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

This question was previously asked in
Official UPSC Civil Services Exam 2016 Prelims Part A
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  1. It is the ratio of value of imports to the Gross Domestic Product of a country
  2. It is the total value of imports of a country in a year
  3. It is the ratio between the value of exports and that of imports between two countries
  4. It is the number of months of imports that could be paid for by a country's international reserves

Answer (Detailed Solution Below)

Option 4 : It is the number of months of imports that could be paid for by a country's international reserves
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Detailed Solution

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The correct answer is It is the number of months of imports that could be paid for by a country's international reserves.

Key Points

  • Import cover:
    • It measures the number of months of imports that could be paid for by a country's international reserves.
    • It is an important indicator of the stability of the currency and a minimum of eight to ten months of import cover is essential for the stability of a currency.
    • Import cover avoids a BoP crisis by taking early preventive action.
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