BBA 302

SECTION A

Q.1.

i.

The Heckscher–Ohlin theorem is one of the four critical theorems of the

Heckscher–Ohlin model, developed by Swedish economist Eli Heckscher and
Bertil Ohlin (his student). It states that a country will export goods that use its
abundant factors intensively, and import goods that use its scarce factors
intensively. In the two-factor case, it states: "A capital-abundant country will
export the capital-intensive good, while the labor-abundant country will export
the labor-intensive good."

The critical assumption of the Heckscher–Ohlin model is that the two countries
are identical, except for the difference in resource endowments. This also
implies that the aggregate preferences are the same. The relative abundance
in capital will cause the capital-abundant country to produce the capital-
intensive good cheaper than the labor-abundant country and vice versa.

iii.

Warranty-

contractual promise by the seller regarding the quality, character, or suitability

of goods he has sold

   The seller, through words or behavior, makes promises about a good

   Statements by the seller may be interpreted as an express warranty if
the buyer has no knowledge or does not deal in the goods the seller
deals in
   Statements by the seller may be interpreted as an opinion if the buyer
as knowledge of the good

Product liability = Product liability is the area of law in which manufacturers,

distributors, suppliers, retailers, and others who make products available to
the public are held responsible for the injuries those products cause
v.

Absolute Advantage

Though it is not economically feasible for a country to import all of the food
needed to sustain its population, the types of food a country produces can
largely be affected by the climate, topography and politics of the region. Spain,
for example, is better at producing fruit than Iceland. The differentiation
between the varying abilities of nations to produce goods efficiently is the
basis for the concept of absolute advantage.

Comparative Advantage

The focus on the production of those goods for which a nation's resources are
best suited is called specialization. When economists refer to specialization,
they mean the increase in productive skill that is achieved from focused
repetition in producing a good or service. A country specializes when its
citizens or firms concentrate their labor efforts on a relatively limited variety of
goods. Historically, specialization arose as a result of different cultural
preferences and natural resources.

vi.

A multinational corporation (MNC) has facilities and other assets in at least one
country other than its home country. Such companies have offices and/or
factories in different countries and usually have a centralized head office
where they coordinate global management. Very large multinationals have
budgets that exceed those of many small countries. Multinational corporations
are sometimes referred to as transnational, international or stateless
corporations.

vii.

The concept of international liquidity is associated with international

payments. These payments arise out of international trade in goods and
services and also in connection with capital movements between one country
and another. International liquidity refers to the generally accepted official
means of settling imbalances in international payments.In other words, the
term 'international liquidity' embraces all those assets which are
internationally acceptable without loss of value in discharge of debts (on
external accounts).

viii.

balance of trade

The balance of trade is the difference between the value of a country's imports
and exports for a given period. The balance of trade is the largest component
of a country's balance of payments. Economists use the BOT to measure the
relative strength of a country's economy. The balance of trade is also referred
to as the trade balance or the international trade balance.

balance of payment

The balance of payments is a statement of all transactions made between

entities in one country and the rest of the world over a defined period of time,
such as a quarter or a year.

SECTION B

Q.3.

An exchange rate is the price of a nation’s currency in terms of another

currency. Thus, an exchange rate has two components, the domestic currency
and a foreign currency, and can be quoted either directly or indirectly. In a
direct quotation, the price of a unit of foreign currency is expressed in terms of
the domestic currency. In an indirect quotation, the price of a unit of domestic
currency is expressed in terms of the foreign currency. Exchange rates are
quoted in values against the US dollar. However, exchange rates can also be
quoted against another nations currency, which are known as a cross currency,
or cross rate.

Fixed Exchange Rate System:

Fixed exchange rate is the rate which is officially fixed by the government or
monetary authority and not determined by market forces. Only a very small
deviation from this fixed value is possible. In this system, foreign central banks
stand ready to buy and sell their currencies at a fixed price. A typical kind of
this system was used under Gold Standard System in which each country
committed itself to convert freely its currency into gold at a fixed price.

Flexible (Floating) Exchange Rate System:

The system of exchange rate in which rate of exchange is determined by forces

of demand and supply of foreign exchange market is called Flexible Exchange
Rate System. Here, value of currency is allowed to fluctuate or adjust freely
according to change in demand and supply of foreign exchange.

Managed Exchange Rate System

Managed float regime is the current international financial environment in

which exchange rates fluctuate from day to day, but central banks attempt to
influence their countries' exchange rates by buying and selling currencies to
maintain a certain range. The peg used is known as a crawling peg.

In an increasingly integrated world economy, the currency rates impact any

given country's economy through the trade balance. In this aspect, almost all
currencies are managed since central banks or governments intervene to
influence the value of their currencies. According to the International
Monetary Fund, as of 2014, 82 countries and regions used a managed float, or
43% of all countries, constituting a plurality amongst exchange rate regime
types.

Q.4.

Trade barriers are government-induced restrictions on international trade.

Man-made trade barriers come in several forms, including:

 Tariffs

 Non-tariff barriers to trade

 Import licenses

 Export licenses

 Import quotas

 Subsidies
  Voluntary Export Restraints

 Local content requirements

 Embargo

 Currency devaluation

 Trade restriction

world trading patterns

The global economy has grown continuously since the Second World War.
Global growth has been accompanied by a change in the pattern of trade,
which reflects ongoing changes in structure of the global economy. These
changes include the rise of regional trading blocs, deindustrialisation in many
advanced economies, the increased participation of former communist
countries, and the emergence of China and India.

Changes in the global economy

The main changes in the global economy are:

1. The emergence of regional trading blocs, where members freely trade with

each other, but erect barriers to trade with non-members, has had a
significant impact on the pattern of global trade. While the formation of blocs,
such as the European Union and NAFTA, has led to trade creation between
members, countries outside the bloc have suffered from trade diversion.
2. Like several advanced economies, the UK's trade in manufactured goods has
fallen relative to its trade in commercial and financial services. Many
advanced economies have experienced deindustrialisation, with less national
output generated by their manufacturing sectors.
3. The collapse of communism led to the opening-up of many former-communist
countries. These countries have increased their share of world trade by taking
advantage of their low production costs, especially their low wage levels.

Growth in trade

Although subject to short term fluctuations as a result of the economic cycle,

the value of trade has continued to grow, reflecting the increased significance
of trade and globalisation. The chart below shows that, as a % of world GDP,
trade increased from 40% in 1990 to 60% in 2014. The effects of the financial
crisis and subsequent recession can also be seen, as world trade fell as a % of
GDP between 2008 and 2010.
Q.5.

i) Free trade

Free trade is a free market policy followed by some international markets in

which countries' governments do not restrict imports from, or exports to,
other countries. In government, free trade is predominately advocated by
political parties that hold right-wing economic positions, while economically
left-wing political parties generally support protectionism.

Most nations are today members of the World Trade Organization (WTO)
multilateral trade agreements. Free trade is additionally exemplified by the
European Economic Area and the Mercosur, which have established open
markets. However, most governments still impose some protectionist policies
that are intended to support local employment, such as applying tariffs to
imports or subsidies to exports. Governments may also restrict free trade to
limit exports of natural resources. Other barriers that may hinder trade include
import quotas, taxes, and non-tariff barriers, such as regulatory legislation.

There is a broad consensus among economists that protectionism has a

negative effect on economic growth and economic welfare, while free trade
and the reduction of trade barriers has a positive effect on economic growth.
However, liberalization of trade can cause significant and unequally distributed
losses, and the economic dislocation of workers in import-competing sectors.

ii) Protection tariff

Protective tariffs are tariffs that are enacted with the aim of protecting a
domestic industry. Tariffs are also imposed in order to raise government
revenue, or to reduce an undesirable activity (sin tax). Although a tariff can
simultaneously protect domestic industry and earn government revenue, the
goals of protection and revenue maximization suggest different tariff rates,
entailing a tradeoff between the two aims.

In present day, the International Trade Commission reports over 12,000

specific tariffs on imports to the United States, including those on agricultural,
textile, and manufactured items. Tobacco has a 350% tariff duty; unshelled
peanuts have a 163.8% duty; European meats, truffles, and Roquefort cheese
are tacked with a 100% tariff rate. Domestic sectors for these same products
depend on tariffs in order to survive; without these elevated costs of
competition, American goods would simply cost more than their foreign
alternatives and would suffer in the eyes of consumers.

Q.7.

Trading companies are businesses working with different kinds of products

which are sold for consumer, business or government purposes. Trading
companies buy a specialized range of products, maintain a stock or a shop, and
deliver products to customers.

Different kinds of practical conditions make for many kinds of business. Usually
two kinds of businesses are defined in trading. Importers or wholesalers
maintain a stock and deliver products to shops or large end customers. They
work in a large geographical area, while their customers, the shops, work in
smaller areas and often in just a small neighbourhood.