Business Environment and International Business Notes (UGC NET Unit 1)

An analysis of 256 previous year questions of Unit 1 across 22 exam cycles (prepared for this site) shows where marks have come from. Revise in this order.

How to use this post

• First read the high-priority sections (trade theories, barriers, India’s foreign trade policy, FDI and BOP), then the rest.
• Learn the one-line facts in the Quick Revision, Timeline and Full Forms sections the day before the exam.
• Attempt the practice questions at the end, then solve the site’s previous year questions topic by topic.
• UGC NET asks many statement-based, match-the-following and chronological-order questions, so learn the years and the first or last items of each list.

The business environment is the sum of all internal and external forces, factors and institutions that surround a firm and affect its decisions, performance and survival. Some of these forces can be controlled by the firm; most cannot.

Features

• Totality of forces: it is the combined effect of many factors, not one factor alone.
• Dynamic: technology, tastes, laws and prices keep changing.
• Complex and uncertain: factors interact with each other and cannot be predicted exactly.
• Relative: what matters in one country or industry may be irrelevant in another.
• Mostly uncontrollable: the firm adapts to it rather than controlling it.

Internal, micro and macro

Environmental scanning

Scanning means collecting, analysing and using information about external events and trends so that management can spot opportunities and threats early. Types: continuous (ongoing monitoring), periodic (at fixed intervals such as yearly) and ad hoc (when a specific event triggers it). Related to scanning is environmental forecasting: projecting how key trends (demand, technology, policy) will move over the coming years, using trend extrapolation, expert opinion (Delphi technique) and scenarios. Common tools are SWOT, PESTLE (political, economic, social, technological, legal, environmental) and Porter’s five forces (rivalry, new entrants, substitutes, buyer power, supplier power).

The economic environment covers the nature of the economic system, the stage of development, income levels, savings and investment, inflation, interest rates, the exchange rate and government economic policy. An economic system answers three questions: what to produce, how to produce and for whom.

India adopted a mixed economy with a strong public sector and licensing after independence. The 1991 reforms (liberalisation, privatisation, globalisation) reduced licensing and opened the economy while keeping the state active in welfare, infrastructure and regulation.

Industrial policy sets the rules for starting, locating, expanding and regulating industry. India’s policy moved from a controlled, state-led model to an open, market-led one.

The 1991 reforms: LPG

• Liberalisation: abolition of industrial licensing, lower tariffs and easier foreign investment.
• Privatisation: reduced government stake and disinvestment in public sector enterprises.
• Globalisation: integration with the world economy through trade, finance and technology flows.

Industrial licensing now remains only for a short list of sectors (for example, certain hazardous chemicals, defence items and some others on environmental or security grounds). Foreign technology agreements are generally allowed on the automatic route.

Monetary policy

Monetary policy is the use of money supply, credit and interest rates by the central bank (the RBI in India) to achieve price stability and growth. It is set by the six-member Monetary Policy Committee (three RBI members and three external members) under the flexible inflation-targeting framework (target 4% with a tolerance band of 2% on either side).

Expansionary (easy) policy cuts rates and reserve ratios to raise credit and demand. Contractionary (tight) policy does the opposite to curb inflation.

Fiscal policy

Fiscal policy is the government’s use of taxation, public expenditure and public borrowing to influence the economy. It is presented through the Union Budget and guided by the FRBM Act, 2003.

Monetary versus fiscal policy

In a slowdown the government may run expansionary fiscal policy (more spending, lower taxes); in a boom with inflation it may run contractionary policy. Monetary policy works on money and credit; fiscal policy works on the government budget; both must be coordinated.

The political environment includes the system of government, political stability, ideology of the ruling party, government attitude towards business and relations with other countries. A stable, business-friendly government encourages investment; instability, sudden policy changes and corruption raise risk.

Roles of government in business

• Regulator: frames laws, licences, standards and competition rules (for example through the Competition Commission and sector regulators such as SEBI, IRDAI and TRAI).
• Promoter: offers incentives, infrastructure, export promotion, Make in India and Startup India support.
• Entrepreneur: runs public sector enterprises in strategic areas such as defence, railways and energy.
• Planner: sets national priorities and directs investment.
• Consumer: a major buyer of goods and services through public procurement.
• Protector: safeguards consumers, workers, small firms and the environment.

Government also affects business through political risk: expropriation or nationalisation, war and unrest, currency controls, and abrupt changes in tax or tariff policy.

The Consumer Protection Act, 2019 replaced the 1986 Act and came into force in 2020. It protects buyers of goods and services (including online and teleshopping) against unfair trade practices and defective goods or deficient services.

Six consumer rights

Right to safety, to be informed, to choose, to be heard, to seek redressal and to consumer awareness.

Authorities and forums

• Central Consumer Protection Authority (CCPA): protects class-wide consumer interests; can order recall of goods, refunds and penalties for misleading advertisements.
• Consumer Protection Councils: advisory bodies at the central, state and district levels.
• Mediation cells attached to the commissions for settlement by agreement.

Value is based on the consideration paid. Appeals lie upward: District to State, State to National, National to the Supreme Court. Other features: product liability of manufacturer, seller and service provider; penalties for misleading advertisements and endorsers; provisions on unfair contracts and e-commerce rules.

Consumerism is the organised movement of consumers, voluntary bodies and government to protect consumer rights against unfair trade practices, unsafe products and poor service. It grew out of problems such as adulteration, hoarding, misleading advertisements and poor after-sales service.

• Product liability means that a manufacturer, product service provider or product seller is liable to compensate a consumer harmed by a defective product or deficient service (a manufacturing defect, a design defect, a failure to warn or a breach of express warranty).
• Consumers can act through consumer organisations, complaints, public interest litigation and media.
• Other protective laws include the Sale of Goods Act, the Food Safety and Standards Act, the Bureau of Indian Standards Act and the Legal Metrology Act.

The Foreign Exchange Management Act, 1999 replaced the strict FERA, 1973 and came into force on 1 June 2000. Its aim is to facilitate external trade and payments and to promote orderly development of the foreign exchange market. It is a civil law (FERA was criminal), and the RBI frames the regulations while the Directorate of Enforcement investigates contraventions.

• Current account transactions (trade, services, remittances, travel) are generally free, subject to some restrictions.
• Capital account transactions (investment, borrowing, lending across borders) are permitted only as the rules allow.
• Dealing in foreign exchange is done only through an authorised person (authorised dealer, money changer).
• Residents may hold and use foreign exchange for permitted purposes, and exporters must realise and repatriate export proceeds within the prescribed period.
• Contraventions attract monetary penalties and compounding, with adjudication and appeal provisions.

The MRTP Act, 1969 controlled the concentration of economic power, monopolistic trade practices, restrictive trade practices and unfair trade practices. After liberalisation it was seen as outdated and was repealed. The Competition Act, 2002 replaced it and is enforced by the Competition Commission of India (CCI), which became fully operational in 2009.

What the Competition Act controls

• Anti-competitive agreements (price fixing, bid rigging, limiting supply, market sharing, cartels).
• Abuse of dominant position (unfair or predatory pricing, limiting production, denying market access).
• Combinations (mergers, acquisitions and amalgamations above prescribed size limits need CCI approval).
• Competition advocacy to spread awareness.

The socio-cultural environment consists of the society’s values, beliefs, customs, language, religion, education, family structure, class, lifestyle and attitude to work, money and risk. It decides what people want to buy and how they respond to marketing and management.

Elements

• Culture and values: traditions, festivals, food habits and symbols.
• Demographics: age, family size, urbanisation, literacy, working women.
• Social institutions: family, religion, educational institutions, media.
• Attitudes: towards saving, credit, brands, foreign goods, work and ethics.

Influence on business

• Shapes product design, packaging, colours, names and advertising; a message that works in one culture may offend in another.
• Creates market segments (youth, senior citizens, festival buyers, health-conscious buyers).
• Affects HR practice: motivation, hierarchy, teamwork, communication style.
• Pushes ethical and social expectations such as sustainability, fair trade and diversity.
• In global business, cultural differences (high-context versus low-context communication, individualism versus collectivism, power distance) affect negotiation and entry strategy.

The technological environment is the state of science, innovation and technical know-how in a society. It changes products, processes, cost, competition and consumer habits (automation, digital payments, artificial intelligence, e-commerce). Firms must watch technology change, invest in research and manage obsolescence and cyber risk.

The natural (ecological) environment covers resources, climate, pollution and biodiversity. It leads to environmental laws, carbon and energy-efficiency norms, waste rules and demand for green products. Firms respond with cleaner technology, recycling and sustainability reporting (ESG).

Together with the economic, political, legal and socio-cultural factors, these make up the PESTLE framework used in environmental scanning.

CSR is the obligation of a business to act in ways that benefit society and the environment, beyond maximising profit and beyond legal minimums. Carroll’s pyramid describes four layers of responsibility.

CSR under the Companies Act, 2013 (Section 135)

• Applies to a company with, in the preceding financial year, net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more.
• Such a company must spend at least 2% of its average net profit of the previous three years on CSR.
• A CSR Committee of the Board recommends the policy; the Board approves it and discloses it.
• Eligible activities are listed in Schedule VII: eradicating hunger and poverty, education, health, gender equality, environment, rural development, sports, support to armed forces veterans and others.
• Unspent money on an ongoing project goes to a special Unspent CSR Account and must be used within three years; other unspent money goes to a Schedule VII fund.
• Spending must be on approved projects that serve society, not activities that benefit only the company or its employees.

Arguments for CSR: better image, loyalty, long-term sustainability, lower regulatory risk. Arguments against: it is the government’s job, it raises costs, and shareholders may be diverted from profit.

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled so that the interests of shareholders and other stakeholders are balanced. Its pillars are transparency, accountability, fairness and responsibility.

Theories

Models

• Anglo-American (outsider) model: dispersed shareholders, single-tier board, strong capital markets and shareholder focus.
• German model: two-tier board (supervisory and management boards) with employee representation.
• Japanese model: cross-holdings (keiretsu), a main bank and insider-dominated boards.
• India: a hybrid with a single-tier board and concentrated promoter holdings.

Key milestones

• Cadbury Committee (UK, 1992) and OECD Principles (1999).
• Sarbanes-Oxley Act (USA, 2002) after major accounting scandals.
• India: Kumar Mangalam Birla Committee (1999) led to Clause 49 of the Listing Agreement (2000); the Narayana Murthy Committee (2003) strengthened it; the Companies Act, 2013 brought independent directors, audit committee, vigilance (whistle-blower) mechanism and board duties; SEBI LODR Regulations, 2015 now govern listed companies.

International business covers all commercial transactions (private and government) between parties in two or more countries: exports and imports of goods and services, foreign investment, licensing, franchising, contract manufacturing and cross-border technology and people flows. International trade is only one part of it.

Scope

• Merchandise trade: physical goods.
• Service trade: IT, tourism, banking, transport, education.
• Investment: foreign direct and portfolio investment.
• Licensing, franchising, technology transfer and management contracts.
• Overseas production through subsidiaries and joint ventures.

Importance

• To firms: larger markets, scale economies, use of spare capacity, risk spreading, access to cheaper inputs and technology, higher profits.
• To nations: foreign exchange earnings, employment, higher living standards, better use of resources, technology and skill transfer, and closer political ties.

Domestic versus international business

Management orientations (EPRG)

Ethnocentric (home country methods are best), polycentric (each host country is different), regiocentric (organise by region) and geocentric (a single global approach that uses the best ideas from anywhere).

A firm usually becomes international in steps.

Uppsala (incremental) model

Johanson and Vahlne explained that firms expand gradually as they gain market knowledge and reduce psychic distance (differences of language, culture and law), moving first to nearby, similar markets.

Compare with born-global firms (often technology start-ups) that go international almost from the start.

Impact of MNCs: they bring capital, technology and jobs but can also transfer profits through transfer pricing, dominate local markets and influence policy.

Globalisation is the growing integration of national economies through flows of goods, services, capital, technology, information and people. India’s own opening started with the 1991 reforms.

Drivers

• Technology: the internet, containers, air cargo and cheap communication shrink distance.
• Liberalisation: lower tariffs, fewer licences, convertible currencies and open investment rules.
• Multilateral and regional agreements: the WTO and trade blocs.
• Multinational corporations: global supply chains and brands.
• Capital mobility: integrated financial markets.
• Cost pressure: search for cheaper labour, materials and scale.
• Converging consumer tastes and rising incomes in emerging markets.
• Global competition that forces firms to look outward.

Pros and cons

A firm chooses an entry mode by weighing control, investment, risk, speed and profit potential. As commitment rises, so do control, risk and returns.

Worked example of comparative advantage (own figures)

Hours needed to produce one unit:

Both gain if A specialises in cloth, B in wheat, and they trade at a price between the two opportunity costs.

Why governments intervene

• Protect infant industries until they can compete.
• National security and strategic goods.
• Protect domestic jobs and farmers.
• Correct a balance of payments deficit.
• Counter dumping and unfair subsidies.
• Raise revenue through customs duty.
• Gain leverage in negotiations or pursue strategic trade policy.

Tariff barriers

A tariff is a tax on imports (or sometimes exports).

Effects of a tariff: the domestic price rises, domestic producers gain, consumers lose, and the government earns revenue; the net result is usually a loss of overall welfare.

Non-tariff barriers

• Quotas (limits on quantity), import licensing, embargo (total ban) and voluntary export restraints.
• Technical barriers to trade and sanitary and phytosanitary rules: standards, labelling, testing and certification.
• Local content requirements and government procurement preference.
• Subsidies to domestic producers and export subsidies.
• Customs procedures, valuation rules and delays; foreign exchange controls and state trading.

Dumping is the sale of a product in a foreign market at a price below its normal value (the home-market price or the cost of production). The difference is the dumping margin.

Trade remedies

• Anti-dumping duty: at most the dumping margin, after an investigation of injury to the domestic industry.
• Countervailing duty: offsets subsidies.
• Safeguard duty: temporary protection against a surge in imports.
• In India the Directorate General of Trade Remedies (DGTR) investigates and recommends; the Ministry of Finance imposes the duty.

Zones

Export-import documents

• Commercial invoice: seller’s bill giving goods, price and terms.
• Bill of lading (sea) or airway bill: transport receipt and, for the bill of lading, a document of title.
• Packing list, certificate of origin, marine insurance policy and quality or inspection certificates.
• Bill of exchange (draft): written order by the exporter asking the importer or bank to pay.
• Letter of credit: bank’s undertaking to pay the exporter if the documents comply.
• Shipping bill (export) and bill of entry (import) filed with customs.

Payment methods from least to most risk for the exporter: advance payment, letter of credit, documentary collection (D/P, D/A), open account. Incoterms (ICC rules, 2020 edition) fix who bears cost and risk: for example EXW (ex works), FOB (free on board), CIF (cost, insurance and freight) and DDP (delivered duty paid).

India’s trade policy is framed by the Directorate General of Foreign Trade (DGFT) under the Foreign Trade (Development and Regulation) Act, 1992. The current Foreign Trade Policy 2023 came into effect on 1 April 2023. Unlike earlier five-year policies, it is open-ended with no fixed end date and is updated when needed. It aims at exports of USD 2 trillion by 2030 (goods and services together).

Main approach

• From incentive to remission: reliance on tax refund schemes such as RoDTEP and RoSCTL rather than direct subsidies.
• Export promotion through collaboration of exporters, states, districts and Indian missions abroad.
• Ease of doing business: lower transaction costs, digital and paperless processes.
• Emerging areas: e-commerce exports, developing districts as export hubs, and SCOMET (controlled dual-use items) rules.

Schemes to know

• Advance Authorisation and EPCG (duty-free import of inputs and capital goods subject to export obligation).
• Export houses recognition (star status for exporters by performance).
• Towns of Export Excellence (clusters recognised for extra support) and Districts as Export Hubs.
• Special Economic Zones and export oriented units.
• Importer-Exporter Code (IEC) needed to import or export.

Foreign Direct Investment (FDI) is investment by a non-resident in a business in another country with a lasting interest and control or significant influence. In India, FDI means investment that gives the foreign investor 10% or more of the post-issue paid-up equity of a listed company, or any investment in an unlisted company. Foreign Portfolio Investment (FPI) is investment in shares, bonds and other securities for returns, below 10% of a company, with no intention of control. The older term FII (Foreign Institutional Investor) is now covered by FPI regulations of SEBI.

Authorities in India

• DPIIT frames FDI policy; the Foreign Investment Facilitation Portal is the single window for approval-route proposals.
• RBI administers the FEMA rules and reporting; SEBI regulates FPIs; sector regulators (IRDAI, TRAI, PFRDA) add conditions.
• FPIs are registered with SEBI; aggregate FPI holding in a company is limited to its sectoral cap, and a single FPI together with its group must stay below 10%.

Types of FDI

• By direction: inward and outward FDI.
• By entry: greenfield (new facility), brownfield (merger or acquisition of an existing firm).
• Horizontal: same line of business abroad. Vertical: backward (towards suppliers) or forward (towards distribution). Conglomerate: unrelated business.
• By motive: resource-seeking, market-seeking, efficiency-seeking and strategic-asset-seeking.

Trends

• Global FDI flows are led by the USA, with large flows to and from Europe, China and other Asian economies; flows are sensitive to geopolitics, interest rates and supply chain shifts.
• India has been one of the leading emerging-market destinations. Most inflow goes to services, computer software and hardware, trading, telecom, automobiles and infrastructure; the main source countries have included Singapore, Mauritius, the USA, the Netherlands and Japan. Latest figures are published by DPIIT.

India’s FDI policy

• Policy is set by DPIIT (Ministry of Commerce) through the consolidated FDI policy and press notes, and implemented under FEMA (Non-Debt Instruments Rules) by the RBI.
• Automatic route: no prior approval from the government or RBI. Government route: prior approval needed.
• FDI is prohibited in lottery, gambling and betting, chit funds, Nidhi companies, real estate business (not construction development), tobacco manufacturing and atomic energy.
• Sector caps change often; the current list is in the next section (as on 12 November 2026). Always check the latest notification before an exam or business decision.
• India also offers FDI-linked incentives such as SEZs, PLI schemes and the National Single Window System.

India follows a negative-list approach: FDI up to 100% on the automatic route is allowed in all sectors unless a cap, condition or prohibition is listed. Caps are in Chapter 5 of the Consolidated FDI Policy (circular of 15 October 2020), amended since by DPIIT press notes. The table below shows the position as on 12 November 2026.

Prohibited sectors

Lottery, gambling and betting, chit funds, Nidhi companies, trading in transferable development rights, real estate business (construction development is allowed), tobacco manufacturing and atomic energy; and activities reserved for the government or public sector such as railway operations.

Land-border countries (Press Note 3 of 2020, eased in 2026)

Investment from, or beneficially owned by, countries that share a land border with India (such as China, Pakistan, Bangladesh, Nepal, Bhutan, Myanmar and Afghanistan) needs government approval. By Press Note 2 of 2026 (15 March 2026), a foreign entity located outside these countries whose beneficial ownership from them is below 10% and non-controlling can invest through the automatic route. Direct investors from the border countries still need approval.

Caps change by press note. For the legally binding text, check the DPIIT press notes and the FEMA Non-Debt Instruments Rules on the official sites listed at the end of this post.

Why do firms invest abroad instead of just exporting? Trade theories cannot answer this, so FDI theories were developed.

Simple reading: if only O exists, license; if O and I exist but L does not, export; if O, L and I all exist, invest directly (FDI).

The balance of payments is a systematic record of all economic transactions between residents of a country and the rest of the world in a given period. Because it is a double-entry record, the total always balances; a deficit or surplus refers to a particular part of it. Balance of trade is only the difference between exports and imports of goods.

Components

• Current account: visible trade (goods), invisible trade (services), primary income (interest, dividends, compensation of employees) and secondary income (remittances, gifts, aid).
• Capital / financial account: FDI, FPI, external commercial borrowings, NRI deposits and changes in foreign exchange reserves.

Numerical illustration (own figures, USD billion)

Importance

It shows the country’s external strength, helps in judging exchange rate and import capacity, guides trade and monetary policy, and warns of vulnerability to foreign borrowing. Corrective measures for a persistent deficit: export promotion, import curbs, exchange rate adjustment, monetary and fiscal tightening, and external borrowing.

Balance of trade versus current account

Autonomous versus accommodating items

A BOP deficit means autonomous receipts are less than autonomous payments, so the gap is met with accommodating items.

Causes of disequilibrium

Falling exports, high import bills, inflation, capital flight, a stage of development with heavy import needs, political shocks and exchange rate misalignment.

Approaches to BOP adjustment

• Elasticity approach: depreciation improves the trade balance only if the sum of export and import demand elasticities exceeds one (Marshall-Lerner condition).
• Absorption approach: the BOP improves only if national output rises relative to domestic spending (absorption).
• Monetary approach: a BOP deficit reflects excess money supply; correct it through monetary tightening.

Other measures: devaluation (official reduction under a fixed rate) versus depreciation (market-driven fall under a floating rate), export promotion, import substitution, exchange controls and borrowing. Under a flexible exchange rate the market adjusts the rate; under a fixed rate the central bank defends it with reserves.

The exchange rate is the price of one currency in terms of another. A direct quote gives the home-currency price of one unit of foreign currency (for example Rs per USD); an indirect quote is the reverse.

Evolution of the international monetary system

Exchange rate arrangements

• Fixed (pegged): the central bank holds the rate at a set parity.
• Crawling peg: the parity is adjusted in small, regular steps.
• Currency board: a fixed rate backed fully by reserves.
• Managed float (dirty float): the market sets the rate, the central bank intervenes. India follows a managed float.
• Free (clean) float: the market alone sets the rate.

Indian exchange-rate history

Linked to the pound sterling until 1975, then to a basket of currencies; large devaluation in July 1991; dual rates under LERMS in 1992-93; unified market-determined rate in 1993; current account convertibility accepted in August 1994 (IMF Article VIII). The capital account is only partially convertible.

Spot, forward and related deals

• Spot: delivery in two business days at today’s rate.
• Forward: delivery on a fixed future date at a rate agreed today. If the forward rate is above spot, the foreign currency is at a premium; if below, at a discount.
• Swap: simultaneous buy and sell of a currency for different dates.
• Futures and options: standardised exchange-traded contracts; an option gives the right but not the obligation to deal.
• Hedging reduces exchange-rate risk; speculation takes it for profit; arbitrage profits from price differences without risk.

Purchasing power parity (PPP)

The law of one price says that an identical good should cost the same in two countries when prices are converted at the exchange rate (no transport cost or barriers). Absolute PPP: Exchange rate = Price level at home / Price level abroad. Relative PPP: the exchange rate changes by the difference between the two countries’ inflation rates. The real effective exchange rate (REER) is a trade-weighted index of the currency adjusted for relative price changes; a rise means loss of competitiveness.

Regional economic integration is the agreement among countries in a region to reduce or remove trade barriers and coordinate economic policy. It proceeds in stages.

Examples: SAFTA and USMCA (free trade areas), MERCOSUR (customs union with common-market aims), the EU single market and euro area (economic and monetary union).

Jacob Viner showed that a regional trade bloc has two opposite effects.

• Trade creation: trade moves from a high-cost domestic producer to a lower-cost partner. It improves efficiency and raises welfare.
• Trade diversion: trade moves from a low-cost outside country to a higher-cost member only because the member is now tariff free. It lowers efficiency and welfare.

Worked example (own figures, price per unit)

A bloc is more likely to be beneficial when its members are close competitors, have high pre-union tariffs among themselves and low external tariffs. The net effect is the sum of both.

India’s recent trade agreements (check latest status)

India has signed or concluded comprehensive pacts with the UAE (CEPA, 2022), Australia (ECTA, 2022), the EFTA states (TEPA, 2024), the UK (CETA, signed 24 July 2025) and has concluded negotiations with the European Union (27 January 2026), subject to ratification.

India and ASEAN

India’s Act East policy builds on the ASEAN-India Trade in Goods Agreement (in force 2010) and the services and investment agreements; both sides are reviewing the goods agreement. Trade, connectivity and maritime cooperation are the main areas.

• Origin: planned at the Bretton Woods conference (1944); began financial operations in 1947. Headquarters: Washington, D.C.
• Members: 191 countries (Liechtenstein joined in October 2024).
• Objectives: promote international monetary cooperation, stable exchange rates, balanced growth of trade, and give temporary financial help to countries with balance of payments problems.
• Funds: member quotas (which also decide voting power and borrowing access) and borrowing arrangements.
• Special Drawing Right (SDR): an international reserve asset created in 1969, valued on a basket of major currencies (US dollar, euro, Chinese yuan, Japanese yen, pound sterling).

Main functions

The World Bank’s main aim is to reduce poverty and support long-term development through loans, grants, guarantees and advice. Headquarters: Washington, D.C. Membership of the IBRD requires first joining the IMF.

The term World Bank strictly means IBRD and IDA; the five together are the World Bank Group.

IMF versus World Bank

The United Nations Conference on Trade and Development was set up in 1964 as a permanent organ of the UN General Assembly, with headquarters in Geneva. It has 195 members. Its first Secretary-General was Raul Prebisch.

• Aim: help developing countries, and especially the least developed, integrate into the world economy on fair terms through trade, investment and finance.
• Functions: research and analysis, consensus-building among governments, and technical assistance. It meets at a ministerial conference once in four years.
• Achievements and issues: promoted the Generalised System of Preferences (tariff preferences for developing countries), commodity agreements and debt and investment policy discussions.
• Publications: World Investment Report, Trade and Development Report and Digital Economy Report.

Bretton Woods system and the Triffin dilemma

At Bretton Woods (July 1944) the allies set up the IMF and the IBRD and a system of fixed but adjustable exchange rates tied to the US dollar, which was convertible to gold. The Triffin dilemma (Robert Triffin, 1960): the reserve-currency country must run deficits to supply world liquidity, but persistent deficits weaken confidence in the currency. The system ended in the early 1970s; the SDR was created as a neutral reserve asset.

The World Trade Organization came into being on 1 January 1995 after the Uruguay Round (1986-94) and replaced the GATT of 1947 as a permanent body. Headquarters: Geneva. It has 166 members. India is a founding member.

Objectives

• Raise standards of living and full employment.
• Expand production and trade in goods and services.
• Use world resources optimally in line with sustainable development.
• Ensure developing and least developed countries get a share of trade growth.

Principles

Non-discrimination (most-favoured-nation treatment and national treatment), freer trade through negotiation, binding tariff commitments, predictability and transparency, fair competition, and special treatment for developing countries.

Functions

• Administer WTO trade agreements.
• Forum for trade negotiations.
• Dispute settlement through the Dispute Settlement Body.
• Monitor national trade policies (Trade Policy Review Mechanism).
• Technical help and training for developing countries.
• Cooperate with the IMF and World Bank for coherent global policy.

Recent note: the 14th Ministerial Conference (Yaounde, March 2026) ended without a ministerial declaration, and the temporary moratorium on customs duties on electronic transmissions lapsed. Treat this as a current-affairs point and confirm the latest position.

GATT (1947) was a treaty without a permanent body, worked through eight rounds of tariff negotiation (Geneva, Annecy, Torquay, Geneva 1956, Dillon, Kennedy, Tokyo and the Uruguay Round), and mainly covered goods.

Dispute settlement process

1. Consultation between the parties (60 days).
2. Panel established and report issued.
3. Appeal to the Appellate Body on points of law.
4. Adoption of the report by the Dispute Settlement Body (negative consensus: adopted unless all members reject it).
5. Compliance within a reasonable period, otherwise compensation or retaliation (suspension of concessions).

Current position: the Appellate Body has been unable to hear appeals since 10-11 December 2019 because new members were not appointed. Some members use the Multi-Party Interim Appeal Arbitration Arrangement (MPIA), effective April 2020, which provides appeals through arbitration. Reform of dispute settlement is still under negotiation.

Agreement on Agriculture (AoA)

• Market access: convert non-tariff barriers into tariffs (tariffication) and reduce them.
• Domestic support: measured by “boxes”: amber (trade-distorting, to be reduced), blue (production-limiting, allowed), green (minimal or no distortion, such as research, extension services and public stockholding for food security under conditions).
• Export competition: export subsidies to be cut; developed members agreed in 2015 (Nairobi) to eliminate them.

GATS (General Agreement on Trade in Services)

First multilateral rules for services trade. It rests on MFN treatment, transparency and progressive liberalisation through country schedules. Four modes of supply:

TRIPS (Trade-Related Aspects of Intellectual Property Rights)

• Sets minimum standards for copyright, trademarks, geographical indications, industrial designs, patents (at least 20 years), layout designs of integrated circuits and undisclosed information.
• Applies national treatment and MFN, and requires enforcement procedures and remedies.
• Flexibilities such as compulsory licensing and public health safeguards (Doha Declaration, 2001).

TRIMS (Trade-Related Investment Measures)

• Bars investment conditions that breach national treatment or impose quantitative restrictions, for example local content requirements and trade-balancing requirements.
• Covers only measures affecting trade in goods; it does not regulate investment as such.

For more practice, try the previous year questions of this unit on the site.

Chronological order to remember: EU’s Treaty of Rome (1957) -> ASEAN (1967) -> SAARC (1985) -> NAFTA (1994) -> WTO (1995) -> euro (1999) -> SAFTA (2006).

1. Q1. Which of the following is part of the internal environment of a firm?
   (a) Competitors (b) Government policy (c) Organisational culture (d) Inflation

   Answer: (c). Culture, management and employees are internal and controllable.

2. Q2. Which is NOT a quantitative instrument of monetary policy?
   (a) CRR (b) Repo rate (c) Moral suasion (d) Open market operations

   Answer: (c). Moral suasion is a qualitative (selective) tool.

3. Q3. Fiscal deficit equals
   (a) Total expenditure minus total receipts (b) Total expenditure minus revenue receipts minus non-debt capital receipts (c) Revenue expenditure minus revenue receipts (d) Fiscal deficit minus interest

   Answer: (b). It equals the government’s net borrowing requirement.

4. Q4. Revenue deficit is
   (a) Revenue expenditure minus revenue receipts (b) Capital expenditure minus capital receipts (c) Fiscal deficit minus primary deficit (d) Imports minus exports

   Answer: (a).

5. Q5. The Monetary Policy Committee of the RBI has how many members?
   (a) 4 (b) 5 (c) 6 (d) 7

   Answer: (c). Three from the RBI and three external members.

6. Q6. Which rate forms the floor of the RBI’s interest-rate corridor?
   (a) Repo rate (b) MSF rate (c) Standing Deposit Facility rate (d) Bank rate

   Answer: (c).

7. Q7. Scanning that is done at fixed intervals such as yearly is called
   (a) Continuous (b) Periodic (c) Ad hoc (d) Strategic

   Answer: (b).

8. Q8. Which of these belongs to the macro (general) environment?
   (a) Suppliers (b) Customers (c) Demographic trends (d) Competitors

   Answer: (c). The others form the micro (task) environment.

9. Q9. The New Industrial Policy of 1991 mainly
   (a) Nationalised banks (b) Abolished licensing for most industries (c) Introduced MRTP (d) Banned foreign technology

   Answer: (b).

10. Q10. In a mixed economy
    (a) Only the state produces (b) Only the market operates (c) Private and public sectors co-exist (d) There is no regulation

    Answer: (c).

11. Q11. Which statements are correct? 1) The Competition Act, 2002 replaced the MRTP Act. 2) The CCI regulates combinations.
    (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither

    Answer: (c).

12. Q12. Technological environment affects a firm mainly through
    (a) Change in products and processes (b) Change in the constitution (c) Change in tax slabs only (d) None

    Answer: (a).

1. Q1. FEMA, 1999 came into force on
   (a) 1 April 1999 (b) 1 June 2000 (c) 1 January 2001 (d) 26 January 2000

   Answer: (b).

2. Q2. FEMA is mainly a
   (a) Criminal law (b) Civil law (c) Tax law (d) Labour law

   Answer: (b). FERA was criminal in approach; FEMA is civil.

3. Q3. Under the Consumer Protection Act, 2019, protection of consumers as a class is entrusted to the
   (a) CCI (b) CCPA (c) National Commission only (d) SEBI

   Answer: (b). The National Commission is the highest adjudicating forum, not the regulator.

4. Q4. Original jurisdiction of the District Commission extends to claims up to
   (a) Rs 10 lakh (b) Rs 20 lakh (c) Rs 50 lakh (d) Rs 1 crore

   Answer: (c). Rs 50 lakh; State Rs 50 lakh to Rs 2 crore; National above Rs 2 crore.

5. Q5. Which is NOT a consumer right?
   (a) Right to safety (b) Right to be heard (c) Right to bargain (d) Right to seek redressal

   Answer: (c).

6. Q6. CSR under Section 135 applies to a company with net profit of at least
   (a) Rs 1 crore (b) Rs 5 crore (c) Rs 10 crore (d) Rs 100 crore

   Answer: (b). Or net worth Rs 500 crore or turnover Rs 1,000 crore.

7. Q7. The minimum CSR spend is
   (a) 1% of average net profit of three years (b) 2% of average net profit of three years (c) 2% of turnover (d) 5% of net profit

   Answer: (b).

8. Q8. The base of Carroll’s CSR pyramid is the
   (a) Ethical responsibility (b) Philanthropic responsibility (c) Economic responsibility (d) Legal responsibility

   Answer: (c).

9. Q9. Which committee led to Clause 49 of the Listing Agreement?
   (a) Cadbury (b) Kumar Mangalam Birla (c) Sachar (d) Narasimham

   Answer: (b).

10. Q10. A two-tier board is characteristic of
    (a) The Anglo-American model (b) The German model (c) The Japanese model (d) The Indian model

    Answer: (b).

11. Q11. Which theory says managers act in the best interest of the company without conflict?
    (a) Agency theory (b) Stewardship theory (c) Stakeholder theory (d) Transaction cost theory

    Answer: (b).

12. Q12. Assertion (A): FEMA permits free current account transactions. Reason (R): Capital account transactions are regulated.
    (a) Both true and R explains A (b) Both true, R does not explain A (c) A true, R false (d) A false, R true

    Answer: (b). Both are true statements but R does not explain A.

1. Q1. The theory of comparative advantage was given by
   (a) Adam Smith (b) David Ricardo (c) Heckscher and Ohlin (d) Porter

   Answer: (b).

2. Q2. The Leontief paradox relates to
   (a) Absolute advantage (b) Heckscher-Ohlin theory (c) Mercantilism (d) Product life cycle

   Answer: (b). US exports were found to be more labour intensive than imports.

3. Q3. Which is NOT a determinant in Porter’s diamond?
   (a) Factor conditions (b) Demand conditions (c) Exchange rate (d) Firm strategy and rivalry

   Answer: (c).

4. Q4. Which mode of entry gives the highest control and the highest risk?
   (a) Exporting (b) Licensing (c) Joint venture (d) Wholly owned subsidiary

   Answer: (d).

5. Q5. A tariff levied as a percentage of the value of goods is
   (a) Specific (b) Ad valorem (c) Compound (d) Quota

   Answer: (b).

6. Q6. Which of these is a non-tariff barrier?
   (a) Ad valorem duty (b) Import quota (c) Countervailing duty (d) Specific duty

   Answer: (b).

7. Q7. Foreign Trade Policy 2023 aims at exports of
   (a) USD 1 trillion by 2025 (b) USD 2 trillion by 2030 (c) USD 5 trillion by 2030 (d) USD 3 trillion by 2027

   Answer: (b).

8. Q8. Foreign Trade Policy 2023 is
   (a) A five-year policy (b) Open-ended with no fixed end date (c) Valid only to 2025 (d) Annual

   Answer: (b).

9. Q9. The EPRG framework was proposed by
   (a) Perlmutter (b) Vernon (c) Dunning (d) Johanson

   Answer: (a).

10. Q10. The Uppsala model explains
    (a) Incremental internationalisation (b) Tariff structures (c) Exchange rates (d) Capital flows

    Answer: (a).

11. Q11. Selling in a foreign market below normal value is
    (a) Arbitrage (b) Dumping (c) Hedging (d) Devaluation

    Answer: (b).

12. Q12. Match: 1) Mercantilism 2) Absolute advantage 3) Product life cycle 4) Eclectic paradigm. With: P) Vernon Q) Dunning R) Adam Smith S) Trade surplus and gold
    (a) 1-S, 2-R, 3-P, 4-Q (b) 1-R, 2-S, 3-Q, 4-P (c) 1-P, 2-Q, 3-R, 4-S (d) 1-S, 2-P, 3-R, 4-Q

    Answer: (a).

13. Q13. A zone where goods are stored and traded duty free, mainly for trade rather than production, is
    (a) EPZ (b) FTZ (c) EOU (d) SEZ

    Answer: (b).

14. Q14. Which document is both a receipt and a document of title for sea shipment?
    (a) Packing list (b) Bill of lading (c) Commercial invoice (d) Certificate of origin

    Answer: (b).

1. Q1. In India, foreign investment of 10% or more of post-issue paid-up equity of a listed company is treated as
   (a) FPI (b) FDI (c) ECB (d) Portfolio

   Answer: (b).

2. Q2. Insurance FDI in India (as on November 2026) is permitted up to
   (a) 26% (b) 49% (c) 74% (d) 100% on the automatic route

   Answer: (d). LIC remains capped at 20%.

3. Q3. Defence FDI is automatic up to
   (a) 26% (b) 49% (c) 74% (d) 100%

   Answer: (c).

4. Q4. Multi-brand retail trading FDI is
   (a) 100% automatic (b) 51% with government approval (c) 26% automatic (d) Prohibited

   Answer: (b).

5. Q5. Which sector is prohibited for FDI?
   (a) Insurance (b) Lottery (c) Single-brand retail (d) Coal mining

   Answer: (b).

6. Q6. Setting up a new factory abroad is
   (a) Brownfield investment (b) Greenfield investment (c) Portfolio investment (d) Licensing

   Answer: (b). Acquiring an existing firm is brownfield.

7. Q7. The OLI paradigm was proposed by
   (a) Hymer (b) Dunning (c) Vernon (d) Linder

   Answer: (b).

8. Q8. FPIs in India are regulated mainly by
   (a) DPIIT (b) SEBI (c) CCI (d) DGFT

   Answer: (b).

9. Q9. Which is an accommodating item in the BOP?
   (a) Merchandise exports (b) FDI inflow (c) Drawing down foreign exchange reserves (d) Remittances

   Answer: (c).

10. Q10. The Marshall-Lerner condition says depreciation improves the trade balance if the sum of the demand elasticities of exports and imports is
    (a) Less than one (b) Equal to zero (c) Greater than one (d) Negative

    Answer: (c).

11. Q11. The J-curve shows that after depreciation the trade balance
    (a) Improves at once (b) Worsens first and then improves (c) Never changes (d) Falls permanently

    Answer: (b).

12. Q12. Which item is NOT part of the current account?
    (a) Trade in services (b) Remittances (c) Portfolio investment inflow (d) Interest income

    Answer: (c).

13. Q13. India adopted current-account convertibility in
    (a) 1991 (b) 1994 (c) 2000 (d) 2006

    Answer: (b). August 1994.

14. Q14. ADRs are traded on
    (a) US exchanges (b) Indian exchanges (c) London only (d) Tokyo only

    Answer: (a).

15. Q15. Under PPP, if home inflation is higher than foreign inflation, the home currency should
    (a) Appreciate (b) Depreciate (c) Stay fixed (d) Become convertible

    Answer: (b).

1. Q1. The stage with a common external tariff but no free factor movement is a
   (a) Free trade area (b) Customs union (c) Common market (d) Economic union

   Answer: (b).

2. Q2. Which is the correct chronological order of formation?
   (a) NAFTA, ASEAN, SAARC, EU (b) ASEAN, SAARC, NAFTA (as in force 1994) (c) SAARC, ASEAN, NAFTA (d) NAFTA, SAARC, ASEAN

   Answer: (b). ASEAN 1967, SAARC 1985, NAFTA 1994.

3. Q3. NAFTA was replaced by
   (a) CPTPP (b) USMCA (c) MERCOSUR (d) APEC

   Answer: (b). Effective 1 July 2020.

4. Q4. Trade diversion occurs when trade shifts from
   (a) A high-cost member to a low-cost member (b) A low-cost non-member to a higher-cost member (c) Home producer to foreign producer (d) None of these

   Answer: (b).

5. Q5. How many members does ASEAN have after October 2025?
   (a) 10 (b) 11 (c) 12 (d) 9

   Answer: (b). Timor-Leste joined.

6. Q6. SAFTA came into force in
   (a) 1985 (b) 1995 (c) 2006 (d) 2016

   Answer: (c).

7. Q7. The IMF has
   (a) 189 members (b) 190 members (c) 191 members (d) 195 members

   Answer: (c). Liechtenstein joined in October 2024.

8. Q8. Which World Bank Group body gives political-risk guarantees to investors?
   (a) IBRD (b) IDA (c) MIGA (d) ICSID

   Answer: (c).

9. Q9. UNCTAD was set up in
   (a) 1947 (b) 1964 (c) 1985 (d) 1995

   Answer: (b). Headquarters in Geneva.

10. Q10. The WTO came into being on
    (a) 1 January 1947 (b) 1 January 1995 (c) 1 January 1999 (d) 1 January 2001

    Answer: (b).

11. Q11. How many modes of supply are there under GATS?
    (a) 2 (b) 3 (c) 4 (d) 5

    Answer: (c).

12. Q12. TRIMS prohibits
    (a) Patents (b) Local content requirements (c) Services trade (d) Subsidies on agriculture

    Answer: (b).

13. Q13. Under the WTO Agriculture Agreement, domestic support that is minimally trade distorting is placed in the
    (a) Amber box (b) Blue box (c) Green box (d) Red box

    Answer: (c).

14. Q14. The headquarters of the New Development Bank is in
    (a) New Delhi (b) Moscow (c) Shanghai (d) Washington

    Answer: (c).

15. Q15. The Special Drawing Right is a reserve asset of the
    (a) World Bank (b) WTO (c) IMF (d) UNCTAD

    Answer: (c).

16. Q16. The 14th WTO Ministerial Conference (March 2026, Yaounde) ended
    (a) With a full declaration (b) Without a ministerial declaration (c) Postponed (d) With India leaving

    Answer: (b).

17. Q17. The WTO Appellate Body has been unable to hear appeals since
    (a) 1995 (b) 2008 (c) December 2019 (d) 2024

    Answer: (c).