Business: the activity of making, buying, selling or supplying goods or services for money.

Businesses include everything from a small owner-operated company such as a family

restaurant, to a multinational conglomerate such as General Electric.
A Business is nothing more than a person or group of persons properly organized to produce or
distribute goods or services. The study of business is the study of activities involved in the
production or distribution of goods and services-buying, selling, financing, personnel and the
like.
Business Environment : It refers to all external forces which have a bearing on the functioning
of the business. According to Barry M. Richman and Melvgn Copen Environment consists of
factors that are largely if not totally, external and beyond the control of individual industrial
enterprise and their managements. These are essentially the givers within which firms and their
management must operate in a specific country and they vary, often greatly, from country to
country.

What is International Business? Meaning

International Business conducts business transactions all over the world. These transactions
include the transfer of goods, services, technology, managerial knowledge, and capital to other
countries. International business involves exports and imports.
International Business is also known, called or referred as a Global Business or an International
Marketing.

1. Large scale operations : In international business, all the operations are conducted on a
very huge scale. Production and marketing activities are conducted on a large scale. It
first sells its goods in the local market. Then the surplus goods are exported.
2. Intergration of economies : International business integrates (combines) the economies
of many countries. This is because it uses finance from one country, labour from another
country, and infrastructure from another country. It designs the product in one country,
1

produces its parts in many different countries and assembles the product in another
country. It sells the product in many countries, i.e. in the international market.
3. Dominated by developed countries and MNCs : International business is dominated
by developed countries and their multinational corporations (MNCs). At present, MNCs
from USA, Europe and Japan dominate (fully control) foreign trade. This is because they
have large financial and other resources. They also have the best technology and
research and development (R & D). They have highly skilled employees and managers
because they give very high salaries and other benefits. Therefore, they produce good
quality goods and services at low prices. This helps them to capture and dominate the
world market.
4. Benefits to participating countries : International business gives benefits to all
participating countries. However, the developed (rich) countries get the maximum
benefits. The developing (poor) countries also get benefits. They get foreign capital and
technology. They get rapid industrial development. They get more employment
opportunities. All this results in economic development of the developing countries.
Therefore, developing countries open up their economies through liberal economic
policies.
5. Keen competition: International business has to face keen (too much) competition in
the world market. The competition is between unequal partners i.e. developed and
developing countries. In this keen competition, developed countries and their MNCs are
in a favorable position because they produce superior quality goods and services at very
low prices. Developed countries also have many contacts in the world market. So,
developing countries find it very difficult to face competition from developed countries.
6. Special role of science and technology : International business gives a lot of
importance to science and technology. Science and Technology (S & T) help the
business to have large-scale production. Developed countries use high technologies.
Therefore, they dominate global business. International business helps them to transfer
such top high-end technologies to the developing countries.
7. International restrictions : International business faces many restrictions on the inflow
and outflow of capital, technology and goods. Many governments do not allow
international businesses to enter their countries. They have many trade blocks, tariff
barriers, foreign exchange restrictions, etc. All this is harmful to international business.
8. Sensitive nature : The international business is very sensitive in nature. Any changes in
the economic policies, technology, political environment, etc. has a huge impact on it.
Therefore, international business must conduct marketing research to find out and study
these changes. They must adjust their business activities and adapt accordingly to
survive changes.

Business Environment has two components (Types)

1. Internal Environment
2. External Environment
Internal Environment: It includes 5 Ms i.e. man, material, money, machinery and
management, usually within the control of business. Business can make changes in these
factors according to the change in the functioning of enterprise.
External Environment: Those factors which are beyond the control of business enterprise
are included in external environment. These factors are: Government and Legal factors, GeoPhysical Factors, Political Factors, Socio-Cultural Factors, Demo-Graphical factors etc. It is
of two Types:
1. Micro/Operating Environment
2. Macro/General Environment
Micro/Operating Environment: The environment which is close to business and affects its
capacity to work is known as Micro or Operating Environment. It consists of Suppliers,
Customers, Market Intermediaries, Competitors and Public.
(1) Suppliers: They are the persons who supply raw material and required components to
the company. They must be reliable and business must have multiple suppliers i.e. they
should not depend upon only one supplier.
(2) Customers: - Customers are regarded as the king of the market. Success of every
business depends upon the level of their customers satisfaction. Types of Customers:
(i) Wholesalers
(ii) Retailers
(iii) Industries
(iv) Government and Other Institutions
(v) Foreigners
(3) Market Intermediaries: - They work as a link between business and final consumers.
Types:(i) Middleman
(ii) Marketing Agencies
(iii) Financial Intermediaries
(iv) Physical Intermediaries
(4) Competitors: - Every move of the competitors affects the business. Business has to
adjust itself according to the strategies of the Competitors.

(5) Public: - Any group who has actual interest in business enterprise is termed as public e.g.
media and local public. They may be the users or non-users of the product.

Macro/General Environment: It includes factors that create opportunities and threats to

business units. Following are the elements of Macro Environment:
1) Economic Environment: - It is very complex and dynamic in nature that keeps on
changing with the change in policies or political situations. It has three elements:
(i) Economic Conditions of Public
(ii) Economic Policies of the country
(iii)Economic System
(iv) Other Economic Factors: Infrastructural Facilities, Banking, Insurance companies,
money markets, capital markets etc.
(2) Non-Economic Environment: - Following are included in non-economic environment:(i) Political Environment: - It affects different business units extensively. Components:
(a) Political Belief of Government
(b) Political Strength of the Country
(c) Relation with other countries
(d) Defense and Military Policies
(e) Centre State Relationship in the Country
(f) Thinking Opposition Parties towards Business Unit
(ii) Socio-Cultural Environment: - Influence exercised by social and cultural factors, not
within the control of business, is known as Socio-Cultural Environment. These factors
include: attitude of people to work, family system, caste system, religion, education,
marriage etc.
(iii) Technological Environment: - A systematic application of scientific knowledge to
practical task is known as technology. Everyday there has been vast changes in products,
services, lifestyles and living conditions, these changes must be analysed by every business
unit and should adapt these changes.
(iv) Natural Environment: - It includes natural resources, weather, climatic conditions, port
facilities, topographical factors such as soil, sea, rivers, rainfall etc. Every business unit must
look for these factors before choosing the location for their business.
(v) Demographic Environment :- It is a study of perspective of population i.e. its size,
standard of living, growth rate, age-sex composition, family size, income level (upper level,
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middle level and lower level), education level etc. Every business unit must see these features
of population and recongnise their various need and produce accordingly.
(vi) International Environment: - It is particularly important for industries directly
depending on import or exports. The factors that affect the business are: Globalisation,
Liberalisation, foreign business policies, cultural exchange.
Characteristics:1. Business environment is compound in nature.
2. Business environment is constantly changing process.
3. Business environment is different for different business units.
4. It has both long term and short term impact.
5. Unlimited influence of external environment factors.
6. It is very uncertain.
7. Inter-related components.
8. It includes both internal and external environment.
*Why countries engage in trade
Is trade advantageous? What are the reasons that move private individuals and firms to
voluntarily engage in trade, governments to favour it and economists to defend it? Trends in
World and Agricultural Trade, long-term international trade flows in a wide range of
commodities have steadily increased over hundreds of years and they have accelerated
spectacularly since the Second World War. This is surely not just because transport and
communications facilities have dramatically improved, but it must also be because benefits are
derived from trade.
Economists have put forward a number of arguments in favour of trade; some are rather obvious
and common sense, others are less evident. These arguments can be classified into three groups
according to whether they emphasize (i) the increase that trade can bring to the total amount of
goods and services available to the national population (increased consumption argument), (ii)
the diversity of goods and services made available through trade to this population
(diversification argument), or (iii) the stability in the supply and prices of goods and services
brought about by trade (stability argument).
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TECHNOLOGICAL ENVIRONMENT
Among all the segments of environment, technological environment exerts considerable
influence on business. Thus this section requires more devotion. J.K. Galbraith defines
technology as a systematic application of scientific or other organized knowledge to practical
tasks. During the last 150 years, technology has developed beyond anybodys comprehensions.
Year 1983 was particularly considered by scientists as the year of scientific success. In this year
scientists put a billion dollars technology into space, produced the worlds first test-tube triplets
and obtained evidence of another solar system. A major break through was achieved in the field
of genetic engg. to cure dwarfism. Technology, thus, is the most dramatic force shaping the
destiny of people and business all over the world.

Status of Technology in India

India, like any other third world country, attended political independence after prolonged
colonial rule and exploitation. The country entered the modern world in a state of economic
backwardness and poverty of a large section of people. It is obvious that technology must attend
to the basic problems of food, clothing, health and housing of people. At the same time rapid
industrial development through latest technology is necessary to catch up with advanced
countries. With these objectives in mind, Government of India set-up series of R & D
establishments, space research centre, Medical research centres, agricultural research
establishments, oil explorations centres, power development projects and the council of scientific
and industrial research. Besides, several universities and institutes have been set-up to provide
higher education in science, technology and management. As on today there are 4700 inter
mediate/junior colleges, 144 universities, and 44 deemed universities in the country. Also there
are more than 500 science and technological institutions, and 1080 in house research and
development laboratories. There is also the Department of Science and Technology, an
administrative wing of Government, to coordinate the activities of all research and technical
activities in the country.

Theories of International Trade:

Mercantilism
According to Wild, 2000, the trade theory that states that nations should accumulate financial
wealth, usually in the form of gold, by encouraging exports and discouraging imports is called
mercantilism. According to this theory other measures of countries' well being, such as living
standards or human development, are irrelevant. Mainly Great Britain, France, the Netherlands,
Portugal and Spain used mercantilism during the 1500s to the late 1700s.

Mercantilist countries practiced the so-called zero-sum game, which meant that world wealth
was limited and that countries only could increase their share at expense of their neighbors. The
economic development was prevented when the mercantilist countries paid the colonies little for
export and charged them high price for import. The main problem with mercantilism is that all
countries engaged in export but was restricted from import, prevention from development of
international trade.

Absolute Advantage
The Scottish economist Adam Smith developed the trade theory of absolute advantage in
1776. A country that has an absolute advantage produces greater output of a good or service than
other countries using the same amount of resources. Smith stated that tariffs and quotas should
not restrict international trade; it should be allowed to flow according to market forces. Contrary
to mercantilism Smith argued that a country should concentrate on production of goods in which
it holds an absolute advantage. No country would then need to produce all the goods it
consumed. The theory of absolute advantage destroys the mercantilistic idea that international
trade is a zero-sum game. According to the absolute advantage theory, international trade is a
positive-sum game, because there are gains for both countries to an exchange. Unlike
mercantilism this theory measures the nation's wealth by the living standards of its people and
not by gold and silver.
There is a potential problem with absolute advantage. If there is one country that does not have
an absolute advantage in the production of any product, will there still be benefit to trade, and
will trade even occur? The answer may be found in the extension of absolute advantage, the
theory of comparative advantage.

Comparative Advantage
The most basic concept in the whole of international trade theory is the principle of
comparative advantage, first introduced by David Ricardo in 1817. It remains a major influence
on much international trade policy and is therefore important in understanding the modern global
economy. The principle of comparative advantage states that a country should specialise in
producing and exporting those products in which is has a comparative, or relative cost, advantage
compared with other countries and should import those goods in which it has a comparative
disadvantage. Out of such specialization, it is argued, will accrue greater benefit for all.
In this theory there are several assumptions that limit the real-world application. The
assumption that countries are driven only by the maximization of production and consumption,
and not by issues out of concern for workers or consumers is a mistake.

Heckscher-Ohlin Theory
In the early 1900s an international trade theory called factor proportions theory emerged by
two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory is also called the
Heckscher-Ohlin theory. The Heckscher-Ohlin theory stresses that countries should produce and
export goods that require resources (factors) that are abundant and import goods that require
resources in short supply. This theory differs from the theories of comparative advantage and
absolute advantage since these theory focuses on the productivity of the production process for a
particular good. On the contrary, the Heckscher-Ohlin theory states that a country should
specialise production and export using the factors that are most abundant, and thus the cheapest.
Not produce, as earlier theories stated, the goods it produces most efficiently.
The Heckscher-Ohlin theory is preferred to the Ricardo theory by many economists, because it
makes fewer simplifying assumptions. In 1953, Wassily Leontief published a study, where he
tested the validity of the Heckscher-Ohlin theory. The study showed that the U.S was more
abundant in capital compared to other countries, therefore the U.S would export capitalintensive goods and import labour-intensive goods. Leontief found out that the U.S's export was
less capital intensive than import.

Product Life Cycle Theory

Raymond Vernon developed the international product life cycle theory in the 1960s. The
international product life cycle theory stresses that a company will begin to export its product
and later take on foreign direct investment as the product moves through its life cycle. Eventually
a country's export becomes its import. Although the model is developed around the U.S, it can be
generalised and applied to any of the developed and innovative markets of the world.
The product life cycle theory was developed during the 1960s and focused on the U.S since
most innovations came from that market. This was an applicable theory at that time since the U.S
dominated the world trade. Today, the U.S is no longer the only innovator of products in the
world. Today companies design new products and modify them much quicker than before.
Companies are forced to introduce the products in many different markets at the same time to
gain cost benefits before its sales declines. The theory does not explain trade patterns of today.

Factors Affecting Decisions for International Business

1.Technological factor
Advances in technology can help improve productivity of labour,also as reduce transportation
costs,distribution costs,communication costs and production costs.Examples of it include
changes that affect the production and distribution of a product or services.
2. economic factor
Economic factor affects the overall consumption and investment in a business. A stable economy
attracts firms that wish to do business.An unstable economy however increases business rioisks
8

and even deters investment. Examples of it include national income, taxation policy, foreign
exchange policy,inflation rate,etc.
3. physical factor
It refers to the physical location and natural environment which directly affects the economic
devbelopment of the countries or a region.A favourable physical environment with well-planned
infrastructures likes the airport and transport facilities can attract firms.
4. Social and cultural factor
Social factor affects the productivity and labour supply.Examples of it includes the population
structure,language ability,education level,etc.Cultural factor affects trhe taste and preferences of
costumers.Examples of it include whether a country encourage women to go out and work and
enphasis on virtue of hard work.
5. Political factor
This is related to the political system,laws and regulations of a country.Political systems can be
classified as aurhoritarian and democratic. Laws and regulations' examples include licensing
laws,customes laws,and labour laws,sorry it should be licensing regulations. A country with
sound legal system and stable politial condition can attract investments as it enhances investors'
confidence.

6.Environmental factors:
-Competitors: A business makes many decisions about the direction to go based on the the
success, or lack thereof, of its competitors. From the customers' standpoint, competition
provides choice. Businesses must analyze competitors to find and exploit weaknesses to gain
increased market share. Businesses often conduct analyses to help identify strengths and
weaknesses of current competitors and threats which can come from future competitors in the
marketplace.

-Customers: Customers provide the backbone of success for any business, whether businessto-consumer or business-to-business. According to James Neblett--a presenter at the 2004
International Association for Management of Technology conference--businesses must conduct
research in their industries to determine levels of product demand by customers, which provides
foundations for company sales and profits. For a company to be successful, it must also keep up
with changing customer views, attitudes and demand for products and services.
-Suppliers: The role of suppliers for a business is critical, as the business is reliant on a third
party which can exert considerable influence. This environmental factor, according to James
Neblett, involves the number of suppliers in the industry and the suppliers'--as well as the
company's--bargaining power. For example, a few large suppliers that dominate the
market and supply material for which there is no good substitute often means that companies
needing those supplies pay higher prices.

-Economics and Geography

Economic and geographic environmental factors impact businesses that are beginning,
expanding or currently competing. Businesses often take into consideration the overall
9

economic conditions in a country, such as whether a recession or boom is underway.

Businesses also consider geographic and climactic factors. For example, a company that
relies on vegetable or fruit crops must consider seasonal temperatures, rainfall and other
conditions.

Balance of payment: (BOP): A record of all transactions made between one particular
country and all other countries during a specified period of time. BOP compares the dollar
difference of the amount of exports and imports, including all financial exports and imports. A
negative balance of payments means that more money is flowing out of the country than coming
in, and vice versa.

Meaning of Disequilibrium in Balance of Payment

Though the credit and debit are written balanced in the balance of payment account, it may not
remain balanced always. Very often, debit exceeds credit or the credit exceeds debit causing an
imbalance in the balance of payment account. Such an imbalance is called the disequilibrium.
Disequilibrium may take place either in the form of deficit or in the form of surplus.
Disequilibrium of Deficit arises when our receipts from the foreigners fall below our payment to
foreigners. It arises when the effective demand for foreign exchange of the country exceeds its
supply at a given rate of exchange. This is called an 'unfavorable balance'.
Disequilibrium of Surplus arises when the receipts of the country exceed its payments. Such a
situation arises when the effective demand for foreign exchange is less than its supply. Such a
surplus disequilibrium is termed as 'favorable balance'.

Causes of Disequilibrium in Balance of Payment

1. Population Growth: Most countries experience an increase in the population and in some like
India and China the population is not only large but increases at a faster rate. To meet their
needs, imports become essential and the quantity of imports may increase as population
increases.

10

2. Development Programmes: Developing countries which have embarked upon planned

development programmes require to import capital goods, some raw materials which are not
available at home and highly skilled and specialized manpower. Since development is a
continuous process, imports of these items continue for the long time landing these countries in a
balance of payment deficit.
3. Demonstration Effect: When the people in the less developed countries imitate the
consumption pattern of the people in the developed countries, their import will increase. Their
export may remain constant or decline causing disequilibrium in the balance of payments.
4. Natural Factors: Natural calamities such as the failure of rains or the coming floods may
easily cause disequilibrium in the balance of payments by adversely affecting agriculture and
industrial production in the country. The exports may decline while the imports may go up
causing a discrepancy in the country's balance of payments.
5. Cyclical Fluctuations: Business fluctuations introduced by the operations of the trade cycles
may also cause disequilibrium in the country's balance of payments. For example, if there occurs
a business recession in foreign countries, it may easily cause a fall in the exports and exchange
earning of the country concerned, resulting in a disequilibrium in the balance of payments.
6. Inflation: An increase in income and price level owing to rapid economic development in
developing countries, will increase imports and reduce exports causing a deficit in balance of
payments.
7. Poor Marketing Strategies: The superior marketing of the developed countries have
increased their surplus. The poor marketing facilities of the developing countries have pushed
them into huge deficits.
8. Flight Of Capital: Due to speculative reasons, countries may lose foreign exchange or gold
stocks People in developing countries may also shift their capital to developed countries to
safeguard against political uncertainties. These capital movements adversely affect the balance of
payments position.
9. Globalization: Due to globalization there has been more liberal and open atmosphere for
international movement of goods, services and capital. Competition has been increased due to
the globalization of international economic relations. The emerging new global economic order
has brought in certain problems for some countries which have resulted in the balance of
payments disequilibrium.
10. Price-Cost Structure:
Changes in price-cost structure of export industries affect the volume of exports and create
disequilibrium in the balance of payments. Increase in prices due to higher wages, higher cost of
raw materials, etc. reduces exports and makes the balance of payments unfavorable.
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11. Changes in Foreign Exchange Rates:

Changes in the rate of exchange is another cause of disequilibrium in the balance of payments.
An increase in the external value of money makes imports cheaper and exports dearer; thus,
imports increase and exports fall and balance of payments become unfavorable. Similarly, a
reduction in the external value of money leads to a reduction in imports and an increase in
exports.
12. Fall in Export Demand:
There has been a considerable decline in (he export demand for the primary goods of the
underdeveloped countries as a result of the large increase in the domestic production of
foodstuffs raw materials and substitutes in the rich countries. Similarly, the advanced countries
also find a fall in their export demand because of loss of colonial markets. However, the deficit
in the balance of payment due to the fall in export demand is more persistent in the
underdeveloped countries than in the advanced countries.
13. Demonstration Effect:
According to Nurkse, the people in the less developed countries tend to follow the consumption
patterns of the developed countries. As a result of this demonstration effect, the imports of the
less developed countries will increase and create disequilibrium in the balance of payments.
14. International Borrowing and Lending:
International borrowing and lending is another reason for the disequilibrium in the balance of
payments. The borrowing country tends to have unfavorable balance of payments, while the
lending country tends to have favorable balance of payments.
15. Newly Independent Countries:
The newly independent countries, in order to develop international relations, incur huge amounts
of expenditure on the establishment of embassies, missions, etc. in other countries. This
adversely affects the balance of payments position.
How to correct the Balance of Payment?
Solution to correct balance of payment disequilibrium lies in earning more foreign exchange
through additional exports or reducing imports. Quantitative changes in exports and imports
require policy changes. Such policy measures are in the form of monetary, fiscal and nonmonetary measures.

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Monetary Measures for Correcting the B0P

The monetary methods for correcting disequilibrium in the balance of payment are as follows :1. Deflation
Deflation means falling prices. Deflation has been used as a measure to correct deficit
disequilibrium. A country faces deficit when its imports exceeds exports. Deflation is brought
through monetary measures like bank rate policy, open market operations, etc or through fiscal
measures like higher taxation, reduction in public expenditure, etc. Deflation would make our
items cheaper in foreign market resulting a rise in our exports. At the same time the demands for
imports fall due to higher taxation and reduced income. This would built a favourable
atmosphere in the balance of payment position. However Deflation can be successful when the
exchange rate remains fixed.
2. Exchange Depreciation
Exchange depreciation means decline in the rate of exchange of domestic currency in terms of
foreign currency. This device implies that a country has adopted a flexible exchange rate policy.
Suppose the rate of exchange between Indian rupee and US dollar is $1 = Rs. 40. If India
experiences an adverse balance of payments with regard to U.S.A, the Indian demand for US
dollar will rise. The price of dollar in terms of rupee will rise. Hence, dollar will appreciate in
external value and rupee will depreciate in external value. The new rate of exchange may be say
$1 = Rs. 50. This means 25% exchange depreciation of the Indian currency. Exchange
depreciation will stimulate exports and reduce imports because exports will become cheaper and
imports costlier. Hence, a favorable balance of payments would emerge to pay off the deficit.
Limitations of Exchange Depreciation:1. Exchange depreciation will be successful only if there is no retaliatory exchange
depreciation by other countries.
2. It is not suitable to a country desiring a fixed exchange rate system.
3. Exchange depreciation raises the prices of imports and reduces the prices of exports. So
the terms of trade will become unfavorable for the country adopting it.
4. It increases uncertainty & risks involved in foreign trade.
5. It may result in hyper-inflation causing further deficit in balance of payments.

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3. Devaluation
Devaluation refers to deliberate attempt made by monetary authorities to bring down the value of
home currency against foreign currency. While depreciation is a spontaneous fall due to
interactions of market forces, devaluation is official act enforced by the monetary authority.
Generally the international monetary fund advocates the policy of devaluation as a corrective
measure of disequilibrium for the countries facing adverse balance of payment position. When
India's balance of payment worsened in 1991, IMF suggested devaluation. Accordingly, the value
of Indian currency has been reduced by 18 to 20% in terms of various currencies. The 1991
devaluation brought the desired effect. The very next year the import declined while exports
picked up. When devaluation is effected, the value of home currency goes down against foreign
currency, Let us suppose the exchange rate remains $1 = Rs. 10 before devaluation. Let us
suppose, devaluation takes place which reduces the value of home currency and now the
exchange rate becomes $1 = Rs. 20. After such a change our goods becomes cheap in foreign
market. This is because, after devaluation, dollar is exchanged for more Indian currencies which
push up the demand for exports. At the same time, imports become costlier as Indians have to
pay more currencies to obtain one dollar. Thus demand for imports is reduced.
Generally devaluation is resorted to where there is serious adverse balance of payment problem.
Limitations of Devaluation :1. Devaluation is successful only when other country does not retaliate the same. If
both the countries go for the same, the effect is nil.
2. Devaluation is successful only when the demand for exports and imports is elastic.
In case it is inelastic, it may turn the situation worse.
3. Devaluation, though helps correcting disequilibrium, is considered to be a weakness for
the country.
4. Devaluation may bring inflation in the following conditions :i.

Devaluation brings the imports down, When imports are reduced, the domestic
supply of such goods must be increased to the same extent. If not, scarcity of such
goods unleash inflationary trends.

ii.

A growing country like India is capital thirsty. Due to non availability of capital
goods in India, we have no option but to continue imports at higher costs. This
will force the industries depending upon capital goods to push up their prices.

iii.

When demand for our export rises, more and more goods produced in a country
would go for exports and thus creating shortage of such goods at the domestic
level. This results in rising prices and inflation.
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iv.

Devaluation may not be effective if the deficit arises due to cyclical or structural
changes.

4. Exchange Control
It is an extreme step taken by the monetary authority to enjoy complete control over the
exchange dealings. Under such a measure, the central bank directs all exporters to surrender their
foreign exchange to the central authority. Thus it leads to concentration of exchange reserves in
the hands of central authority. At the same time, the supply of foreign exchange is restricted only
for essential goods. It can only help controlling situation from turning worse. In short it is only a
temporary measure and not permanent remedy.

Non-Monetary Measures for Correcting the BOP

A deficit country along with Monetary measures may adopt the following non-monetary
measures too which will either restrict imports or promote exports.
1. Tariffs
Tariffs are duties (taxes) imposed on imports. When tariffs are imposed, the prices of imports
would increase to the extent of tariff. The increased prices will reduced the demand for imported
goods and at the same time induce domestic producers to produce more of import substitutes.
Non-essential imports can be drastically reduced by imposing a very high rate of tariff.
Drawbacks of Tariffs :1. Tariffs bring equilibrium by reducing the volume of trade.
2. Tariffs obstruct the expansion of world trade and prosperity.
3. Tariffs need not necessarily reduce imports. Hence the effects of tariff on the balance of
payment position are uncertain.
4. Tariffs seek to establish equilibrium without removing the root causes of disequilibrium.
5. A new or a higher tariff may aggravate the disequilibrium in the balance of payments of a
country already having a surplus.
6. Tariffs to be successful require an efficient & honest administration which unfortunately
is difficult to have in most of the countries. Corruption among the administrative staff
will render tariffs ineffective.

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2. Quotas
Under the quota system, the government may fix and permit the maximum quantity or value of a
commodity to be imported during a given period. By restricting imports through the quota
system, the deficit is reduced and the balance of payments position is improved.
Types of Quotas :1. the tariff or custom quota,
2. the unilateral quota,
3. the bilateral quota,
4. the mixing quota, and
5. import licensing.
Merits of Quotas :1. Quotas are more effective than tariffs as they are certain.
2. They are easy to implement.
3. They are more effective even when demand is inelastic, as no imports are possible above
the quotas.
4. More flexible than tariffs as they are subject to administrative decision. Tariffs on the
other hand are subject to legislative sanction.
Demerits of Quotas :1. They are not long-run solution as they do not tackle the real cause for disequilibrium.
2. Under the WTO quotas are discouraged.
3. Implements of quotas is open invitation to corruption.
3. Export Promotion
The government can adopt export promotion measures to correct disequilibrium in the balance of
payments. This includes substitutes, tax concessions to exporters, marketing facilities, credit and
incentives to exporters, etc.The government may also help to promote export through exhibition,
trade fairs; conducting marketing research & by providing the required administrative and
diplomatic help to tap the potential markets.

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4. Import Substitution
A country may resort to import substitution to reduce the volume of imports and make it selfreliant. Fiscal and monetary measures may be adopted to encourage industries producing import
substitutes. Industries which produce import substitutes require special attention in the form of
various concessions, which include tax concession, technical assistance, subsidies, providing
scarce inputs, etc.
Non-monetary methods are more effective than monetary methods and are normally applicable
in correcting an adverse balance of payments.
Drawbacks of Import Substitution:1. Such industries may lose the spirit of competitiveness.
2. Domestic industries enjoying various incentives will develop vested interests and ask for
such concessions all the time.
3. Deliberate promotion of import substitute industries go against the principle of
comparative advantage.

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