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Commerce Question Bank – 36 Short Questions With Answers on “International Business”

1. What is extended facility of IMF?

The aim of this facility is to give medium term assistance to member-countries in ‘special circumstances of balance of payments difficulties, viz., (a) serious payments imbalance due to structural maladjustments in production, trade and prices, (b) slow growth and (c) an inherently weak balance of payments position preventing the pursuit of an active development policy. The member is required to submit detailed statement of policies and measures for the first and subsequent twelve-month periods.

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2. What is the purpose of enlarged access policy of IMF?

The purpose of the enlarged access policy is to enable the Fund to provide additional financing from borrowed resources, in conjunction with the Fund’s ordinary resources, to members facing serious payments imbalances that are large in relation to their quotas.

The enlarged access policy is used only when the member needs financing from the Fund that exceeds the amount available to it in four credit tranches or under the extended Fund facility, and when its problem requires a relatively long period of adjustment.

3. What is meant by structural adjustment facility of IMF?

Established in March 1986, this facility provides loans on concessional terms to low income member- countries that are facing protracted balance of payments problems in support of medium-term macro- economic and structural adjustment programmes.

The potential amount of SAF loan available to each eligible member is 63.5 percent (initially set at 47 percent) of the member’s quota to be disbursed in 3 years, 20 percent in the first year, 30 percent in the second year and 13.5 percent in the third year. SAF loans carry an interest rate of % of 1 per cent and have 514 years grace period, with repayments to be made semi-annually over the subsequent 434 years.

4. Describe the innovative features of SAF.

The SAF has three major innovative features: (i) SAF arrangements require a comprehensive 3-year policy framework which incorporates more explicitly than in most previous Fund facilities the structural policy elements of a member’s reform programme, (ii) the process of collaboration with the World Bank was formalised through the requirement of joint assistance to a member-country in the formulation of the policy framework paper (PFP) and of common negotiation of the final arrangement, and (iii) there was an expectation that the PFP and SAF process would be a catalyst for additional resources.

5. Write a snort note on ESAF

In December 1987, the Fund announced the establishment of the Enhanced Structural Adjustment Facility (ESAF) whose objectives, basic procedures and financial conditions parallel those of the Structural Adjustment Facility. The ESAF is expected to provide resources to low income developing countries engaged in economic and structural adjustment These resources were to supplement the SDR that remained to be disbursed under SAF

6 What is SDR?

SDR is an international reserve asset created by the IMF as a supplement to the existing reserve assets As SDRs are not backed by any assets, they are also known as paper gold. They were first allocated to all member-countries of the IMF in 1970-72 on the basis of the then existing quota, total allocation being SDR 9 3 billion To strengthen the resources of the Fund, SDR allocations are revised from time to time

7. Write a short note on World Bank

The International Bank for Reconstruction and Development (IBRD), also known as the World Bank, was set up in 1945 to provide international capital for reconstruction and development of Western Europe which was devastated during the Second World War.

The objective has since been achieved. The main function of the World Bank is now to provide loans to the developing countries for development projects and programmes. Since the credit rating of many developing countries is poor, they find it difficult to raise resources in international capital markets. The World Bank is, therefore, a vital source of finance to the developing countries.

8. What are the basic rules that govern the World Bank operations?

The basic rules governing the World Bank operations are:

(i) It must lend only for productive purposes and must stimulate economic growth in the developing countries where it lends

(ii) It must give due regard to the prospects of repayment

(iii) Each loan is made to a government or must be guaranteed by the government concerned.

(iv) The bank’s decisions to lend must be based on economic considerations.

(v) Loans must be used to meet the foreign exchange component of the projects

(vi) The rate of interest is somewhat lower but related to market rates.

(vii) The use of loans cannot be restricted to purchases in any particular member-country In other words loans are not ‘tied’.

9. Write a short note on IFC.

The International Finance Corporation (IFC) was set up as an affiliate of the World Bank in 1956. The Corporation has at present 142 members. IFC extends credit to private business enterprises in the developing countries. ‘It provides equity and loan capital for private enterprises in association with private investors and management encourages the development of local capital markets and stimulates the international flow of private capital. In particular, it supports joint ventures which provide opportunities to combine domestic knowledge of market and other conditions with the technical and managerial experience available in the industrial nations.

10. Does IFC provide soft loans?

IFC, unlike other multinational financial institutions, does not provide soft loans but participates in the equity of private sector firms

11. What conditions should be followed by a project to attract IFC investments?

Every project in which IFC invests should meet the following conditions:

1. It should have the prospect of earning a profit.

2. It should benefit the economy of the host country.

3. Local investors should be able to participate in the project at the outset or later.

4. The funds needed are not available from private investors on reasonable terms.

5. Management is capable and experienced

6. The sponsor of the project has a substantial shareholding in the enterprise.

12. Define foreign trade.

Trade between two or more nations is called foreign trade or international trade. This involves the exchange of goods and services between the citizens of two nations. When the citizens of one nation exchange goods and services with the citizens of another nation, it is called foreign trade, for example, India’s trade with U.S.A . Japan, France and Pakistan. Foreign trade is also known as external trade.

13. Classify foreign trade transactions.

Foreign trade transactions are classified under three categories:

1. Import Trade

2. Export Trade

3. Enterpot Trade

Import trade refers to the purchase of goods from a foreign country. Countries import goods which are not produced by them either because of cost disadvantage or because of physical difficulties or even those goods which are not produced in sufficient quantities so as to meet their requirements.

By export trade we mean the sale of goods to a foreign country. Sometimes goods are purchased or imported from one country with the objective of selling or exporting them to some other countries. It is called enterpot trade.

14. Point out differences between home trade and foreign trade.

Home trade refers to trade within a country i. e , exchange of goods and services for money or money’s worth within the national boundaries of the country concerned whereas foreign trade refers to trade between two or more countries which involves the exchange of goods and services between the citizens of one country and the citizens of another country. The other differences between home or inland trade and foreign trade are:

(a) Foreign trade involves the exchange of currencies because the currency of one country is not the legal tender in the other country. In home trade, there is no such exchange of currencies.

(b) In foreign trade, as the goods are to be transported to long distance, they are exposed to a greater risk as compared to home trade.

(c) Every country has its own laws, customs and regulations which has a direct bearing on foreign trade.

15. What kinds of services do commercial banks provide to the exporters?

Commercial banks provide the following services to the exporters:

(a) Provide overdraft facilities to the exporter

(b) They collect the bills of exchange on behalf of the exporters

(c) They provide finance for the procurement of machines to be used for producing export goods

(d) They collect information regarding the credit worthiness of the importers.

(e) Commercial banks purchase bills in foreign currency and grant loans, shipping and other documents

(f) They also provide loans and advance for the movement of goods for export or for import of goods.

16. What is ECGC?

Export Credit Guarantee Corporation (ECGC) was established in 1964 to promote India’s export by offering export credit, insurance and guarantee. The corporation insures the exporters credit risk and guarantees payment to them. It also provides guarantees to the financing banks so that the latter may offer credit facilities to the exporters to expand their operations. The corporation provides the coverage against all risk whether it is commercial risk or political risk

17. What is the role of exchange banks in foreign trade?

Like commercial banks, exchange banks also play an important role in providing finance to those engaged in foreign trade. Exchange banks are those commercial banks which are incorporated in foreign countries and have their offices in India. Such banks finance the operations of importers and exporters.

18. Describe the role of the Reserve Bank in the sphere of foreign trade.

The Reserve Bank of India is the apex body in financing and control of foreign trade. In the sphere of providing finance to foreign trade, the Reserve Bank performs the following functions:

(a) It undertakes purchase and sale of foreign exchange.

(b) It performs the functions of exchange control to regulate the export trade

(c) It refinances foreign trade through the commercial banks.

(d) It provides rediscounting facilities to the commercial banks by rediscounting the foreign bills.

19. Write down the meaning of the following terms—Dock warrant. Matis receipt. Bill of lading, Charter party and Consular invoice.

Dock Warrant:

Permission of the dock office to bring the goods on the dock is known as dock warrant.

Matis Receipt:

The receipt issued by the captain of the ship after accepting goods on board of the accepting ship is called matis receipt.

Bill of Lading:

An agreement between the shipping company and the forwarding agent to carry goods to the destined part against the payment of freight is called bill of lading. It is semi negotiable document.

Charter Party:

An agreement between the shipping company and exporter hiring the entire ship or part there of for specific period or voyage is called charter party.

Consular Invoice:

An invoice prepared by the consul (trade representative of importers country) stationed in the exporting country certifying the details and value of goods is known as consular invoice.

20. What do you understand by loco price?

Loco price is also known as ex-works price or the ex-warehouse price of goods. This price includes the cost of goods, packing cost and some normal profit.

Loco price or ex-works price = Cost of goods + packing costs = Normal profit All other charges are paid by the buyer Usually the packing charges are specially mentioned as ex- works packing included or packing extra. Loco price quotations are rarely used in international markets. For most standard products no buyer accepts ex-works price quotations. But for products such as heavy machinery, when it is difficult to estimate the cost of transportations, shipping freight, etc. ex- works quotations are accepted.

21. Describe the meanings of F.O.R and FA S.

F.O.R.: It means free on rail. The price quoted includes cost of goods plus packing charges plus the cost of carrying goods to a railway station and loading them into wagons. Delivery takes place at rail sliding while the goods and transit risks pass to the buyer when the delivery is made to the carrier. All other expenses are payable by the buyer.

Free Alongside Ship (F.A.S.): This quotation covers all the charges upto putting the goods alongside the ship to be paid by the exporter, while putting them on the ship is at buyer’s expose. The goods and transit risks are transferred to the buyer when the ship is able to load.

22. What is FOB. and C.A.F.?

F.O.B.: It is one of the most common export terms meaning free on board. Under a F.O.B. quotation the exporter will deliver the goods. Free on broad a ship as per contract at the port named, that is to say, he will pay all expenses and give delivery of goods on board the ship. The buyer has to pay for freight, insurance and all subsequent expenses. Cost and Freight (C.A.F.): If we add shipping freight to the F.O.B. value we get C. & F. price. In this case the importer has to pay the insurance charges C & F = F. O.B. + freight + insurance.

23. Describe the meanings of CIF, ex-ship price and in bond price.

C.I.F.:

It means cost, insurance and freight. Under a C.I.F. quotation the seller must ship the goods meeting all charges upto on board and pay freight insurance of goods also.

C.I.F. = F.O.B. + freight + insurance.

Ex-ship Price:

All expenses upto the time the goods arrive at the port of discharge are to be borne by the seller. The buyer has to bear the cost of taking delivery from the ship.

In Bond Price:

This price includes all those expenses incurred till the goods are carried to the bonded warehouse at the named port. Charges for the withdrawal of goods from the bonded warehouse have to be borne by the buyer.

24. What do you understand by the terms landed price, duty paid price and Franco or rendu of free price?

Landed Price:

It indicates that all expenses upto the goods discharged on land at the port of destination are met by the exporter.

Duty Paid Price:

This price includes all those expenses which are incurred on carrying the goods to the bonded warehouses, in the importing port and the import duties as well.

Franco or Rendu of Free Price:

It means that all the charges are paid by the exporter upto and including delivery to the buyer’s warehouses and this includes duty as well as landing charges and internal freight costs. Delivery takes place when the goods arrive at their final destination.

25. What measures have been taken by the Government of India to promote exports?

The Government of India has taken a series of measures to encourage exporters and promote exports. These are mentioned below:

1. Supply of raw materials.

2. Providing import replenishment licenses.

3. Exemption from customs duty.

4. Cash compensatory assistance.

5. Drawback of duties

6. Marketing development fund.

7. Market development allowance.

8. Bilateral trade agreements.

9. Transport concessions.

10. Various tax reliefs to exporters.

11. Trade delegations.

12. Trade fairs and exhibitions.

13. Concessional credit facilities.

14. Various institutions set up for furtherance of foreign trade.

26. Which institutions has been setup by Government of India to promote exports?

The Government of India has set up a number of institutions for the promotion of exports. Some important institutions designed for promoting exports are named below:

1. Export promotion councils.

2. Commodity boards.

3. The board of trade.

4. Indian Trade Development Authority.

5. Indian Institute of Foreign Trade.

6. The Federation of Indian Export Organization (F.I.E.O.).

7. Export Inspection Council.

8. Directorate of Exhibitions and Commercial Publicity.

9. Export Credit and Guarantee Concessions (E C G.C.).

10. Minerals and Metals Trading Corporation (M.M.T.C.).

11. State Trading Corporation (S.T.C.).

27. Write a short note on State Trading Corporation (S T C.).

The State Trading Corporation was set up in May 1956 as an autonomous corporation primarily to play an important role in the implementation of government’s foreign trade policy. The main functions of the S T.C. are:

1. To explore new markets for existing as well as new products.

2. To promote exports of ‘difficult to sell’ items and promotion of long-term export operations.

3. To diversify and increase India’s export trade

4 To undertake exports and imports where bulk handling is advantageous.

5. To undertaken import and/or internal distribution of commodities in short supply with a view to establishing prices and rationalizing distribution

6. To hold or assist in holding exhibitions in India and elsewhere of the products and articles in which the company is interested.

28. What is MMTC?

The Minerals and Metals Trading Corporation of India (M M T.C.) was established by the Government in 1963. It was set up to develop the export of mineral ores and such other products as may be assigned to it by the government of India from time to time. The various items canalized for exports by the M.M.T.C include (i) iron ores, bi-metal ore (ii) coal and coke.

The corporation provides many facilities in the promotion of trade in minerals and ores. It provides railways sliding, heavy duty vehicles which may not be in the possession of mine owners, loading facilities at the railways stations and ports, supply of machinery on hire and easy installments. It also helps in the development of roads and makes advances to the suppliers of ores.

29. What is meant by enterpot trade?

Sometimes goods are imported from one country with the objective of selling or exporting them to some other countries. It is called enterpot trade.

The features of such trade are:

1. The goods which are imported are kept in bonded warehouses till they are re-exported and no duty is paid upon such goods.

2. If necessary, the goods are processed and re-packed

3. No import duty is levied on such trade.

30. Describe the role of enterpot trade in the foreign trade.

Enterpot trade plays an important role in the foreign trade. It is necessitated where it is difficult to establish direct connection between the producing and consuming countries due to the absence of direct communication facilities, difficulty of language and inconvenience and high costs involved in selling small lots. The enterpot simply acts as a collecting and distribution centre. The important centres for enterpot trade are London, Hong Kong, Amsterdam and Singapore.

31. Write a short note on EXIM bank. What are the functions of EXIM bank?

The bank was set up in 1982 to facilitate and promote India’s foreign trade. The EXIM (export import) Bank has been intended to function as the personal financial institution for promoting exports and coordinating the courting of other institutions engaged in financing foreign trade.

The main functions of EXIM bank are as follows:

(i) To provide finance to export oriented industries

(ii) To conduct exports studies

(iii) To assess export

(iv) To provide international merchant banking services

(v) To assist overseas Indian joint ventures and turn-key projects.

32. Write down the functions of Federation of Indian Export Organization.

Federation of Indian Export Organization has the following functions:

(i) To send trade delegations to foreign countries.

(ii) To participate in international trade and exhibitions.

(iii) To undertake publicity of Indian goods in foreign countries

(iv) To give advice and make representations to the Government on matters relating to foreign trade.

33. (a) Give two main functions of WTO. (b) What is the objective of Foreign Trade Development and Regulation Act?

(a) (i) The WTO shall administer the ‘understanding in rules and procedures governing the settle­ment of disputes.’ (ii) The WTO shall administer the ‘Trade Review Mechanism’.

(b) The objective of the Act is to provide with the development and regulation of foreign trade by facilitating imports into, and augmenting exports from India and for matters connected there­with.

34. What do you mean by (a) Tariffication (b) Intellectual Property Rights?

Tariffication means the replacement of existing non-tariff restrictions on trade such as import quotas by such tariffs as would provide substantially, the same level of protection.

Intellectual property rights may be defined as information with a commercial value and public will­ingness to bestow the status of property on them and give their owners the right to exclude others from access to or use of protected subject-matter.

35. What is meant by liberalisation under Exim Policy?

Liberalisation means licensing, quantitative restrictions and other regulatory and discretionary con­trols have been substantially eliminated. All goods, except those coming under the negative list, may be freely imported and exported.

36. What do you mean by (a) Canalisation, (b) Import Substitution?

Canalisation means that the import or export of the goods concerned may be done only by the desig­nated public sector agency, such as Indian Oil Corporation for petroleum products, NDDB for certain dairy products.

Import substitution is the substitution of a domestic source of supply for a foreign source of supply. It is regarded by many developing nations as an important means to reduce trade gap and to develop the economy.

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