International Business Environment

IBO-01
1. A) critically examine Recardian Theory of Trade.
Ans. Recardian theory of trade focuses on the comparative advantage of the nation. Let
us discuss them in detail.
Labour Theory of Value
Classical economists such as David Ricardo believed that labour is the only Source of
value of goods produced in the economy. This does not mean that no other inputs are
required in production, but since the other inputs such as raw materials and capital goods
are also produced by labour, it is the h h u r which determines the relative valuation of
goods, Among other inputs, not produced by labour, land is given by nature in a fixed
quantity Landowners earn rent which does not determine price, rather it is the price
which determines how much rent the landowners will earn. Such an explanation is known
as the labour theory of value. Let us understand it with the help of an example. Assume
that it takes 3 hours of labour to make one yard of cloth and 5 hours of labour to 10
kilogram of wheat. The wheat and cloth markets are perfectly competitive and labour is
free to move from to cloth production and vice versa. This implies that the wage rate will
be same in the cloth and wheat industries. Let W be this Wage rate. Then the average
costs (cost per unit, one unit of cloth is one yard and one unit of wheat is 10 Kg in cloth
and wheat production will be respectively 3W and 5W. These will also be the prices of
cloth and wheat respectively, because under perfect competition price is equal to average.
Thus, the relative price of cloth in term of wheat is 3W/SW or 3/5 which simply means
that 3/5th of a unit of wheat will buy one unit of cloth, or 6 kg wheat will exchange for
one yard of cloth. In the terminology of classical economists this exchange ratio is known
as value which is determined only by labour and nothing else.
Autarky Equilibrium
The importance of the labour theory of value. We are dealing with two markets
simultaneously and therefore it is in the general equilibrium framework. The labour
theory of value gives a simple explanation of how the relative price of two goods is
determined. Since we do not intend to introduce money in the model, it is the relative
price or the exchange ratio which will determine the production and demand in the two
industries. We would of course assume that the labour requirements per unit of wheat or
cloth (5,3) remain the same, no matter how many units of the two goods the economy
produces. This assumption is known as the constant returns to scale (CRS). CRS means
that the labour productivities are independent of the scale of output. What are the labour
productivities in cloth and wheat production ? These are 113 and 115 respectively one
hour of labour will produce 1 /3 yard of cloth and 115 x 10 = 2 Kg. wheat. Labour
productivity is just the reciprocal of the unit labour requirement. With 300 hours of
labour available and filly employed at one time in an economy, the production possibility

frontier is shown as AB. Look at Figure which shows production possibilities of wheat
and cloth. Notice that if all labour is devoted to the production to cloth, then 100 units of
cloth will be produced and that if all labour goes into wheat production, then 60 units of
wheat will be produced. Thus the slope of the production possibility frontier is 6011 00 =
315 which is the exchange ratio. In autarky the economy's consumers will choose a point
like P on the production frontier in such a way that their welfare is maximized. 'Thus in
equilibrium, OW and OC are the quantities of wheat and cloth respectively, both
demanded and supplied. The point P, in other words, represents a general equilibrium in
the economy where demand and supply in each of the two markets are equal.
Absolute Advantage versus Comparative Advantage
Now let us look at another economy where the unit labour requirements are somewhat
different because of an improved technology. We assume that 1 and 4 hours of labour
produce respectively one unit of cloth and one unit of wheat, Since less labour is required
to produce one unit of each good in the second country (call it a foreign country I), it has
what is called an absolute advantage over the first country (call it the home country). So
far there is no trade between the two countries. But suppose there is trade now and would
it be correct to say the foreign country has no incentive to trade because it is efficient in
both goods, whereas the home country is too eager to trade because it is inefficient in the
production of both goods? The answer is that the so-called absolute advantage does not
determine the Pattern of trade between two countries. It is the comparative advantage
relevant.
But what is comparative advantage? In home country 3/5th of a unit of wheat is
exchanged for one unit of cloth and in the foreign country 1/4 of a unit of wheat will
exchange for one unit of cloth. Since 3/5 > 1/4, cloth is more expensive in terms of
wheat in the home country than in the foreign country. Thus the foreign country has
comparative advantage in cloth production. But home country has comparative advantage
in wheat production because here 513 units of cloth will exchange for one unit of wheat
which is less than 4 units of cloth which will exchange for one unit of wheat in the
foreign country. Thus, though the foreign country has an absolute advantage in both
goods it has comparative advantage in only one, namely cloth. The home country has
absolute disadvantage in both goods but it has a comparative advantage in wheat. But
what determines comparative advantage? In order to answer this question let us find the
labour productivities in the two countries in cloth and wheat production.
As you remember, labour productivities are just the reciprocals of unit labour
requirements. If we compare the ratios of the labour productivity in cloth to that in wheat
production we see that the foreign country has a, higher ratio (4 1513) and therefore it is
relatively more productive in cloth. On the other hand, if we compare the ratios of labour
productivity in wheat to that in cloth production, the home country has a higher ratio (315
> 114) which shows that the home country is relatively more productive in wheat. Thus,
the Ricardian theorem on trade pattern states that a country lays comparative advantage

in the good in which its relative labour productivity is higher than its trading partner and
tends to export this good and tends to import the good in which its trading partner has
comparative advantage.
As regards the pattern of specialization the Ricardian theory states that a country
completely specialises in the good in which it has comparative advantage. In the above
example the home country will produce only wheat and the foreign country only cloth
because the relative labour productivity is assumed to remain constant. Obviously, with
no change in labour productivity, the country will put all its labour in the production of
the good in which its labour is relatively more productive. If this theory is taken to be
true, then no country will have an import competing sector because the imported goods
will not be produced at all in the country.

Free Trade and Gains from Trade

The countries will not trade with each other unless trade makes them better off. What we
can show here is that free trade is always better than no trade. In course of this discussion
we will further explain why in the Ricardian system the specialisation is complete. Our
starting point is the exchange ratios or values in the two countries in the pre-trade
situation. For the home country the exchange ratio (3/5 unit of wheat exchanged for one
unit of cloth) is the slope of the production possibility frontier in Figure 2.1. One may
draw a similar diagram for the foreign country and the slope of its production possibility
frontier will show the exchange ratio as 114 unit of wheat for one unit of cloth. But there
is another aspect of Figure which has not been fully explained and this is the indifference
curve drawn as a dotted curve, tangent to the production possibility frontier. At the
equilibrium point P, the I marginal rate of transformation (MRT) which is slope of the
production possibility frontier gives the rate at which wheat can be converted into cloth
by shifting labour from wheat to cloth. This is again the same as the exchange ratio. The
slope of the indifference curve measures the marginal rate of substitution (MRS) or the
rate at which the consumers will substitute wheat for cloth. At P, MRT=MRS= 315. For
the foreign country MRT=MRS=l/4,

Terms of Trade
The definition of commodity terms of trade is the price of one good in terms of the other.
In autarkies the home country's terms of trade was 315 unit of wheat for one unit of cloth
whereas the foreign countries terms of trade was 114 unit of wheat for one unit of cloth.
As we have just argued, the equilibrium terms of trade in the world markets will be
somewhere between 114 and 31.5 and we have assumed that it is 215. In the context of
trade, the terms of trade is the price of the exported good in terms of the imported good.
Since the home country is an exporter of wheat, its terms of trade are 215 unit of wheat
for one unit of cloth. But for the foreign country which is a cloth exporter the terms of
trade is just the reciprocal of the home country's terms of trade, i.e., 5L? units of cloth for
one unit of wheat.

International trade will not only change the autarky terms of trade of the two countries
and bring them together at a common level, it will also change the relative wage rate, the
ratio between the home country's wage rate and the foreign country's wage rate is known
as the factorial terms of trade. The meaning of factorial terms of trade is number of hours
of one country's labour that will exchange for one hour of the other country's labour. But
one has to be careful in interpreting this concept. There is no exchange of labour between
the two countries; there is only an exchange of goods. But goods embody labour hours
spent in their production. Thus, trade determines factor terms of trade indirectly.
We have just seen in the above that the commodity terms of trade will lie between 315
and 1/4. Can we find such limits for the factorial terms of trade? The answer is yes and
the limits for the factorial terms of trade are 113 and 415. To prove this let us assume that
W,, and W, are respectively the wage's rates in the home and foreign countries measures
either in terms of wheat or in t e n s of 210th. In the foreign country which has
comparative advantage in cloth the average cost of cloth must be less than the home
country's average cost of cloth. This is precisely why the home firms do not produce
cloth. Since this average cost is W, in the foreign country and 3 W,, in the home country,
W, < 3 Wh or Wh IW, > 113 (remember that I and 3 are respectively the number of hours
of labour required to produce one unit of cloth in the foreign and home countries). Since
4 and 5 hours of labour are required to produce one unit of wheat in the foreign and home
countries respectively and since the home average cost in wheat must be less than the
foreign average cost, we must have 5W, < 4Wf, or Wh / W, 415. This shows that the
factorial terms of trade will lie between 113 and 415. These numbers can be located in the
table above giving labour productivities where 113 is simply the ratio of labour
productivities in the two countries in cloth production and 415 is the ratio of labour
productivities in the two countries in wheat production.
(b) What is balance of payments? Explain the factors affecting balance of payments.
Ans. Balance of payment is an accounting record of the transactions between the
residents of one country and the residents of the rest of the world over a given period of
time. Transactions in which domestic residents either purchase assets (goods and
services) from abroad or reduce foreign liabilities are considered uses (out flow) of funds
because payments abroad must be made. Similarly, transactions in which domestic
residents either sell assets to foreign residents or increase their liabilities to foreigners are
sources (inflows) of funds because payments from abroad are received. Thus, in a way, it
resembles a company's sources and several of funds statement.
UNDERLYING PRINCIPLES AND CONCEPTUAL FRAMEWORK
The balance of payment is part of a larger system of social accounts recording the
economic activity of an economy and its various sections. The social accounts relate to
economic transactions not only within the domestic economy but also between the
domestic economy and the rest of the world. Balance of payment is concerned with
economic transactions. Five basic types of economic transactions may be distinguished.

They are:
a) Purchases and sales of goods and services against financial items i.e. the interchange
of goods and services against claims and monetary gold.
b) Barter, i.e. the interchange of goods and services against other goods and services;
c) The interchange of financial items against other financial items e.g. sale of securities
for money, or the repayment of commercial debts in money;
d) The provisions or acquisition of goods and services without requital, e.g. grants in
1and,
e) The provision or acquisition of financial items without requital, e.g. in payment of
taxes or as a gift
COMPONENTS OF THE BALANCE OF PAYMENT
The balance of payments is a collection of accounts conventionally grouped into three
main categories with subdivisions in each.
Three main categories are:
a) The Current Account: Under this are included imports and exports of goods and
services and unilateral transfers, which reflect government and private gifts and grants.
b) The Capital Account: Under this are grouped transactions leading to changes in
foreign financial assets and liabilities of the country.
c) The Reserve Account: In principle, this is not different from the capital account it is
as much as it relates to financial assets and liabilities. However, in this category, only
reserve assets are included. These are the assets which the central bank of the country
uses to settle the deficits and surpluses that a rises in the other two categories.
FACTORS AFFECTING BALANCE OF' PAYMENTS
The Current Account
A country's current account balance can significantly affect its economy; therefore, it is
important to identify the factors that influence it. The most important factors are:
i) Inflation
ii) National Income
iii) Government Restructures

iv) Exchange Rates.

Let us discuss them one by one.
Inflation: If a country's inflation rate increases relative to the countries with which it
trades, its current account would be expected to decrease. Due to higher prices at home,
consumers and corporations with in the country will most likely purchase more goods
overseas (due to high local inflation), while tile country's exports to other countries will
decline.
National Income: If a country's national income rises by a higher percentage than those
of other countries, its current account is expected to decrease, other things being equal.
As the real income level (adjusted for inflation) rises, so does consumption of goods. A
percentage of that increase in consumption will most likely reflect an increased demand
for foreign goods.
Government Restrictions: If a country's government imposes a tax on imported goods
(often referred to as a tariff) the prices of foreign goods to consumers effectively
increases. An increase in prices of imported goods relative to goods produced at home
will discourage imports and is expected to increase the current account balance. In
addition to tariffs, a government may reduce its' imports by enforcing a quota, or a
maximum limit on imports.
Exchange Rates: Each country's currency is valued in terms of other currencies through
the use of exchange rates, so that currencies can be exchanged to facilitate international
transactions, The values of most currencies can fluctuate over time because of market and
government forces, If a countrys current account balance decreases, other things being
equal, goods exported by the country will become more expensive to the importing
countries, if its currency strengthens, as a consequence, the demand for such goods will
decline. For example, a refrigerator selling in the United State for $ 1 require a payment
of Rs. 3500, if the dollar were worth Rs. 351- Ks. 1 = $0.028). Yet, if the dollar were
worth Rs. 401- (Rs. 1 = $ 0.025), it would take Rs, 4000 to buy the refrigerator which
could discourage Indians to buy it, However, according to J-curve theory, a country's
trade deficit worsens just after its currency depreciates because price effects will
dominate the effect on volume of imports in the short run. That is the higher costs of
imports will more than offset the reduced volume of imports. Thus, the J curve theory
states that a decline in the value of home currency should be followed by a temporary
worsening in the trade deficit before its longer term improvement.
The Capital Account
As with the current flows, government policies affect the capital account as well. A
country's government could, for example, impose a special tax on income account by
local investors who invested in foreign markets. A tax would discourage people from

sending their funds for investment in the foreign markets and could therefore, increase
the country's capital account. Capital flows are also influenced by capital controls of
various types. Interest rates also affect the capital flows. A hike in interest rates relative to
other countries may affect capital inflows from abroad. Similarly, a reduction in domestic
rates may induce people to invest abroad.
The anticipated exchange rate movements by investors in securities can affect the capital
account. If a home currency is expected to strengthen, foreign investors may be willing to
invest in the country's securities to benefit from the currency movement. Conversely, a
country's capital account balance is expected to decrease, if its home currency is expected
to weaken, other things being equal.
When attempting to assess why a country's capital account changed and how it will
change in future, all factors must be considered simultaneously. A particular country may
experience a reduction in capital account even when its interest rates are attractive, if the
home currency is expected to depreciate.
2. (a) what is multilateralism? Explain the impact of Regional Economic Grouping
on multilateralism.
Ans.: General Agreement on Tariffs and Trade was founded in 1947 with 23 members. It
is a multilateral arrangement aimed at reducing barriers to trade, both tariff and non tariff.
The GATT mandate was to oversee international trade in goods and to gradually liberalise
the trade by means of progressive reductions in tariff barriers. The furthering of trade
liberalisation was to be achieved by negotiating rounds held among various GATT
contracting parties on a regular basis. In all, there have been eight GATT Rounds,
including the Uruguay Round. In this unit, you will learn the World Trade Organisation,
various agreements under the Uruguay round and India's position in relation to WTO.
The impact of regional economic groupings:
Trade Diversion: It is established that, increased intra-regional trade being the main
objective of regional grouping, formation of grouping leads to trade diversion away
from countries outside the grouping to countries within the grouping. In the case of the
European Union, probably the most successful grouping of today, intra-trade accounts for
more than 60 percent of the total trade as compared to about 30 percent during the 50s. in
the case of some grouping in Africa and south America, in particular LATA, Andean pact
countries, CARICOM, ECOWAS and MERCOSUR, intra-trade has grown faster than
trade with the outside world. Even in the case of the recently formed NAFTA, intra-trade
total trade has, in fact, declined or at best remained stationary over the last more than two
decades. It is, perhaps, an indication of the success of the policies of some grouping, in
particular the European Union, vis--vis other grouping in achieving their objective.

Share of Intra-trade in the Total Trade of Major Regional Grouping for

Selected year during 1970-96
EU (15)
EFTA (6)
NAFTA
CACM
LAIA
Andean
Common
Market
CARICON
ASEAN
ECOWAS
MERCOSUR

1970
59.5
18.1
36.0
26.0
9.9
1.8

1980
61.0
14.7
33.6
24.4
13.7
3.8

1990
66.0
13.5
41.4
15.3
10.6
3.8

1993
61.2
11.4
45.4
14.2
15.9
9.2

1995
62.0
11.5
46.2
14.1
15.8
11.8

1996
60.4
11.5
47.3
15.3
15.5
10.7

4.5
23.1
3.0
9.4

4.4
17.0
10.2
11.6

7.6
18.6
7.9
8.9

8.5
20.0
8.6
17.5

3.9
23.5
11.4
18.3

4.1
21.6
11.0
19.6

Trade Creation: Conceding that intra-trade has grown faster than extra-trade in the case
of some major regional grouping, the question is whether there has been at least
reasonable growth in the imports of these regional groupings from outside world. The
European Union, perhaps, is again a good example in this context. While there is, no
doubt, that, between 1958 and 1996, the share of intra-trade in the total trade of the union
has grown from about 30 per cent to more that 60 per cent, it is also a fact that extra-EU
imports have grown substantially during the same period, from ECU 24 billion to ECU
570 billion, i.e. more than 20 times in a period of slightly less than four decades. Hence
one can conclude that the benefits of the trade creation effects of the regional grouping
have flowed to non member countries. However, it is noticed that, as far as most of the
developing countries are concerned, the benefits have not very much influenced the
composition of their export basket because the share of the developing countries in the
extra-EU imports of manufacturers is not significant. For instance, inspite of substantial
import of engineering goods by the European Union, Indias share in the total EU import
of this group of items is not even 1 per cent. Thus, though the trade creation effects of
the regional grouping, in the case of European Union, is probably apparent, it is
confirmed, by and large to primary product at least in the case of developing countries
and value added items have not benefited much. Consideration the problems of primary
goods are exporters and the attempts being made by almost all the developing countries
to promote exports of manufacturers items as much as possible imports of primary goods
by a regional grouping may, after all, not be of many benefits to the developing countries.
Terms of Trade Effect: The demand of growth, if it comes about as a result of trade
creation effect, might mean prices for the products exported by third countries leading to
beneficial effect on the term of trade of those countries. This, however, depends on the
relative position of a third country is respect of a particular product in the regional
grouping whether it is a monopoly supplier or one amongst a few suppliers the price and
income elasticities of import demand, the price elasticity of export supply and the relative
unit value of the products imported by the exporting countries.

Economies of Scale and Ease of Entry: One of the apparent implications of a regional
grouping is increase in market size. Instead of third country exporter dealing separately
with each country with limited population or limited number of countries, he can deal
with the entire grouping that is many times bigger than the country/countries he was
earlier dealing with. This has two implications. One is that the size of the export order is
likely to be considerably large with the attendant benefits sales and scale of economies.
Secondly, if he is able to entre one country in the region on the basis of one approval of
one set of documents by one set of authorities, it can safely be assumed that he will be
able to reach his products to other countries in the grouping with practically no restriction
after the fist point of entry. However, it is also true that if his products are rejected at the
first entry point he will not be able to enter any other country in the grouping through any
other entry point. But more that this, the greatest limitation that will probably be faced by
many developing countries related to supply constraints. Having used to catering to small
sized market, many exporters form developing countries may not find it very easy to
execute large size orders emanating from the regional markets, due to supply constraints,
particularly within a limited period.
Mergers & Acquisitions: Flowing from the above is the fact that the bargaining power
of the exporter from a developing countries may be somewhat weakened since he may
have to deal with a more powerful importer who now controls more markets than in the
past. This problem becomes more acute when one considers the corporate mergers and
acquisition taking place/likely to take place in the regional grouping to take advantage of
regional market as against the former country-wide market. It is a documented fact that in
the European Union, cross border merger an acquisition deals have grown in recent years
and are growing. These merger and acquisitions mean that, while on the one hand, there
is no certainty of the exporter from a third country bagging the orders because this may
largely be determined by the relative strengths of the parties to the merger, it may also
effect the bargaining power of the exporter, to a consider term of size operation. This
problem assumed greater significance when one considers the supply constraints face,
generally, by many developing countries when they are called upon to execute large
orders.
Increased Competition: Regional grouping definitely mean more competition both from
within and outside the region. From within the region, companies will have the benefit of
large size orders leading to reduced unit cost and, from outside the region, the sheer
enlargement of the size of the market is incentive enough for companies to intensify their
efforts to penetrate the regional market. In this, the present and former linkages of a third
country with one or more of the countries in the region will play a significant role.
Reduction in Marketing Costs: Perhaps one of the positive developments of regional
grouping in reduction in marketing cost as far as homogeneous/standardised products are
concerned. However, in personalized items such as garments and shoes, this advantage
will not be available.
Impact of FDI Flow: It is generally believed that a regional grouping, to the extent it
leads to increased prosperity among the members of the region, will remain increased

foreign direct investment (FDI) outflow. However, while a richer region might mean
more funds available for overseas investment, it also means that, because of its
prosperity, the region itself becomes an attractive soil for investment not only for local
investment not only for local investors but for outside also. It is also a fact that in each
regional grouping, all countries and less developed countries within each region. Hence
there is always a possibility that, while on the other hand, increased prosperity of the
region means greater availability of funds for investment, on the other, it also means that
the funds are more likely to be invested in the less developed countries within the region
rather than outside the region both by local investors and investors from outside. Thus,
for a country outside the grouping, attracting private investment from a regional grouping
will depend more on its policies, procedures and climate relating to FDI vis--vis the
countries in the grouping. Empirical evidence has established that, at least in the case of
the European Union, large fund from within and outside are flowing into less developed
countries in the Union.
(b) Evaluate the role of International Commodity Agreements in stabilizing prices
of primary products.
Ans.: It is generally believed that there are disadvantages in the form of costs associated
with wide fluctuation in commodity prices and earnings. Commodity agreements have
been devised by economists and policy makers to remove excessive instability. Since
1920, there has been international interest in stabilizing commodity prices to achieve
orderly marketing. It was not until after World War II that an international mechanism
was formally instituted via the United Nations through which such inter-governmental
agreements could be negotiated, ratified and implemented. Before this the agreements
were to be signed by interested parties without the supervision of a world body, and in
almost all cases without the consumers being a party to such agreements. Cocoa was the
first commodity which had gone through the stages of design, negotiations and
implementation under the auspices of the UN.
In 1947, the Economic and Social Council (ECOSOC) of the UN established a special
branch, the Interim Coordinating Committee on International Commodity Agreements
(ICCICA) to deal specifically with commodity agreements. Later, in 1965, the United
Nations Conference on Trade and Development was set up to deal with the commodity
problems of developing countries.
The international commodity agreements are expected to have the following components
depending on commodities. A general discussion of these components will be in order.

A successfully international commodity agreement can be negotiated when 90

per cent of producers and 90 per cent of consumers participate.
Objectives of agreements must be well spelt out,
Buffer stock operation has been considered very effective in stabilizing some
commodity prices and volume traded. Buffer stock is built by the agreement
parties to perform an interventionist role. The agreement seeks to constrain the
price between a 'floor' and a 'ceiling'. Normally, the buffer stock manager must

sell at 'ceiling' and buy at 'floor' price. Maintenance of the buffer stock is
expected to be financed by the parties to the agreement. A number of
questions arise while operating the buffer stock.
a) The commodity must be amenable to buffer stock operation. Commodities lose
their original quality soon.
b) Determination of 'floor' and 'ceiling' prices must be well calculated.
C) When the buffer stock authority should operate must also be well studied and
The necessary procedures built up.
Operating the buffer stock is thus a difficult exercise,
Export Control Agreements
Export Control Agreements operate by attempting to force a balance between supply and
demand by controls on supply. In principle, supply reduction may be met either by
reduction in production, any national stockpiling of excess production or by disposal of
excess production. Which of these courses is adopted is largely dependent on the
characteristics of a particular commodity. It is difficult to significantly affect production
of crop commodities within the harvest year and so here stockpiling or disposal is the
normal course. On the other hand, there is a greater flexibility in metal production and in
general it is cheaper to store it underground. Export Control Agreements are considered
cheaper because they do not entail foreign exchange costs.
Updating Support Price
From time to time it will become necessary to update the price support range of a buffer
stock agreement. The same applies to the production or export control price trigger in a
control agreement. Factors which might be considered for updating are: (a) changes in
exchange rate; (b) changes in the general level of prices; (c) changes in conditions in taste
and technology; (d) commodity price; and (e) level of the stock held by the buffer stock
authority.
3. (a) State the circumstances under which an agreement is void abinitio.
Ans.:
An agreement has been defined as a promise or set of promises forming consideration for
each other. The promise is an accepted proposal or offer. A person (Say A) is said to be
making a proposal (or offer) when he (A) signifies to another person (Say B) his
willingness to do or to abstain from doing something with a view to obtaining the assent
of that other person (B) to such act or abstinence. When that other person (B) to whom
the proposal or offer is made accepts the proposal, it becomes a promise. Logically we
can say that an agreement is an accepted proposal. In other words, an agreement is the
sum total of offer and acceptance. An agreement can therefore, be formed by at least two
persons and there must be an offer by one party and the acceptance of the offer by the
other with an intention to create legally binding obligations. Such an agreement to be

enforceable must graduate or become a contract provided it fulfils certain other

conditions or essential elements of a valid contract which reflect the general as well as
the limiting principles applicable to all types of contracts. If one or more of these
conditions or elements are lacking the agreement is void abinito (right from the
beginning) and the agreement is destitute of all legal effects.
(b) Define export sales contract. Distinguish between export sales contract and
domestic sales contract.
Ans.: Export sales contracts (ESC) or Export contract is defined as a contract whereby
the exporter (seller) transfer or agrees to transfer the property in the good to the importer
(buyer) for a price. This definition emphasizes the following elements of ESC.
1. It is a contract between two distinct parties, i.e. an exporter and an importer who
must be competent to contract.
2. Good which from the subject matter of the contract must be movables and may be
either existing goods owned and possessed by the exporter or future goods (to be
procured or manufactured)
3. The exporter transfers or agrees to transfer the property (ownership) in the goods
to the importer. Transfer of general property in the goods or ownership is the
essence of the contract of export sales.
4. The transfer of property in the goods from the exporter to the importer is for
consideration which must be money, called the price. When goods are exchanged
for goods it is not an export (or sales) but barter. When the consideration is partly
in cash and partly in goods the transaction is an export or sale.
5. The other essential elements of contract like the competency of the parties, lawful
object and consideration, certainty of meaning etc. are also applicable to ESC.
Export sales contract like a Domestic sales contract includes both export (sale or outright
sale) and an agreement to export (agreement to sell). Export or sale involves transfer of
property in the goods at the time of making of the contract whereas an agreement to
export or sell involves transfer of property in the good subsequent to the making of the
contract or at a future date or on the fulfillment of certain specified condition. Export
(sale) is an absolute and executed contract whereas an agreement to export or sell is an
executor and conditional contract.
Export transaction involves a foreign element and a lot of legal and other formalities
exports are hardly affected on the basis of sale or outright sale. In view of this, most
exports are conducted on the basis of an agreement to sell which operate as a present
agreement to sell future goods i.e. the goods which are yet to be either produced or
produced for export after entering into a contract of sale. An agreement to export or sell
becomes an export or on fulfillment of certain specified conditions.
Export sales contract is formed by offer (to buy or sell goods) by one party and its
acceptance (to sell or buy goods respectively) by the other party. The contract is made in
writing or by word of mouth or partly in writing and partly by word of mouth. The

contract may also be implied from the conduct of the parties or from the course of dealing
between the parties. Although oral contracts are valid, it is always safe and secure to have
a formal written contract.
Difference between Export Sales Contract and Domestic Sales Contract
Although the essential elements of a valid export sales contract and that of the domestic
sales contract are same there appears to be some differences between these two contracts.
This is mainly because all export sales have a foreign element which is absent in all
domestic contract sale. The Export Sale Contract (which legalizes the export sales)
involves parties who are called exporter and importer belonging to different countries.
The price (consideration) under the export sales contract is quoted and realized in foreign
currency. The goods (forming the subject matter of export sales contract) are exported
across the boundary of the exporters country. The applicable law and jurisdiction under
the export sale contract may or may not be the exporters country law and jurisdiction.
The export sales contract is concluded subject to the provisions of certain laws of foreign
exchange regulations, foreign trade development and regulations etc., which are not
relevant for domestic sales regularized through domestic sale contract. Lastly, the export
sales regularized through export sale contract is subjected to various legal and procedural
formalities which are not required in domestic sales formalized through domestic sale
contract.
4. (a) Describe the direction and composition of world trade in services. Explain the
future prospects of trade in services.
Ans.: Trade has been one of the most buoyant international economic activities in recent
period. World merchandise trade has been consistently growing at rates higher than rates
of growth in global output in the nineties. The world merchandise trade grew by an
average rate of 6% during the period 1990-95.
The trade growth slowed in the year 1998 as the Asian crisis deepened and its
repercussions were felt increasingly outside Asia. The volume of world merchandise
exports grew by 3.5% in the year 1998 after an outstanding growth rate of 10.5% in 1997.
All major regions experienced a marked slowdown of their trade growth in 1998.
Trade performance in 1998 differed widely among regions. While oil-exporting regions
recorded the strongest annual value declines in merchandise exports, countries directly
affected by the Asian financial crisis reported the strongest import decline. The
contractionary forces of the Asian crisis and falling commodity prices were attenuated by
the robustness of continued economic growth in the United Sates and strengthened
demand in Western Europe. All regions recorded a lower export expansion in 1998 than
1997. The transition economics and the Latin America recorded the strongest export
volume growth. Asias export volume increased marginally, as the strong contraction of
intra-Asian trade was only just offset by a sharp rise in extra regional flows. Western
Europes export trade was only just offset by a sharp rise in extra regional flows. Western
Europes export growth remained above the global average of 3.5% and North Americas
export growth fell below the average.

As far as import is concerned, Western Europe, the largest regional trader, was the only
region not to record a deceleration in import growth in the year 1998. Western Europe's
import growth rate of 7.5% was less than the 10% rate recorded by North America, Latin
America and the transition economies. The imports into Asia fell by 8.5%. The stagnation
or decrease in import volumes is estimated for Africa and the Middle East.
Services are becoming a significant component in global trade. The value of commercial
services increased from US $ 1275 billion to US $ 1320 billion in 1996 to 1997. It fell
down to US $ 1290 billion in the year 1998.

Commodity Composition:
Manufactured items again proved to be the most dynamic component of global trade their
share in world merchandise export have been growing steadily. It will be noticed from
Annexure 1 that since 1990, while the share of manufactured items has grown from 61.2
per cent to 74.4 per cent in 1995 to 76% in 1998, those of mining products and
agricultural products declined during the period. The decline is particularly marked in the
case of fuels from 10.5 per cent to as low as 7.1 per cent in 1995 to 6.5% in 1998,
followed by fwd items and raw materials. On the other hand, the share of each one of the
product groups of manufactures excluding iron and steel has grown during the period. It
is of' interest to note that higher the value addition, the more is the rate of growth in
exports, as is evidenced by the substantial increase in the share of machinery and
transport equipment in world merchandise exports.
Manufactured items are, by far, the single largest product group of exports of all the
regions excluding Africa and Middle East: mining products (including petroleum)
constitute the major share in the exports of the latter two regions. It is worth noting that
the share of manufactures in total exports is the highest (83%) in the case of Asia
followed by Western Europe (80.2%) and North America (77.9%) and lowest (27.7%) in
the case of Middle East and second lowest by Africa (3 1.6%). It is also interesting to
note that Western Europe contributes as much as 47.0% to global exports of
manufactures, followed by Asia (26.8%) and North America (17.4%), and while Africa's
contribution is the least (0.8%) followed by Middle East (0.9%).
The fact that manufactured items have turned out to be the most dynamic items in global
trade is also substantiated by Annexure 4 which provides data on world merchandise
imports by product group and region. Manufactures are not only the single largest
product group of imports of all the regions including Africa and Middle East,
notwithstanding the fait that the main exports of the latter two regions is mining products
but the share in the imports of no region is less than 70%.

Direction of Trade:
As far as direction of global merchandise trade of different groups of countries is
concerned, that there is very heavy intra-regional trade in Western Europe followed by

Asia and North America. The high share of intra-trade in total trade in West Europe is
attributed to the European Union: in Asia, apart from the existence of ASEAN, the large
trade of Japan, Australia and New Zealand within the region explains the substantial
share of intra-trade; notwithstanding the existence of regional groupings in Latin
America, the share of intra-trades in this region is not substantial, while the impact of
NAFTA, to some extent at least, is, perhaps, visible in the increase in the share of intra
trade in North America's global trade; the share of intra-trade in total trade has,
understandably, dropped significantly in the Eastern European region consequent to the
breaking up of former USSR. Recently the share has increased from 19% in 1995 to 31%
in 1998. Perhaps one finding could be that regional trade blocs have succeeded, as far us
stepping up intra-trade is concerned, more among developed countries than among
developing countries.

(b) Describe Hosmers model for ethical analysis of management decisions.

Ans.: Hosmer has suggested a model for ethical analysis of management decisions that
is helpful in analysing the ethical dilemmas of international managers. Look at Figure
which shows the model for ethical analysis. Before giving thought to the other factors of
the model and to appreciate the multifaceted nature of managerial dilemmas, consider the
elements of content of managerial dilemma. This has been done in the context of a onecountry problem related to human resources.
Cultural
Experiences
Ethical Belief
Systems

Moral Standards
Of Behaviour

Content of

Financial
Legal
Organisatinal

management
dilemma

Social
Personal

And social Instruction

The HR problem posed by Hosmer relates to employee drug testing issue of a company
that faces the problem of low productivity and low quality. It is suspected that it is due to
drug and alcohol abuse. The testing for chemical depending is an invasion of personal
privacy and the test does not always give accurate result. The management has
information that less than 20 per cent of the workforce uses drugs and alcohol. However,
if the test is carried out, the other 80 per cent will also have to go through the indignity of
tests. The managerial dilemma is whether to go for drug test or not.
Content of managerial dilemma. Hosmer model has financial, legal, organizational, social
and personal aspects as parts of content of managerial dilemma. In the HR example these
refer to the following.
The financial content refers to financial benefits and costs in solving the drug problem.
The organizations tend to give more weight to this aspect in their decisions. The legal
content is concerned with any legislation, which permits or prevents the type of' drug

testing proposed. There is always a possibility of compensation claims, as a result of test

that may have financial implications. The organisational consequences of the drug testing
can be both positive and negative. It may lead to better working environment once the
problem is solved and also more job security due to improved efficiency in production.
However, on the negative side, there is the possibility of low morale as a result of the
action.
The implication of the proposed action on the wider society is the domain of social
content of the managerial dilemma. On the plus side the testing may enhance the
competitive position of the company and it may also enhance its reputation in the locality.
However, if a society considers individual's privacy important, there can be negative
implications in the community as a result of charges of invasion of privacy. The managers
while taking decisions are also concerned with the result of their actions on their careers.
There is also the possibility of loosing their jobs if something goes wrong. This
constitutes the personal content of the managerial dilemma.
The issues discussed under the content of the managerial dilemma above clearly show
that the approach followed by Homer is utilitarian because the action is judged in the
light of its outcome. Apart from the content of managerial dilemmas, the model has other
elements such as moral standards of behavior, the ethical system of belief.
Moral Standards of Behaviour: This occurs in the model prior to the consideration of
the dilemmas facing the decision-maker. We use moral standards of behavior to judge our
behavior and that of others. It is important to note that these tend to be subjective,
imprecise and varies between the individuals. They are also likely to vary from one
situation to another as is evident in our attitude towards lying.