/02/wp05-38.pdf
  3. [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > RESERVE ADEQUACY FEW MONTHS OF IMPORTS RULE VERSUS GUIDOTTI-GREENSPAN RULE > p. 497
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Q. Which of the following best describes the term 'import cover', sometimes seen in the news? [A] It is the ratio of value of imports to th…
At a glance
Origin: Books + Current Affairs Fairness: Low / Borderline fairness Books / CA: 2.5/10 ¡ 5/10
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This is a classic 'Term Definition' question derived from the External Sector chapter. It bridges static concepts (Balance of Payments) with recurring news headlines about Forex reserves. If you read 'Forex reserves rose to $X billion', the immediate next sentence in any quality report is 'covering Y months of imports'.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Is the term "import cover" (as used in news reporting) defined as the ratio of the value of imports to a country's Gross Domestic Product?
Origin: Weak / unclear Fairness: Borderline / guessy
Indirect textbook clues
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > 2020, 2019 > p. 18
Strength: 4/5
“Which of the following best describes the term 'import cover' sometimes seen in the news? • (a) It is the ratio of value of imports to the GDP of a country. • (b) It is the total value of imports of a country in a year. • (c) It is the ratio between the value of exports and that of imports between two countries. • (d) It is the number of months of imports that could be paid for by a country's international reserves.”
Why relevant

This snippet presents a multiple-choice question listing (a) import cover = ratio of imports to GDP and (d) import cover = number of months of imports payable by international reserves, showing both formulations are seen in textbooks/questions.

How to extend

A student could treat this as evidence that (a) is a proposed but contestable definition and compare it to other sources or standard usage to decide which is correct.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.27 Balance of Payment (BoP) > p. 108
Strength: 5/5
“As such, I don't think that we need to go into those minute details of the new format]. Import Cover: Presently India's Forex reserves are around $600 billion and our monthly imports are around $60 billion, which means that if we do not earn additional Forex then this $600 billion will be sufficient for the next 10 months of import. Thus, we say that our present Forex reserves provide import cover for 10 months. Forex reserves are also measured in terms of import cover.”
Why relevant

Explicitly describes 'Import Cover' as the number of months of imports that a country's forex reserves can finance (reserves á monthly imports).

How to extend

One could extend this by computing reserves/monthly imports for a country and checking news usage to see if 'import cover' refers to months rather than a GDP ratio.

Macroeconomics (NCERT class XII 2025 ed.) > Chapter 6: Open Economy Macroeconomics > National Income Identity for an Open Economy > p. 102
Strength: 3/5
“Gross Domestic Product (GDP) Aggregate value of goods and services produced within the domestic territory of a country. It includes the replacement investment of the depreciation of capital stock. Gross fiscal deficit The excess of total government expenditure over revenue receipts and capital receipts that do not create debt. Gross investment Addition to capital stock which also includes replacement for the wear and tear which the capital stock undergoes. Gross National Product (GNP) GDP + Net Factor Income from Abroad. In other words GNP includes the aggregate income made by all citizens of the country, whereas GDP includes incomes by foreigners within the domestic economy and excludes incomes earned by the citizens in a foreign economy.”
Why relevant

Gives a clear definition of GDP (aggregate domestic production), identifying what GDP measures and distinguishing it from other aggregates.

How to extend

A student can use this to judge plausibility: compare the conceptual link between 'months of imports covered by reserves' and GDP to see which denominator (monthly imports vs GDP) fits the usual idea of 'cover'.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.9 Gross Domestic Product > p. 12
Strength: 3/5
“The total final value of goods and services produced within the domestic territory of a country in a specified time period (generally a financial year) is called Gross Domestic Product. GDP can be calculated by three methods:”
Why relevant

Also defines GDP as total domestic production and notes methods of calculation, reinforcing what GDP represents.

How to extend

Use this to assess whether expressing 'import cover' as a ratio to GDP would meaningfully measure the ability of reserves to finance imports (likely less direct than months-of-imports measure).

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Statement analysis

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Statement analysis

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