It is necessary that the name of the drawee should be mentioned in the bill.

The words OR ORDER OR BEARER indicate the persons to whom the bill has to be paid.

v. FOR VALUE RECEIVED A bill of exchange is always drawn against a certain amount or value. Therefore the words For Value Received should always be written on the bill.

vi. SIGNATURE OF THE DRAWEE A bill lacking the signature of the drawer is unacceptable and unlawful. Such type of a bill can be dishonoured. That is why the structure of the drawer are essential.

vii. NAME & ADDRESS OF THE DRAWEE The closing of the bill includes the name and address of the drawee. It is written on the left side corner of the bill. Q.3. What are the assumptions and criticism relating to the theory of comparative advantage?

ASSUMPTIONS OF THE THEORY The comparative cost theory is based on the following assumptions: i. labour is regarded as the sole factor of production and the cost of production only consists of labour cost. ii. Production is subject to the law of constant returns. iii. Factors of production are assumed to the perfectly modile within a country but immobile between countries.

CRITICISM The theory of comparative cost is criticized on the following grounds.

Assumption of Constant Cost

Ricardo argued that two countries can gain very well by trading even if one the countries is having an absolute advantage in the production of both the commodities over the country. The condition is Provided the extent of absolute advantage is different in the two commodities in question i.e. the comparative advantage is greater or comparative is lesses in respect of one good than in that of the other. In this connection we compare not the cost of production of one commodity with the other rather we compare the ratio between the cost of production of the two commodities concerned in one country with the ratio of their cost of production in the other country.

EXAMPLE Suppose there are two countries A and B and there are two commodities wheat and rice. Suppose a unit of labour produces 10 tons of wheat or 20 tons of rice in country A. The same unit can produce 6 tons of wheat and 18 tons of rice in country B. According to this situation country A is having an absolute advantage in the production of both commodities over B. But she is at a greater comparative advantage in the production of wheat country B is at a disadvantage in both. Commodities the comparative disadvantage is less than case of rice. Hence the ratio would be In A it is 10 : 20 i.e. 1 : 2 In B it is 06 : 18 i.e. 1 : 3 Therefore, A will specialize in wheat and B in rice and international trade will become possible and profitable. This is the law of comparative advantage or costs. Q.5. What are the advantages of International trade? Also discuss its disadvantages.

ADVANTAGES OF INTERNATIONAL TRADE Various advantages are named for the countries entering into trade relations on a international scale such as:

A country may import things which it cannot produce International trade enables a country to consume things which either cannot be produced within its borders or production may cost very high. Therefore it becomes cost cheaper to import from other countries through foreign trade.

Maximum utilization of resources

Internation trade leads to intensive cultivation of land. Thus it has the operations of law of diminishing returns in agricultural countries. It also makes a nation poor by giving too much burden over the resources.

Over Specialization Over Specialization may be disasterous for a country. A substitute may appear and ruin the economic lives of millions.

Danger of Starvation A country might depend for her food mainly on foreign countries. In times of war there is a serious danger of starvation for such countries.

One country may gain at the expensive of Another One of the serious drawbacks of foreign trade is that one country may gain at the expense of other due to certain accidental advantages. The Industrial revolution is Great Britain ruined Indian handicrafts during the nineteenth century.

It may lead to war Foreign trade may lead to war different countries compete with each other in finding out new markets and sources of raw material for their industries and frequently come into clash. This was one of the causes of first and second world war. Q.6. Why do International trade take place? OR What are the bases for international trade? Some of the reasons that why do trade between different countries occur are discussed under the following heads.

NATURAL ENDOWMENTS Differences in advantages of trade to different countries may arise because of natural reasons like geographical and climatic conditions. This lead to territorial division of labour and localization of industry. This different countries specialize in the production of different

absolute advantage for that country over rest of the world. The absolute advantage results in a regular inflow and outflow of goods which gives rise to International Trade.

COMPARATIVE ADVANTAGE When a country has an advantage of production and move than one commodity it prefers to produce only one commodity that is more advantageous for other. This advantage is calculated by comparing the different commodities that how much they paying commodity is selected and the country goes for specializing. This is known as comparative advantage. Q.8. Explain in detail that how are adverse balance of payments can be corrected?

METHODS OF CORRECTING AN ADVERSE BALANCE OF PAYMENTS Following are same of the methods adopted for correcting and adverse balance of payments.

Improving the balance of trade through import restrictions & measures of export promotions Since balance of payments becomes adverse because of excess imports over exports, so a country having such a problem must try to check imports either by total prohibition or by levying import duties so by a quota system. Another method may be import substitution i.e. trying to produce in the country what it currently imports. Exports can be stimulated by measures of export promotion granting subsidies or other concessions to industrialists and exports.

Depreciation of the currency If a country depreciates its currency it proves very helpful in increasing the exports of goods. The value of the home currency fall relatively to foreign currency hence the foreigners are able to buy move goods with the same amount of their own currency or for the same amount of goods they have to pay less in terms of their own currency than before.

Devaluation A country can turn the balance of payments in its favour by devaluating her currency. In this case also the devalued currency will become cheaper in terms of the foreign currency and the foreigners will be able to buy move goods by paying the same amount of their own currency. The effect is the same as in the case of depreciation.

The Current Account uncludes merchandise trade in good and International Services are termed as Invisible trade. There are four basic service components. Tourism, Investment, Private Sector, Services such as royalties, rent, consulting and engineering fees etc and Government services such as diplomatic and buildings and membership fees in international organizations.

B.O.P CAPITAL ACCOUNT The capital account has a long term and a short term sector. The long term amount shows the inflow and outflow of capital commitments which have a maturity longer than a year. Short term capital movement frequently have a maturity date from 30-90 days. Long term capital items generally include loans to and from other governments, financial support for development. Projects abroad and export financing. Short term capital include paying for international services, selling accounts etc. Q.10. Define Balance of Trade

BALANCE OF TRADE Balance of trade refers to the difference in the value of imports and exports of commodities only i.e. visible items only. Movements of goods between countries is known as visible trade because the movement is open and can be verified by the custom officials with respect to balance of trade the following terminologies are important.

Balanced Balance of Trade If during a given years exports and imports of the country are equal the balance of trade is said to be Balanced.

Favourable Balance of Trade If the value of exports exceeds the value of imports the country is said to experience an export surplus or favourable balance of trade.

Un-Favourable Balance of Trade If the value of imports exceeds the value of its exports the country is said to have a deficit or an adverse balance of trade. Q.11. Compare the direct and Indirect methods adopted of exchange control.

i. By centralizing all trading in foreign exchange with central bank of the country. ii. To prevent the exchange of national currency against foreign currency with the permission of the government. iii. By making all foreign exchange transactions through the agency of the government.

Exchange Clearing Agreement Under this method the countries engaged in trade pay to their respective central bank the amounts payable to their respective foreign creditors. The central banks they use the money in off setting the corresponding claims after fixing the value of the foreign currencies by common agreement. The basic principle is to offset international payments so that they have not to be settled through the medium of the foreign exchange market.

INDIRECT METHODS The most commonly used direct method or tool of exchange control is the use of tariff duties and quotes and other quantative restrictions on the volume of international trade. By imposing tariff and quotes the demand for the foreign currency falls down in the case of restricting the imports.

Rate of Interest Another method of indirect exchange is the rate interest. The rate of exchange is the result of demand and supply of each other currencies arising out of trade and capital movement. A high rate of interest in a country attracts short term capital from other countries that leads to a exchange rate for the currency in terms of other currencies goes up. Q.13. Identify the objectives of exchanges control?

OBJECTIVES OF EXCHANGE CONTROL The following are some of the objectives of exchange control.

To restore Equilibrium The chief objective of exchange control is to restore equilibrium in its balance of payments. If a country finds that its balance of trade has been persistently unfavourable then it must do something set it right. The balance of payment must ultimately be made to balance.

Q.15(A). Define the term rate of exchange. Q.15(B). Explain how the rate of exchange is determined?

RATE OF EXCHANGE The rate at which the currency or monetary unit of one country can be exchanged with the monetary unit of other country is called the rate of exchange. In other words, the rate at which a unit of one country exchanges for the currency of another is the rate of exchange between them. It may be used to denote the system whereby the trading nations pay off their debts.

Determination of Rate of Exchange The rate of exchange is determined under the following under the following money systems as:

Under Gold Standard If two currencies are on gold standard and if their currencies are expressed in terms of gold i.e. a certain weight of gold then the rate of exchange is determined by reference to the gold contents of the two currencies. Suppose Pakistan and United States are on gold standard the rupee being equal to 10 grams of gold and dollar consisting of 50 grams of gold. The rate of exchange between the two countries will be 1 Rupee = 10/50 = 1/5 $ or 0.20 cents 1 Dollar = 50/10 = 5 Rupees. Thus the rate of exchange is determined in a direct manner by comparison between the gold contents of the two countries. This rate of exchange is also known as Mint Par of Exchange. The actual rate in the foreign exchange market will be slightly different from the mint par to allow for certain expenses. However the actual rate of exchange between currencies will not depart much from the mint par and will move between the two points of export and import of gold. These points are called Gold Points.

Under Paper Currency Method This phenomenon of exchange rates determination is also called Purchasing Power Parity Theory. No country in the world is rich enough to have a free gold standard. All countries nowadays have paper currencies. According to this theory the rate of exchange between

ii. Signature of Notery Public. iii. The name of the person whose bill was protested. iv. The date and amount of the protest. v. The cause of the protest. vi. The reply of the drawee. vii. The reason of absence of the drawee and the accepted. viii. The reason for the non-payment of the bill. ix. The certificate stamp of the notery public. Q.18. What are the essentials of a bill of exchange?

ESSENTIALS OF A BILL OF EXCHANGE The following are the essentials of a bill of exchange. i. It must be in writing. ii. It must be an unconditional order to pay. iii. It must be signed by the maker. iv. It must be addressed by one person to another. v. It must be written for some certain sum of money. vi. It must be payable on demand. Q.19. Who are the parties to a Bill of Exchange? The parties to a bill of exchange are i. The Drawer who prepares the bill. ii. The Drawee in whose name the bill has been drawn. iii. The Payee to whom the bill has to be paid.

instrument stands as a surety for some other person who may or may not be a party thereto.

v. Time Bill These are such type of bills which are payable on demand on some specified dates. These specified dates may be of present or future.

vi. Demand Bill The bills which are payable on demand are called demand bills. Such type of bills are generally used for specific purposes. Q.21. Write Short Notes.

PROMISSORY NOTE The promissory note is one of the simplest forms of the credit instrument. Section 4 of the Act defines a Promissory Note as an instrument in writing not being bank note or a currency note containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the orders of a certain person to the bearer of the instrument.

Characteristics of a Promissory Note The essential characteristics of a promissory note are as follows i. It is a written document signed as follows. ii. It contains an unconditional promise to pay. iii. Besides an acknowledgement a promissory note is an express promise to pay. iv. Promissory note must always relate to a definite and certain amount of legal money of the country and not to foreign money. v. It should not be a bank note or currency note. vi. No particular from is prescribed for it. vii. A promissory note is not payable to the bearer on demand.

endorsement. When the member or holder signs his name on the negotiable instrument for the purpose of negotiation i.e. direction to pay the amount to another person is called Endorsement. Section 15 of the Negotiable Instrument Act 1881 defines Endorsement as When the maker or holder of a negotiable instrument sign the same, otherwise than as such maker for the purpose of negotiation on the back or face therefore on a slip of paper or so signs for the same purpose a stamp paper intended to be completed as a negotiable instrument he is said to endorse the same and he is called the endorse . KINDS OF ENDORSEMENT Different kinds of Endorsement are as follows. i. Blank or General Endorsement When the endorser simply put his signature on the back of the instrument without specifying the name of the endorsee, it is said to be general endorsement. The holder can convert it in full endorsement by writing the name of the payee above the signature of the endorsee. ii. Special or Full Endorsement It specifies in addition to the signature of the endorser the person to whom or to whose order the instrument is payable. iii. Restrictive Endorsement An endorsement which prohibited further negotiation of the instrument is called restrictive endorsement. For instance if a cheque is endorsed saying "Pay A only" or "Pay A for A/C of B" the endorsed has no power to transfer his right further. iv. Partial Endorsement An endorsement which makes the transfer of the instrument from the endorser to the endorsee after the fulfillment of stated conditions is called Partial Endorsement. Sans Recourse When a person wants to exclude his liability to the endorse or any subsequent holder in case of dishonour of the instrument. The Endorser fees himself from his liability on a negotiable instrument by writing the words SANS RECOURSE after the name of the endorsee. He should make it clean that he endorsee or the holder should not look to him for payment in case of the dishonour of the instrument. The endorsee may refuse to take an instrument with such an endorsement. Q.24 (B). Under what circumstances a cheque is said to be dishonoured.

DISHONOUR OF A CHEQUE The relation between a banker and his customer is that of a debtor and a creditor. Money deposited will always belong to the customer and the bank will be bound to return its equivalent to the customer or to any person to his order. But in certain cases a banker

Formerly in certain countries, many banks issued their own notes. This resulted in uncontrolled confusion. Hence, gradually the right of note issue was withdrawn from ordinary banks. Note issue became the sole privilege of the central bank. Today the central bank in every country enjoys the exclusive privilege of bank note issue.

BANK TO THE GOVERNMENT This functions of a central bank may be studied under the following two heads.

As Banker To The Government As governments banker, the central bank keep the deposits or banking accounts of government departments boards and enterprises. It advances short term loans to the government in anticipation of collection of taxes or the raising of loans from the public. It also makes extra-ordinary advances during depression, war or other national emergencies.

As An Agent Of The Government As an agent of the government the central bank is often entrusted with the management of the public debt and issue of new loans and treasury bills on behalf of the government. Moreover the central bank is the fiscal agent to the government and receives taxes and other payments into its account.