Unit 1 BE and IB PYQ’s 25th Dec 2021 Shift 1

The correct answer is (A) – (III), (B) – (IV), (C) – (I), (D) – (II)

Important Points

Theory of absolute advantage by Adam Smith (1776):

• Adam Smith argued that trade should be based on absolute advantage.
• This term describes the position when one country is absolutely more efficient at producing good A, whilst another country is absolutely ‘better’ at producing good B.
• Both countries would benefit if they specialised in producing the goods at which they have the aTheory of comparative advantagedvantage and then exchanged their products.

Theory of comparative advantage by David Ricardo (1817):

• Smith’s argument about absolute advantage was refined and developed by David Ricardo in 1817.
• Ricardo, improving upon Adam Smith’s exposition, developed the theory of international trade based on what is known as the Principle of Comparative Advantage (Cost). 
• As a person specialises in the trade in which he has best advantages, a country also specialises in the production of the commodity in which it has the best natural advantages.
• A country may produce many things at a time, but it may have comparative advantages in the production of some commodities (say, tea or jute as in India) over others, and it will specialise in those goods.

Factor endowment theory by Heckscher (1919) – Ohlin (1933):

• The Heckscher-Ohlin (HO) model is a more accurate representation of the global economy following WWII.
• Heckscher-Ohlin theory is an economics theory of comparative advantage in international trade that states that countries with abundant capital and scarce labour will tend to export capital-intensive products and import labor-intensive products, while countries with abundant labour and scarce capital will tend to export labor-intensive products and import capital-intensive products.

Theory of competitive advantage by Michael Porter (1990):

• According to Porter’s idea of competitive advantage, if you have a true competitive edge over your competitors, you can operate at a lower cost, command a higher price, or do both. It’s more difficult to figure out how to gain an advantage.
• Every organization’s purpose is to produce items or services whose value surpasses the sum of all input expenses.
• Thus, the ideal indicator, according to Porter, is Return on Invested Capital (ROIC).
• ROIC will be consistently higher than the industry average if you have a genuine competitive advantage.

The correct answer is (D), (A), (E), (C) and (B)

Key Points Uppsala Model:

• Swedish scholars (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977) developed the Uppsala Internationalization Model as a result of their interest in the internationalisation process.
• They constructed a model of the firm’s choice of market and type of entrance when moving abroad after studying the internationalisation of Swedish manufacturing enterprises.
• The Uppsala model is one of the best known models of how firms set about the internationalization process.
• It presents a sequential approach, meaning that the firm internationalizes incrementally.
• The model assumes that there is a lack of knowledge of the foreign market which is detrimental to internationalization.

Important Points

Sequence of process of entering international markets:

1. Domestic operations and production
2. Sporadic (Ad hoc) exports
3. Exporting via independent representative
4. Establishing a foreign sales subsidiary
5. Foreign production and manufacturing

The correct answer is Export Subsidies

Key Points ​Counter Vailing Duties (CVD):

• Counter Vailing Duties are tariffs imposed on imported commodities to compensate for subsidies given to producers of these goods in the exporting country.
• Countervailing duty (CVD) is a specific form of duty that the government imposes in order to protect domestic producers by countering the negative impact of export subsidies.

Important Points Why Counter Vailing Duties are imposed?

• Foreign governments may grant subsidies to their producers in order to make their products cheaper and increase demand in other nations.
• To prevent these commodities from flooding the importing country’s market, the importing country’s government applies a countervailing tax, charging a specific amount on imports of these goods.
• The tariff raises the price of the imported product, bringing it closer to market value. The government can ensure a level playing field for domestic products in this way.

Additional Information

•  Predatory pricing: A predatory pricing strategy is a pricing strategy in which goods or services are supplied at a very low price point in order to drive out competitors and create entry barriers.
• Dumping: In the financial sector, dumping happens when a firm or country sells its products at a cheaper price than it charges domestically. Exporters dump to compete with the importing country’s producers and sellers.

The correct answer is Government route

Key Points

• Following the COVID-19 epidemic, on 18th April 2020, the government made prior approval essential for foreign investments from nations that share a land border with India in order to prevent “opportunistic takeovers” of Indian enterprises, a move that will limit FDI from China.
• Countries which share land borders with India are China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan.

Important Points According to a press note issued by the Department for promotion of Industry and Internal Trade (DPIIT)

“An entity of a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the government route,“

Additional Information What is Government Route?

Government route means the entry route through which investment by a person resident outside India requires prior Government approval, and foreign investment received under this route shall be in accordance with the conditions stipulated by the Government in its approval.

The correct answer is A, D and E only

Key Points World Bank Group:

• The World Bank Group is a one-of-a-kind global cooperation, with five institutions working together to find long-term solutions to poverty reduction and shared prosperity in developing nations.
• On issues ranging from climate change, conflict, and food security to education, agriculture, finance, and trade, the Bank Group collaborates with country governments, the business sector, civil society organisations, regional development banks, think tanks, and other international institutions.

Important Points World Bank Group consists of five development institutions:

• The International Bank for Reconstruction and Development (IBRD) provides loans, credits, and grants.
• International Development Association (IDA) provides low- or no-interest loans to low-income countries.
• The International Finance Corporation (IFC) provides investment, advice, and asset management to companies and governments.
• The Multilateral Guarantee Agency (MIGA) insures lenders and investors against political risk such as war.
• The International Centre for the Settlement of Investment Disputes (ICSID) settles investment-disputes between investors and countries.

The correct answer is B, C and E only

Key Points Corporate Social Responsibility

• The concept of corporate social responsibility (CSR) is that a company should play a good role in the community and take into account the environmental and social consequences of its business actions.
• It’s tied to ESG, which stands for Environmental, Social, and Governance, and sustainability, which creates economic, social, and environmental benefit.
• All three focus on non-financial elements that large and small businesses should consider when making decisions.

Important Points

•  Corporate Social Responsibility (CSR) to act ethically by the business, the life of the workforce and their families as well as the local community and society at large.
• There is a constant commitment to contribute to economic development while improving quality.
• The environment here also includes the improvement of nature.

The correct answer is A, B, C, D only

Key Points 

International Diversification:

• International diversification is a risk management strategy that tries to disperse risk across several geographical regions in order to lessen volatility.
• This entails not only investing in the securities of companies that operate in various industries and have varying sizes and styles, but also distributing assets across various places and countries.
• These countries have a poor connection and react to market and economic developments differently.
• This is done to lessen the long-term volatility of the portfolio’s returns.

Important Points

•  Optimal diversification also known as Markowitz diversification.
• It takes a different approach to building a diversified portfolio.
• Here, the focus is on finding those properties that have a complete relationship with each other which is not positive in any way.
• It has the following problems –
  • adverse fluctuations in the exchange rate
  • friction in the international market
  •  manipulation of securities prices
  • unequal access to information

The correct answer is Technology adoption and innovation

Key Points

• Technology adoption and innovation has been the most powerful driver of business change during the COVID-19 pandemic.
• All business information can be made available only through technology and innovation and business can be developed technically.

The correct answer is – (D), (A), (C), (E), (B)

Key Points

• Preferential Trade Agreements (PTA) – (D)
  • This is the most basic form of economic integration.
  • Member countries reduce tariffs on certain products but do not eliminate them completely.
• Free Trade Area (FTA) – (A)
  • All trade barriers between member nations are removed.
  • Each country maintains its own external trade policies.
• Customs Union (CU) – (C)
  • All member countries adopt a common external tariff.
  • Trade barriers between members are eliminated.
• Common Market – (E)
  • In addition to free trade and a common external tariff, factors of production (labor and capital) move freely.
• Economic Union – (B)
  • Highest level of integration.
  • Includes a common currency, harmonized economic policies, and full economic integration.

Additional Information

• Example of Free Trade Area
  • NAFTA (Now USMCA) – Allows free trade among the US, Canada, and Mexico.
• Example of Customs Union
  • MERCOSUR – South American trade bloc with a common external tariff.
• Example of Common Market
  • European Union before the introduction of the Euro.
• Example of Economic Union
  • European Union (EU) with the Euro as a common currency.