Unit 1 Business Environment and IB PYQ’s 26th Nov 2021 Shift 1

The correct answer is – IMF

Key Points

International Monetary Fund:

• The IMF was originally laid out as a part of the Bretton Woods system exchange agreement in 1944.
• The main motive was to ensure global monetary coordination, maintain currency exchange rates, and increase global liquidity (access to hard currencies).
• India became a member of IMF on December 27, 1945
• There are 190 member countries of IMF.
• The IMF works to achieve sustainable growth and prosperity for all of its 190 member countries.
• Members with balance-of-payments deficits have the option to borrow foreign currency, which they must pay back with interest, by purchasing the foreign currency held by the IMF with their home currencies.
• The IMF introduced SDRs in 1969 to supplement members’ existing reserves of foreign currencies and gold.
• SDRs are a type of international reserve asset.

Additional Information

World Trade Organisation: An international organisation is the WTO (World Trade Organisation). It establishes the regulations governing international trade in products, services, industrial, agricultural, and intellectual property.

GATT: A legal agreement called the General Agreement on Tariffs and Trade (GATT), which was signed on October 30, 1947, by 23 nations, aimed to minimise trade barriers by removing or cutting quotas, tariffs, and subsidies while keeping important restrictions in place.

UNCTAD: An intergovernmental body called the United Nations Conference on Trade and Development (UNCTAD) was founded in 1964 with the goal of advancing developing countries’ interests in international trade.

The correct answer is – Licensing

Key Points

Licensing:

• The companies which want to establish a retail presence in an overseas market with minimal risk, the licensing strategy allows another person or business to assume the risk on behalf of the company.
• Licensing allows a business in the target nation to utilise the licensor’s assets.
• These assets are typically immaterial and include production methods, patents, and trademarks.
• The use of the intangible property is granted to the licensee in exchange for a fee called royalty, which may include cover technical support.

Additional Information

International Franchising:

• The growth of a domestic company into global markets and nations is referred to as international franchising.
• The process of franchising internationally is intricate and calls for careful analysis of a variety of aspects, including viability, adaptability, and advantages vs disadvantages.

Contract manufacturing:

• Contract manufacturing is when two businesses come to an arrangement to produce parts or goods over a predetermined period of time.
• Manufacturing outsourcing is similar to outsourcing personnel in that it enables businesses to compete in markets they couldn’t before.

Joint ownership:

• When two or more people share title to the same property, this is known as co-ownership or joint ownership.
• When two or more people jointly own property, they have the right to share possession and use of that property.

The correct answer is – The collapse of Eastern Europe in 1989 and USSR in 1991 lead to the emergence of the transitory economies

Important Points

• The revolutions of 1989 led to a wave of revolution from the late 1980s to the early 1990s which destroyed communism in Central and Eastern Europe.
• Eastern Europe collapsed in 1989 and the USSR in 1991.
• The fall of USSR led to the rise of the floating economy.

The correct answer is – Raw materials and manpower are in abundance

Key Points

Foreign Direct Investment:

Foreign direct investment refers to any investment made into a nation by a person or business that is based abroad.

• FDI generally refers to the establishment of enterprises or the acquisition of ownership or a controlling interest in the stock of a company by a foreign entity.
• It differs from a foreign entity just purchasing equity shares in a company, which is a foreign portfolio investment.
• In FDI, the foreign entity has a say in how the business is run on a daily basis.
• FDI includes the entrance of technology, knowledge, skills, expertise, and know-how in addition to the inflow of money.
• It is a significant non-debt financial resource for a nation’s economic growth.

Important Points

According to Dunning’s eclectic theory, FDI can be divided into four categories:

• Market seeking: FDI factors including market size, market growth, domestic market structure, etc. work to penetrate the local markets of host nations.
• Resource seeking: These investments are undertaken to gain easy access to resources like cheap labour, infrastructure, and raw materials.
• Efficiency seeking: FDI efficiency-seeking factors include new competitiveness sources, economies of scale, specialisation, and cheap cost of manufacturing.
• Strategic asset seeking: Motivated by the desire of investors to invest in strategic assets (such as brands, people, distribution networks, etc.) that will help a company compete in a particular market. These occurs as a result of mergers and acquisitions.

The correct answer is – C only

Key Points

Tax Buoyancy –The relationship between variations in the growth of tax revenues collected by the government and changes in GDP is explained by tax buoyancy.

Important Points

Features of Tax Buoyancy –

• It speaks to how well tax revenue growth responds to changes in GDP.
• A tax’s revenue rises without the tax rate being raised when it is buoyant.
• One of the most important metrics for evaluating the effectiveness of a government’s tax system is tax buoyancy.
• In general, the government’s tax revenue increases as the economy experiences quicker growth.
• In other words, it measures the responsiveness of tax mobilisation to economic growth.
• Tax buoyancy depends largely on –
  • The size of the tax base
  • The friendliness of the tax administration
  • The reasonableness and simplicity of the tax rates

The correct answer is – E, B, D, C, A

Key Points

• Europe (E)
  • Received the lowest FDI inflows among the given options in 2020.
  • Factors include economic slowdown and Brexit-related uncertainties.
• Transition Economies (B)
  • These include countries shifting from centrally planned to market economies.
  • FDI inflows are moderate but affected by political and economic instability.
• Developed Economies (D)
  • Higher FDI inflows compared to Europe and transition economies.
  • Includes major economies like Japan and Australia.
• North America (C)
  • Significant FDI destination due to strong economic policies and stable investment climate.
  • USA and Canada attract large-scale foreign investments.
• Developing Economies (A)
  • Received the highest FDI inflows, especially in Asia.
  • Countries like China and India drive strong FDI growth.

Additional Information

• UNCTAD Report 2020 Insights
  • Global FDI fell sharply due to the COVID-19 pandemic.
  • Developing economies showed resilience compared to developed regions.
• Top FDI Receiving Countries
  • China became the largest FDI recipient in 2020.
  • USA saw a decline in FDI inflows due to economic disruptions.
• Factors Affecting FDI Inflows
  • Political stability and ease of doing business.
  • Market size and growth potential.
  • Government policies and incentives.

The correct answer is – B, A, D, C, E

Key Points

Economic Integration:

• One of the major economic trends that has affected global trade in recent years is economic integration.
• Countries have sought to cooperate economically in order to utilise their resources more efficiently and to generate substantial markets for the countries that would make up the ensuing integrated territories.

Important Points

The correct answer is – B and C only

Key Points

The correct answer is B and C only because both are current account transactions and the remaining others are capital account transactions.

Important Points

Definition of Current Account Transactions:

“current account transaction” means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes, —

• payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business,
• payments due as interest on loans and as net income from investments,
• remittances for living expenses of parents, spouse and children residing abroad, and
• expenses in connection with foreign travel, education and medical care of parents, spouse and children;

Additional Information

Difference Between Current Account Transactions and Capital Account Transactions

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

Important Points

Bretton Woods Conference – The United Nations Monetary and Financial Conference is the full name of the Bretton Woods Conference. It was a conference conducted in Bretton Woods, New Hampshire, USA, from July 1 to July 22,1944, at the Mount Washington Hotel.

GATT- The General Agreement on Tariffs and Commerce (GATT), which was ratified on October 30, 1947, was a legal agreement that reduced restrictions on international trade by getting rid of or cutting back on quotas, tariffs, and subsidies while keeping other important rules in place.

Multi-fibre Agreement – The Multifiber Arrangement (MFA) was the name of a global trade agreement encompassing involving apparel and textiles. In 1974, the MFA was formed.

WTO replaced GATT – GATT was replaced by WTO in 1 January 1995, which had been in existence since 1947. It was replaced by WTO because GATT failed to achieve its goals.The weaknesses of the GATT was behind its failure, including the existence of legal problems, particularly in the areas of agriculture and textiles.