NAME

ROLL NO
SUBJECT CODE &
SUBJECT NAME
BK ID

AFREEN
1402004834
MB0053 &
INTERNATIONAL
BUSINESS MANAGEMENT
B1724

QUES 1 The world economy is globalizing at an

accelerating pace. Discuss this statement and list
the benefits of globalization.
ANS 1 According to business terminologies,
globalization is defined as the worldwide trend of
businesses expanding beyond its domestic
boundaries.
The world economy is globalizing at an accelerating pace
as countries previously closed to foreign companies have
opened up their markets. Advances in transportation and
telecommunication infrastructure are major factors in
globalization, generating further interdependence of
economic and cultural activities.
The advances in science and technology have
allowed businesses to easily cross over territorial
boundary lines.
Companies have become more creative, competitive;
thus raising quality of goods, services and the worlds
living standard. Secondly, companies from more
developed countries have already venture to begin
foreign operations or branches to take benefit of low cost
labor in poorer countries. This kind of activities will

provide more arrival of cash and assets funds into less

developed countries.
Geographic distance is shrinking because of the
Internet, as the ambitious companies aim for
global leadership. All this is possible because of
booming international business. International business is
mainly concerned with the issues that are related to
international companies and governments cross border
transactions. International business involves multiple
countries to satisfy the objectives of every individual as
well as the organizations. International business
management is a process of achieving the global
objectives of a firm by effectively managing the human,
financial, intellectual and physical resources.
International business can be defined as any
business that crosses the national borders of a
country. It includes importing and exporting;
international movement of goods, services, employees,
technology, licensing, and franchising of intellectual
property (trademarks, patents, copyright and so on).
International business includes investment in financial
and immovable assets in foreign countries. Contract
manufacturing or assembly of products for local sale or
for export to other countries, establishment of foreign
warehousing and distribution systems, and import of
goods from one foreign country to a second foreign
country for subsequent local sale is part of international
business.
BENEFITS OF GLOBALIZATION
Promotes foreign trade and liberalization of
economics.

 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 standardized 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.

QUES 2 Compare the Adam Smith and David

Ricardos theories of international trade with
examples.
ANS 2-

ABSOLUTE ADVANTAGE 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.
Adam Smith argued that counties 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 specialize 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.
Absolute advantage theory was based on positive sum
game.
Example: England by virtue of their superior
manufacturing processes, were the worlds most efficient
textile manufacturers of the world and French had one of
the most efficient wine industries in the world.
Thus England has an absolute advantage in the
manufacturing of textiles and France has an absolute
advantage in the production of wine.
According to Smith, both the countries should exchange
such products of absolute advantage with each other.

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.
COMPARRATIVE ADVANTAGE 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 the goods.
Adam Smiths theory suggested that such a country
might not have been benefitted from international trade
as trade is positive sum game.
Ricardo argued that it was not the case and
showed that countries should trade goods with
each other where they have comparative cost
advantage.
Ricardo argued that a country should specialize 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.
Example: A practical case of England and France
Ricardo used England and Portugal as examples in his
demonstration, the two goods they produced being wine
and cloth.

According to him, Portugal has an advantage in both

areas of manufacture. To demonstrate that trade between
both the countries will lead to gains, the concept of
Opportunity Cost (OC) is introduced. A country has a
comparative advantage in producing goods if the
opportunity cost is lower at home than in other country.
Portugal has the lower opportunity cost in wine making
while England has the lower opportunity cost in making
cloth. Thus, Portugal has comparative advantage in the
production of wine whereas England in the production of
wine.
QUES 3 Regional integration is helping the
countries in growing their trade. Discuss this
statement. Describe in brief the various types of
regional integrations.
ANS 3 -

REGIONAL INTEGRATION

Definition: It can be defined as the unification of

countries into a larger whole. 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.
Regional integration results in the creation and
diversion of trade. It supports overall growth of the
region, coupled with efficient trading practices.
Trade creation increases production and income and
also leads to new entrants in the market and
therefore results in tougher competition.
The transfer of technology is also faster.

 Regional integration induces reduction on tariffs and

prohibitions.
It spreads goodwill among member countries and
also helps in reduces the chances of conflict.
TYPES OF REGIONAL INTEGRATION
1)
Preferential trading agreement: It is a trade
pact between countries.
It is the weakest form 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 countries not party to the
agreement.
2)
Free trade area: It is a type of trade bloc and
can be considered as the second stage of economic
integration.
It comprises of all the countries that are willing to
or agree to reduce preferences, tariffs and quotas
on services and goods traded between them.
The importers must obtain product information
from all the suppliers.
3)
Custom union: It is an agreement between 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
custom duty on mutual trade.
4)
Common market: It is a group formed by
countries within a geographical area to promote duty

free trade and free movement of labor and capital

among its members.
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, labor and services.
5)
Economic union: It is a type of trade bloc and
is instituted through a trade pact.
It comprises of a common market with a customs
union.
The purpose of economic union is to promote
closer cultural and political ties while increasing
the economic efficiency between the member
countries.
6)
Political union: It is a type of integration, 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.
QUES 4 Write short note on:
a)
GATS (General Agreement on Trade in
Services)
b)
ILO (International Labor Organization)
ANS 4a)
in Services)

GATS (General Agreement on Trade

Meaning: GATS is a framework agreement defining the

rules under which trade in services must occur. GATS aim
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. WHO has recognized over 150 service subsectors.
Role:
To establish a framework for liberalizing 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.
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.
4b)
Organization)

ILO (International Labor

Meaning: ILO is a specialized agency of the United

Nations which deals with labor issues. The headquarters

is situated in Geneva, Switzerland. The secretariat

comprises of the people employed by the organization
throughout the world. The secretariat is known as the
International Labor Office.
ILO manages work through 3 main bodies. They are:
International Labor Conference
Governing Body
International Labor Office
Role:
The initial motivation of ILO was humanitarian
because the workers were exploited without any
improvement in their health and family.
The preamble of the constitution of the ILO states
the condition of labor and the injustice and
privation to large number of people.
The economic factor was the second motivation as
it has a certain effect on the cost of production.
The failure of a nation to adopt humane conditions
of labor affects the economic situation of the
country adversely.
The first six International Labor Conventions that
dealt with working hours in industry, minimum
age, unemployment, maternity protection and
night work for women and night work for young
person was implemented in the first annual
International Labor Conference.

QUES 5 What is the difference between domestic

and international accounting and how will you
measure the difference.
ANS 5 - Accounting standards determine the
financial reporting quality and provides separately
verified information about an organizations
financial performance to investors and creditors.
The accounting system of a domestic organization
must meet the specialized 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 organize their
operations, local managers require accounting
concepts and denomination in the local currency.
This translation is done using accounting concepts
and measures, which are detailed by the
organization. The organization has to pay taxes to
the countries where it does business, based on the
accounting statements prepared in these countries.
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
The differences between IAS and DAS can be measured 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. One should
consider the institutional determinants of accounting
differences such as legal origin, governance
structure, economic development, and equity
market.
QUES 6 Discuss the various payment terms in
international trade. Which is the safest method
and why.

ANS 6 METHODS OF PAYMENT FOR

INTERNATIONAL TRADE
1)
Cash-in-advance: It 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 cash-inadvance 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.
2)
Letters of credit: It 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 are explained in the
required documents.
3)
Documentary collections: It is a transaction in
which, the exporters bank (remitter bank) sends the
documents to the importers 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 of the documents.
4)
Open account: It 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.
Safest mode of payment:
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 issued by the bank that
guarantees payment to the 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.