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The question below has an answer and an explanation.  Please explain the explanation. Statement: Should India encourage exports, when most things are insufficient for internal use itself? Arguments: Yes. We have to earn foreign exchange to pay for our imports. No. Even selective encouragement would lead to shortages. A. Only argument I is strong Explanation: Clearly, India can export only the surplus and that which can be saved after fulfilling its own needs, to pay for its imports. Encouragement to export cannot lead to shortages as it shall provide the resources for imports. So, only argument I holds. __________________   Please explain the explanation.

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I can explain the explanation, though I am not convinced that it is correct in all its aspects.

The explanation is based on the assumption that India will only export goods that it does not need.  That is, it assumes that India will not import anything if there is still unfulfilled domestic demand for that good.  For example, this assumes that India will not export any rice until all domestic buyers have been able to purchase as much as they want.  While I do not agree with this assumption, it is the basis for the explanation.

So, we are assuming that India will only export goods that it does not need at home.  Therefore, there is no way that exporting will lead to shortages.  If India satisfies, for example, its domestic demand for rice, then no shortages can occur if it exports the rest of the rice.   India is only exporting things that it does not need at home.  This is why Argument II is invalid. 

When India exports goods, it gains foreign currency.  The countries that buy the Indian goods must give their currency to Indian merchants in exchange for rupees that can be used to buy the Indian goods.  When India builds up foreign currency reserves, that helps it pay for imports.  It can use the foreign currency to buy goods from those or other countries.  This is what Argument I is saying. 

The explanation you have given is sound if it is based on sound assumptions.  I am not sure that its assumptions are sound, but whoever created the answer clearly believes that they are.

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