1 The world economy is globalizing at an accelerating pace.

Discuss this
statement and list the benefits of globalization.
Answer- Globalisation is a process where businesses are dealt in markets around the
world, apart from the local and national markets. According to business
terminologies, globalisation is defined as the worldwide trend of businesses
expanding beyond their domestic boundaries. It is advantageous for the economy
of countries because it promotes prosperity in the countries that embrace
globalisation. In this section, we will understand globalisation, its benefits and
challenges.
Global companies Companies, which invest in other countries for business and also operate
from other countries, are considered as global companies. They have multiple manufacturing
plants across the globe, catering to multiple markets.
The transformation of a company from domestic to international is by entering just
one market or a few selected foreign markets as an exporter or importer. Competing
on a truly global scale comes later, after the company has established operations in
several countries across continents and is racing against rivals for global market
leadership. Thus, there is a meaningful distinction between a company that
operates in few selected foreign countries and a company that operates and
markets its products across several countries and continents with manufacturing
capabilities in several of these countries.
Companies can also be differentiated by the kind of competitive strategy they adopt
while dealing internationally. Multinational strategy and global competitive strategy
are the two types of competitive strategy.
Global competitive strategy Companies adopt this strategy when prices and competitive
conditions across the different country markets are strongly linked and have common synergies.
In a globally competitive industry, a companys business gets affected by the changing
environments in different countries. The same set of competitors may compete against each
other in several countries. In a global scenario, a companys overall competitive advantage is
gauged by the cumulative efforts of its domestic operations and the international operations
worldwide.
A good example to illustrate is Sony Ericsson, which has its headquarters in Sweden, Research
and Development setup in USA and India, manufacturing and assembly plants in low-wage
countries like China, and sales and marketing worldwide. This is made possible because of the
ease in transferring technology and expertise from country to country.
Industries that have a global competition are automobiles, consumer electronics
(like televisions, mobile phone), watches, and commercial aircraft and so on.

Benefits of globalisation
The merits and demerits of globalisation are highly debatable. While globalisation creates
employment opportunities in the host countries, it also exploits labour at a very low cost

compared to the home country. Let us consider the benefits and ill-effects of globalisation.
Some of the benefits of globalisation are as follows:
Promotes foreign trade and liberalisation of economies.
Increases the living standards of people in several developing countries through capital
investments in developing countries by developed countries.
Benefits customers as companies outsource to low wage countries. Outsourcing helps the
companies to be competitive by keeping the cost low, with increased productivity.
Promotes better education and jobs.
Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best
practices, and culture.
Provides better quality of products, customer services, and standardised delivery models
across countries.
Gives better access to finance for corporate and sovereign borrowers.
Increases business travel, which in turn leads to a flourishing travel and hospitality industry
across the world.
Increases sales as the availability of cutting edge technologies and production techniques
decrease the cost of production.

Provides several platforms for international dispute resolutions in business, which facilitates
international trade.
Some of the ill-effects of globalisation are as follows:
Leads to exploitation of labour in several cases.
Causes unemployment in the developed countries due to outsourcing.
Leads to the misuse of Intellectual Property Rights (IPR), copyrights and so on due to the
easy availability of technology, digital communication, travel and so on.
Influences political decisions in foreign countries. The MNCs increasingly use their
economical powers to influence political decisions.

 Causes ecological damage as the companies set up polluting production plants in countries
with limited or no regulations on pollution.
Harms the local businesses of a country due to dumping of cheaper foreign goods.
Leads to adverse health issues due to rapid expansion of fast food chains and increased
consumption of junk food.
Causes destruction of ethnicity and culture of several regions worldwide in favour of more
accepted western culture.
2 Compare the Adam Smith and David Ricardos theories of international trade with
examples.
AnswerAdam Smiths theory
In one of the most notable book Wealth of Nations in 1776, Adam Smith attacked
the mercantilism and argued that countries differ in their ability to produce goods
and services efficiently due to variety of reasons. At that time, England, by virtue of
their superior manufacturing processes, were the worlds most efficient textile
manufacturers of the world. This was due to combination of several factors such as
favourable climate, good soils, skilled manpower and accumulated experience and
expertise in textile production. On the other hand, the French had one of the most
efficient wine industries of the world. Thus, England had an absolute advantage in
the manufacturing of textiles and France had an absolute advantage in the
production of wine. Adam Smith argued that a country has an absolute advantage if
it has one of the most efficient and cost effective product in comparison to any
other country producing it.
Smith argued that countries should specialise in production and manufacturing of goods and
services in which they have an absolute advantage. Such cost effective and efficient products
can be traded with goods from other countries in which that country has an absolute advantage.
According to Smith, England should specialise in the production of textiles and France should
specialise in the production of wine. Both countries should exchange such products of absolute
advantage with each other, i.e. England should sell textiles to France and France should sell
wine to England.
The crux of Smiths absolute advantage theory is that a country should not produce
goods at home in which it does not have cost advantage; instead it should import
from other countries. Absolute advantage theory was based on positive sum game
where countries benefit from trade unlike mercantilism theory which was based on
zero game. Caselet tabled as under illustrates the benefits of absolute advantage
theory.
David Ricardos theory

David Ricardo, in his notable book Principles of Political Economy published in 1817 came up
with an improvement on Adam Smiths absolute advantage theory. Ricardo argued what might
happen if one country has an absolute advantage in the production of all goods. Adam Smiths
theory suggests that such a country might not have benefitted from international trade as trade
is positive sum game and countries prosper only if they exchange the goods in which they have
absolute advantage.
Ricardo argued that it was not the case and showed that countries should trade
goods with each other where they have comparative cost advantage. For a
sustainable economic system, Ricardo argued that a country should specialise in the
production of those goods that it can produce most efficiently and import the goods
which it produces less efficiently even if it has absolute cost advantage in the
production of those goods. Practical case on comparative cost advantage is tabled
as under:

3 Regional integration is helping the countries in growing their trade. Discuss this
statement. Describe in brief the various types of regional integrations.

Answer: Regional integration can be defined as the unification of countries into a larger whole.
It also reflects a countrys willingness to share or unify into a larger whole. The level of
integration of a country with other countries is determined by what it shares and how it shares.
Regional integration requires some compromise on the part of participating countries. It should
aim to improve the general quality of life for the citizens of those countries.
In recent years, we have seen more and more countries moving towards regional
integration to strengthen their ties and relationship with other countries. This
tendency towards integration was activated by the European Union (EU) market
integration. This trend has influenced both developed and developing countries to
form customs unions and Free Trade Areas (FTA). The World Trade Organisation
(WTO) terms these agreements of integration as Regional Trade Agreements (RTA).

Types of Integration
Preferential trading agreement:- Preferential trading agreement is a trade pact
between countries. It is the weakest type of economic integration and aims to
reduce taxes on few products to the countries who sign the pact. The tariffs are not
abolished completely but are lower than the tariffs charged to countries not party to
the agreement. India is in PTA with countries like Afghanistan, Chile and South
Common Market (MERCOSUR). The introduction of PTA has generated an increase in
the market size and resulted in the availability and variety of new products.
Free trade area
Free Trade Area (FTA) is a type of trade bloc and can be considered as the second stage of
economic integration. It comprises of all countries that are willing to or agree to reduce

preferences, tariffs and quotas on services and goods traded between them. Countries choose
this kind of economic integration if their economical structures are similar. If countries compete
among themselves, they are likely to choose customs union.
The importers must obtain product information from all suppliers within the supply
chain in order to determine the eligibility for a Free Trade Agreement (FTA). After
receiving the supplier documentation, the importer must evaluate the eligibility of
the product depending on the rules pertaining the products. The importers product
is qualified individually by the FTA. The product should have a minimum percentage
of local content for it to be qualified.
Custom union
Custom Union is an agreement among two or more countries having already
entered into a free trade agreement to further align their external tariff to help
remove trade barriers. Custom union agreement among negotiating countries may
encompass to reduce or eliminate customs duty on mutual trade. Under customs
union agreement, countries generally impose a common external -tariff (CTF) on
imports from non-member countries. Such common external tariff helps the
member countries to reap the benefits of trade expansion, trade creation and trade
diversification. In the absence of common external tariff, there is a possibility that
countries with lower custom duties may become conduits for members which has
higher custom duty. Custom union is third stage in level of economic integration and
is followed only after free trade agreement among participating countries.

Common market

Common market is a group formed by countries within a geographical area to promote duty free
trade and free movement of labour and capital among its members. European community is an
example of common market. Common markets levy common external tariff on imports from nonmember countries.
A single market is a type of trade bloc, comprising a free trade area with common policies on
product regulation, and freedom of movement of goods, capital, labour and services, which are
known as the four factors of production. This agreement aims at making the movement of four
factors of production between the member countries easier. The technical, fiscal and physical
barriers among the member countries are eliminated considerably as these barriers hinder the
freedom of movement of the four factors of production. The member countries must come
forward to eliminate these barriers, have a political will and formulate common economic
policies.
A common market is the first step towards a single market. It may be initially limited
to a FTA with moderate free movement of capital and services, but it is not capable
of removing the other trade barriers.
Benefits and costs
A single market has many advantages. The freedom of movement of goods, capital, labour and
services between the member countries results in the efficient allocation of these production
factors and increases productivity.
A single market presents a challenging environment for businesses as well as for customers
making the existence of monopolies difficult. This affects inefficient companies and hence,
results in a loss of market share and the companies may have to close down. However, efficient
companies can gain from the increased competitiveness, economies of scale and lower costs.
Single market also benefits the consumers in a way that the competitive environment provides
them with inexpensive products, more efficient providers of products and increased variety of
products.
A country changing over to a single market may experience some short term
negative effects on the national economy due to increased international
competition. National companies that earlier benefited from market protection and
subsidies may find it difficult to cope with their efficient peers. If these companies
fail to improve their methods, they may have to close down leading to migration
and unemployment.

Economic union
Economic union is a type of trade bloc and is instituted through a trade pact. It comprises of a
common market with a customs union. The countries that are part of an economic union have
common policies on the freedom of movement of four factors of production, common product
regulations and a common external trade policy.
The purpose of an economic union is to promote closer cultural and political ties
while increasing the economic efficiency between the member countries.
Economic unions are established by means of a formal intergovernmental legal agreement
among independent countries with the intention of fostering greater economic integration. The
members of an economic union share some elements associated with their national economic
jurisdictions.
These include the free movements of:

 Goods and services within the union along with a common taxing method for imports from
non-member countries.
Capital within the economic union.
Persons within the economic union. Some forms of cooperation usually exist while framing
fiscal and monetary policies.
Political union
A political union is a type of country, which consists of smaller countries/nations.
Here, the individual nations share a common government and the union is
acknowledged internationally as a single political entity. A political union can also be
termed as a legislative union or state union.
4 Write short note on:
a) GATS (General Agreement on trade in services)
b) ILO (International Labour organization)
Answer
GATS (General Agreement on trade in services)
General Agreement on Trade in Services (GATS) GATS is a framework agreement defining
the rules under which trade in services must occur. GATS aims at extending the rules covering
trade in goods to trade in services. A detailed rule has been included to take into account the
differences between goods and services and the way in which trade in services is conducted.
Trade in services cover a wide range of activities in the area of telecommunication, information,
banking, insurance and education. WTO has recognised over 150 service sub-sectors.
The main objective of GATS is to establish a framework for liberalising trade in
services. It encourages countries to modify their domestic regulations. This
modification results in elimination of restrictions applied to service products
entering the country and is applicable to international service suppliers who are
carrying out business in various modes. According to the GATS, MFN status and
transparency is applicable to all services. Other commitments such as national
treatment and market access are only applicable to services that are opened
according to the specified negotiated commitments. GATS covers services known as
consumption abroad where services such as e-commerce are used by the
consumers in a host country and citizens of a country travel overseas to consume
products such as tourism or education.

Trade-Related Aspects of Intellectual Property Rights (TRIPS) The Agreement on TradeRelated Aspects of Intellectual Property Rights (TRIPS) is one of the WTO agreements that is
compiled by all WTO members. According to TRIPS, developed and developing members of
WTO must adopt the same minimum levels of intellectual property protection. The TRIPS
Agreement includes rules on domestic enforcement procedures. TRIPS Agreement focuses on
issues such as innovation and the dissemination of technology, development of biotechnology,
health care and the operation of multilateral environment agreements.

The TRIPS agreement states that members can take actions to protect the public health and
nutrition. It encourages protection of new plant varieties. The members are encouraged to
develop national systems that promote local breeding, rights of farmers and protect
human fundamental human rights which include the right to food and health. It
promotes the use and protection of knowledge that is relevant to the conservation
and use of biological diversity. This includes knowledge in technology and genetic
material. The 1995 WTO TRIPS Agreements covers copyright and related rights,
geographic indications, trademarks, and patents of integrated circuits, protection of
information and control of anticompetitive practices in contractual licenses.

General Agreement on Tariffs and Trade (GATT) GATT is a multilateral agreement among
countries providing a framework for conducting international trade. GATT is regarded as an
international institution governing international trade relations. It consists of disciplines on
governments and matters related to import and export of goods. It was established to promote
international trade by reducing tariff and non-tariff restrictions on imports imposed by member
nations. Tariff barrier refers to imposing import duty and non-tariff barriers means restricting
imports through import licensing and by banning the imports. GATT provides a framework for
negotiations on the level of tariff. It promotes multilateral trade among member nations. It
provides protection against unfair trade and obstructions to trade.

International Labour Organisation (ILO)

International Labour Organisation (ILO) is a specialised agency of the United Nations which
deals with labour issues. The headquarters is situated in Geneva, Switzerland. The secretariat
comprises of the people employed by the organisation throughout the world. The secretariat is
known as the International Labour Office. The ILO manages work through three main bodies.
They are:
International Labour Conference The members of the ILO meet at the International
Labour Conference every year in June, in Geneva. Two government delegates along with an
employer delegate and a worker delegate represents their respective member state. The
technical advisors also accompany the delegates. The Cabinet Ministers are usually responsible
for labour affairs, head the delegations and present
the viewpoint of their government. The Conference creates and implements standards for
international labour. Social and labour issues are discussed in the Conference. It also assigns
the budget of the organisation and elects the Governing Body.
Governing Body The executive council of the ILO is known as the Governing Body. It
meets thrice a year in Geneva and takes decisions on the ILO policies. It forms programmes
and budgets which are submitted to the Conference for adoption. The Governing Body has 28
government members, 14 employer members and 14 worker members. Ten government seats
are permanently held by states of chief industrial importance. Taking into consideration the
geographical distribution, representatives of other member countries are elected at the
Conference once in every three years. The representatives are elected by the employers and
workers.

International Labour Office The permanent secretariat of the International Labour

Organisation is the International Labour Office. It is the central point for all activities that are

administered by the governing body. The Office is a center for administration, research and
documentation. It employs more than 1,700 officials from 110 nationalities. The Office also
organises certain programmes to extend technical help to all member nations. Under this
programme of technical cooperation, around 600 experts undertake missions in all regions of
the world.
International Labour Code
The International Labour Code is composed of Conventions and Recommendations adopted by
the International Labour Conference. In 1997, the Code contained 181 conventions and 188
recommendations that covered important subjects in labour and social fields. The main function
of the ILO is to set international labour standards by adopting conventions and
recommendations covering the major labour-related issues which are referred to as the
International Labour Code. The Conference adopts conventions and recommendations which is
prepared by the International Labour Office and the governing body. The representatives of the
member nations bring the conventions and recommendations to the notice of the authorities.

Conventions These treaties are not bound to a country unless they are approved by that
country. ILO conventions that have secured a two-third majority should be presented by the
member country in the Conference. The ILO conventions are approved as written and without
reservations. Flexibility clauses are included in the conventions to accommodate different
climatic conditions or states of development of particular countries.
Recommendations When state practices vary largely, non-binding guidelines known as
recommendations are issued. Recommendations are issued when the subject is:
Very technical and cannot be handled by a convention.
Already covered by a convention but needs to be addressed in more detail.
Member states are required to bring recommendations to the attention of their governments.
5 What is the difference between domestic and international accounting and how

will you measure this difference?

Answer:
Domestic vs. international accounting
Different countries whether domestic or international, have different accounting standards. A
common belief is that these differences reduce the quality and importance of accounting
information. Accounting standards determine the financial reporting quality and provides
separately verified information about an organisation's financial performance to investors
creditors.
Though there are differences in accounting methods, domestic businesses are not affected. The
accounting system of a domestic organisation must meet the specialised and regulatory
standards of its home country. But, an MNC and its subsidiaries must meet differing accounting
and auditing standards of all the countries in which it operates. This leads to a need for
comparability between businesses in the group. In order to successfully manage and organise
their operations, local managers require accounting information, which should be prepared
according to the local accounting concepts and denomination in the local currency. Yet, for
financial controllers, to measure the foreign subsidiarys performance and worth, the

subsidiarys accounts must be translated into the organisations home currency. This translation
is done using accounting concepts and measures, which are detailed by the organisation.
Investors worldwide look for the highest possible returns on their capital, in order to interpret the
track record, though they use a currency and an accounting system of their own. The
organisation also has to pay taxes to the countries where it does business, based on the
accounting statements prepared in these countries. Besides this, when a parent corporation
tries to combine the accounting records of its subsidiaries to produce consolidated financial
statements, extra complexities occur because of the changes in the value of the host and home
currencies.
There are many differences between International Accounting Standards (IAS) and Domestic
Accounting Standards (DAS). On the basis of difference between the two, two indices, namely
'divergence' and 'absence', are created. Absence is the difference between DAS and IAS; the
rules on certain accounting issues are missed out in DAS and covered in IAS. Divergence
represents the differences between DAS and IAS; the rules on the same accounting issue differ
in DAS and IAS.
Measurement of differences between IAS and DAS
You can measure the differences between IAS and DAS in the following way:
Literature on international accounting differences Referring to earlier reports on
international accounting could give more information about the subject. Most of the earlier
reports understand international accounting differences as various options adopted by nations
for the similar accounting problems, which correspond to divergence concept.

Framework of analysis Links between variations in accounting standards and financial

reporting quality of various countries could be clearly seen from the reports published earlier.
We should consider the institutional determinants of accounting differences such as legal origin,
governance structure, economic development, and equity market.
National differences in accounting
One of the major problems encountered by an international business is lack of consistency in
accounting standards in various countries. Organisations show opposite financial results
because of the differences in accounting standards.
Differences in accounting standards exist because of diverse political, legal, economic, and
cultural systems of the countries. Accounting standards and practices are also prejudiced by the
sources of capital used to fund business. Figure 9.1 shows the influencing factors on a countrys
accounting practices.

You might think that accounting systems in the world were uniformly influenced by
a few historical developments. There could be some similarities but no two
countries and their systems are alike. Accounting systems are developed suiting the
countrys specific needs. It is a fact that different countries evolved in different
ways. Accounting systems were influenced by private ownership, industrialisation,
inflation, and so on. When there are differences in economic conditions, it is not
surprising to find differences in accounting practices. However, there are other
influencing elements apart from economic factors. These are legal systems,
educational systems, socio cultural features, and political systems. These also
influence the need for accounting, speed and direction of its development. Due to
the increasing trend in globalisation of business, understanding various accounting
systems is important.
Legal systems
Law system is divided into civil law and common law in countries worldwide. In
countries like US, Australia, UK and New Zealand accounting procedures originate
from decisions of independent standards setting boards, such as US Financial
Accounting Standards Board (FASB). Each board works with professional accounting
groups. In countries, which follow common law, accountants follow Generally
Accepted Accounting Principles (GAAP), which provides a 'true and fair view' of the
organisation's performance, based on the standards approved by these professional
boards. Many civil law countries also have a similar approach as that of GAAP.
Functioning within the limitations of these standards, accountants have freedom to
implement their professional judgment in reporting a 'true and fair' representation
of the organisation's performance.
Countries following civil law are likely to codify their national accounting measures and
standards. In these countries, accounting practices are determined by the law. To assist the
legal role, all business accounting records must be officially registered with the government.
The way in which the accounting practices are imposed depends on the legal
system. Most of the developed countries depend on both private and public
enforcement of business performance, though the public or private combination

varies from country to country. The difference of legal system is a major restriction
in the growth of accounting standards. In some countries, the accounting policies
are restricted to detailed legislation, which is passed by governments. This
restriction forms a major problem to international accounting bodies that are
created to increase harmonisation of national accounting frameworks. This is
because, such government-controlled regimes are inclined to be less flexible, and
perceive private sector influences as less acceptable.
6 Discuss the various payment terms in international trade. Which is the safest
method and why?
Answer:- Understanding Payment Mechanism in Foreign Trade-For
successfully conducting international trade in todays competitive international
environment, it is essential for the exporters to offer attractive sales terms and
payments to importers so as to woo them for business. One of the major concerns
for en exporter is to choose the appropriate payment method in order to minimise
risks related to payments of trade transaction. Payment should be done after
understanding the economic scenario of importers country, importer credit
worthiness and to certain extent accommodating the needs of the importer.
Exporter can choose any mode of payment depending on risk perception, size of
deal, importer credit worthiness and economic situation in importers country.

In case of domestic business, main factor driving salesmans decision criteria for realisation of
payments is based on the buyer's ability, willingness and honesty to make payment coupled with
exporter trust on buyer. Usually sale in domestic market are on open account and in certain
cases it can be on cash in advance. Such methods also depend on buyers and sellers power
to negotiate and nature of competition such as:
Monopoly condition will favour to the seller.

 Perfect competition will favour to the buyers.

However, in case of international trade, exporter has to take more precautions as
some methods of payment are unique and usually used in case of international
trade only. Key consideration while deciding upon a payment term in foreign trade is
elaborated as under.
A. Some of the major risks involved in realisation of payments in international trade can be
either at importer, importer bank and importers country such as insolvency and default by
importer, insolvency of importer bank and exchange control restrictions, inconvertibility issues
with importers country.
B. Some of the risks involved in international trade in Liberalisation, Privatisation and
Globalisation era can be under control of exporter but some cannot be. For example, credit risk
which arises from a change in
the credit worthiness of importer can be covered by ECGC. Exchange Rate Fluctuation risk can
be covered by hedging the currency invoiced in forward contract market but risk such as Force
Majeure which arises from change in policy of a country, which in turn affects the trade
capability, and by a natural disaster cannot be anticipated in complex international
environments1. Other risks mainly arises due to a difference in culture, law, or language are also
beyond exporter control.

C. International Trade Operations offers different types, quantum and location of risks, thereby
confusing the exporter with uncertainty over realisation of payments and timing of payments
between the exporter and importer2.
D. For exporters, any international sale will be equivalent to gift until he has not realised the
payment from the importer. For importer any payment is donation until he has received the
cargo as sent by exporter.

E. Exporter will always be interested to receive the payments as soon as he/she sends the
goods to importer through shipment. Importer will be willing to delay the payments as he/she will
be interested to sell these goods in markets and then make the payments to exporter.
F. However, the selection criteria for mode of payment is based on mutual negotiation of
exporter and importer and in LPG&M era there are other parties such as bank, credit insurer
involved which helps in exporter in financing and assuring about the payment.
G. Though safe mode of payment such as L/C is getting popular, this is not usually used by
small exporters and importers due to heavy transaction costs. For example, L/C is used as
mode of payment only in 14% trade transactions due to heavy transactions costs3.
H. Exporter can alternatively divide the payment category into secure mode and unsecure
mode. The secure mode of payment for exporter is cash in advance and letter of credit.
Unsecure mode of payment are Open Account, Documents against Acceptance and Documents
against Payments.
Payment terms in foreign trade
Since international trade deals with exchange of goods, there are various ways in which the
payment terms (finance) will be handled.
Bothe seller and trader should be careful about the method of payment as they are at different
locations and transactions happen without face-to-face interaction. There are four methods of
payment for the international transactions. This includes the Cash-in-advance method, Letter of
Credit, Documentary collections and the Open Account. These are shown in figure 14.1.

As shown in figure 14.1, there is uncertainty during the time when payment transactions happen
between importer and exporter. The figure compares and contrasts the most suitable
methodology from the perspective of importer and exporter. Apparently the most secure
methodologies that work for the exporter is not safe for the importer. For exporters,
documentary collection and open account are less secure and letter of credit and cash in
advance are more secure methods. In the same way, with respect to the importer, the letter of

credit and cash in advance are less secure and the documentary collection and open account
are more secure. These terms are explained as follows.
Cash-in-advance
Cash-in-advance helps in removing the risks of credit by the exporter. By this method, exporter
receives the payment before the transfer of goods. The options that are available with the cashin-advance method include wire transfers and credit cards. This is the least attractive method for
many of the buyers as it creates cash flow problems. The buyers are concerned about the
quality/quantity and delivery of the goods that are not sent if the payment is made in advance.
Letters of credit
The letter of credit is the most secure instrument available for international traders. This is the
commitment made by the bank that the payment will be made to the exporter if the terms and
conditions are met. The terms and conditions of the payment are explained in the required
documents.
Documentary collections
Documentary collection is a transaction in which, the exporter's bank (remitter bank) sends the
documents to the importer's bank (collecting bank). The document contains information about
the payment. The funds are collected from the importer and paid to the exporter through the
banks involved in the collection, in exchange for the documents.
Open account
The open account transaction involves the shipping and delivery of goods in advance. The
payment is due usually from 30 to 90 days. This is advantageous for the importer in cash flow
and cost terms, but at the same time it is very risky for the exporters. Buyers from abroad stress
on open accounts since the extension of credit from the seller to the buyer are more common in
many countries. Exporters who avoid extending credit may face loss in the sale because of
competitors in the market.
Letter of credit
International Trade is affected by distance, laws, political instability and lack of familiarity by the
transacting parties. Letter of credit assumes significance since it can be used to mitigate risk. It
is a document that is issued by the bank that guarantees payment to a beneficiary. It is written
by the financial institution in favour of the importer of goods to the seller. In the letter, the bank
promises that it will honour the drafts drawn on it if the seller confirms to the specific conditions
that are set forth in the letter of credit. The process of letter of credit works as shown under: