UNIT 16: CORPORATE FINANCE

1. What does the term “corporate finance” refer to?

Corporate finance is a broad term that is used to collectively identify the various
financial dealings undertaken by a corporation.
2. What is one of the main functions of corporate finance?
One of the core functions of responsible corporate finance is to make wise use of
the financial resources available to the company.
3. What is the ultimate goal of corporate finance?
Ultimately, the goal is to ensure that the corporation is achieving the maximum
benefit from available financial resources, while incurring the minimum amount of
expenditure required attaining those benefits.
4. What does corporate finance include?
Corporate finance includes planning, raising, investing and monitoring of finance.
5. What sources of finance can financial managers use when they want to
raise more capital?
Finance can be collected from many sources such as shares, debentures, banks,
financial institutions, creditors,…
6. How is the capital of a firm basically classified?
There are 2 types of corporate capital: Fixed capital and working capital.
7. How is fixed capital often used?
Fixed capital is used to purchase fixed assets like land, buildings…
8. How is working capital often used?
Working capital is used to purchase raw materials and to pay the day-to-day
expenses like salaries, rent, taxes,…
9. What are the tasks of financial managers in planning the finance?
The finance manager plans the finance of the company. He takes decisions on
questions like:
 How much finance is required by the company?
 What are the sources of finance?
 How to use the finance profitably?
10. What are the tasks of financial managers in raising the finance?
The finance manager raises finance for the company. Finance can be collected
from many sources: shares, debentures, banks, financial institutions, creditors,
…
11. What are the tasks of financial managers in investing in finance?
The finance manager uses the finance to achieve the objectives of the company.
2 types of the corporate capital:
 Fixed capital: is used to purchase fixed assets like land, buildings,...
 Working capital: is used to purchase raw materials and to pay day-to-day
expenses like salaries, rent, taxes,...
12. What are the tasks of financial managers in monitoring finance?
The finance manager monitors the finance of the company. He has to minimize:
 The cost of finance
 The wastage and misuse of finance
 The risk of investment of finance
 He also has to get maximum return on the finance.

UNIT 17: FUNDING THE BUSINESS

1. What do finance managers need to do to ensure a company’s long-term
survival and prosperity?
To ensure a company’s long-term survival and prosperity, finance managers
need to make decisions abouts the gearing of the company.
2. What’s gearing?
Gearing is the relationship between equity capital and long-term debt.
3. What are capital sources for companies to raise for their businesses?
Debt financing: trade credit, issuing new bonds, banks loan or bank overdraft.
Equity financing: sale of assets, reinvested earnings, issuing new shares.
4. What are capital sources of debt financing?
Debt financing: through long-term loans, trade credit, bank loan, bank overdraft.
5. What are capital sources of equity financing?
Equity financing: owner’s capital, venture capital, unlisted securities market,
stock exchange.
6. What does the high/ low gearing mean?
High gearing means the company has a larger proportion of debt versus equity.
Low gearing means the company has a smaller proportion of debt versus equity.
7. How many forms of equity are there?
There are 4 forms of equity:
 Owner’s capital
 Venture capital
 Unlisted securities market
 Stock exchange
8. In what way/How can a company raise its capital on the unlisted securities
market?
A company can raise equity by issuing securities or selling them on the unlisted
securities market.
9. What is the unlisted securities market?
Unlisted securities market is a market in which unlisted securities are traded and
where small companies can raise more capital.
10. In what way/ How can a company raise its capital on the stock exchange?
(or Listed securities market)?
The company can raise equity by issuing securities and selling them on the stock
exchange.
11. What are the advantages and disadvantages of an owner's capital?
Advantages: In successful times, the owners have a claim on all the net profit.
Disadvantages: This is the most exposed form of capital because owners are the
last people to receive net profits.
12. What are the advantages and disadvantages of venture capital?
 Advantages: the venture capital company doesn’t usually interfere in the running
of the company.
Disadvantages: the venture capital company demands a much faster and higher
rate of return more than owners do.
13. What are the advantages and disadvantages of the unlisted securities
market?
Advantages:
 The owner doesn't lose much control of the company.
 The owner has the opportunity to raise capital, especially for the unlisted
company.
Disadvantages: Capital financing is limited.
14. What are the advantages and disadvantages of the stock exchange?
Advantages:
 The company has the long-term opportunity of raising capital
 The stocks have high liquidity
Disadvantages:
 Difficult for unlisted or small companies.
 Lose control of original owners.
15. What are the sources of long-term loans?
They are clearing banks, merchant banks and pension funds.
16. What are the advantages and disadvantages of long-term loans?
Advantages:
 The company can raise capital for investments through long-term loans.
 In the successful times, companies obtain much higher net profit.
Disadvantages:
 Companies have to secure debt over assets.
 In unsuccessful times, interests soak up most of the profit.
17. Is higher gearing helpful or harmful to companies?
In successful times, high gearing will give the owners a much better return as net
profit will be a much higher percentage of equity after interest payments on long-
term debt.
In harder times, the owner’s earnings will drop dramatically as interest payments
will soak up most of the company’s profits.

UNIT 18: MANAGEMENT OF WORKING CAPITAL

1. How is profitability determined?
Profitability is determined in part by the way in which a company manages its
working capital.
2. What is one of the principal functions of financial management in
managing working capital?
One of the principal functions of financial management in managing working
capital is to provide the correct amount of working capital at the right time and in
the right place to realize the greatest return on investment.
3. How can working capital initially be broken down? / How many types of
working capital are there?
There are 2 types of working capital: Permanent working capital and temporary
working capital.
4. What is permanent working capital used for?
It is tied up in keeping the business flowing throughout the year.
5. What is temporary working capital used for?
It is needed from time to time to take account of seasonal, cyclical or unexpected
fluctuation in the business.
6. Which type is usually serviced for from an overdraft facility?
An overdraft facility is a credit agreement made with a bank that allows account
holders to use or withdraw more money than what they have in their account up
to the approved limit.
Temporary working capital is serviced from an overdraft facility.
7. What are major applications of working capital?
There are 3 applications of working capital: Debtors, inventories, cash.
8. What are inventories further divided into?
Inventories are divided into: raw materials, work in progress, finished goods.
9. What is the role of financial managers in managing inventories?
The role of financial managers in managing inventories: minimize the quantity of
raw materials, work in progress and finished goods.
10. What are debts further divided into?
Debts are divided into: Debts due to suppliers and debts due to customers.
11. What is the role of financial managers in managing debts?
The role of financial managers in managing debts is to negotiate with suppliers
generous credit terms but offer minimal credit terms to customers. They have to
achieve the balance between getting and giving good credit terms in order to
attract customers and maintain positive relationships with suppliers on one hand
and minimize cash outlay on the other hand.
12. What is cash further divided into?
Cash is divided into cash for normal and abnormal requirements.
13. What is the role of financial managers in managing cash?
The role of financial managers in managing cash is to ensure that adequate cash
is always available for meeting the company’s day-to-day debts and there is also
a small reverse on hand to meet the contingencies.
14. What is the vicious circle in the business?
Over-stringent control can lead to disruption in production caused by delay in
receiving raw materials, a failure to take account of costly price rises in the
pipeline, a failure to keep production volume required by future sales, and
resulting expensive and damaging effects on customer goodwill. The loss of
goodwill leads to loss of sales and results once again in stringent cost controls.
15. What happens to the production system of a company if its inventories are
controlled too stringently?
There is a disruption in production.
16. What can cause the disruption in production?
The delay in receiving raw materials can cause disruption in production.
17. What are the results/consequences of over-stringent cost control?
They are disruption in production, failure to meet customer orders, loss of
customer goodwill and loss of sales.

UNIT 19: MARKETING

1. How to distinguish between selling and marketing?
Marketing is the process of understanding the market demand and then
developing and creating new products to satisfy customer’s wants and needs.
Selling is the process of producing the products first and then thinking how to sell
them on the market.
2. Why should the production department understand the marketing concept?
Because once the target market has been identified, a company has to decide
what goods or services to offer. It means the marketing concept has to be
understood throughout the company, in the production department of a
manufacturing company as much as in the marketing department itself.
3. What is the selling concept?
The selling concept assumes that resisting consumers have to be persuaded by
vigorous hard-selling techniques to buy non-essential goods and services.
Products are sold rather than bought.
4. What is the marketing concept?
Marketing includes organizations’ activities which determine, set prices, promote
and distribute products in order to meet the target market’s requirements.
5. What are market opportunities?
Market opportunities are profitable possibilities of filling unsatisfied needs of
creating new ones in areas in which the company is likely to enjoy a differential
advantage, due to its distinctive competencies.
6. Why must the companies consider the existence of competitors?
Because the existence of competitors always have to be identified, monitored
and defeated in the search for loyal customers.
7. Why is market research important?
Because by conducting market research, the company can minimize the risk of
launching a product or service solely on the basis of intuition or guesswork.
8. How to conduct market research?
They collect and analyze information about the size of a potential market and the
consumer's reactions to particular product or service features and so on.
9. What is the marketing mix?
Marketing mix is all various elements of a marketing program, their integration,
and the amount of effort that a company can expand on them in order to
influence the target market.
10. How many elements of the marketing mix are there?
There are 4 elements of marketing mix: Product, place, price and promotion.
11. What does the product include?
Product includes: quality, feature, size, style, brand name, guarantee, service,
packaging.
12. What does the place include?
 Place includes: distribution, distribution channels, location of points of sale,
transport and inventory size.
13. What does the price include?
Price includes: the basic list price, discounts, the length of payments and
possible credit terms.
14. What does promotion include?
Promotion includes: advertising, publicity, sales promotion and personal selling.
15. What does the producer market include?
Producer market includes all the raw materials, manufactured parts and
components that go into consumer goods, plus capital equipment such as
buildings, machines and supplies such as energy, pens and paper, services, all
of which have to be marketed.
16. Why don't they use techniques to persuade customers to buy essential
goods?
Because essential goods are things that everyone needs.
17. What are two types of market?
Two types of market are consumer market and producer market.
18. Which is larger, consumer market or producer market?
The producer market is actually larger than the consumer market.

UNIT 20: SETTING THE PRICE

1. What is setting/determining the price?
Setting/Determining the price means determining a figure at which products and
services are exchanged in the market.
2. How were prices set?
Prices were set by buyers and sellers negotiating with each other.
3. How are prices set now?
Now, one price is set for all buyers.
4. Why have non-price factors become relatively important in buyer-choice
behavior?/What are the important roles of price?
There are some reasons:
 Price has operated as a major determinant of buyer choice.
 Price remains one of the most important elements determining company
market share and profitability.
 Price is the only element in the marketing mix that produces revenue, the
other elements represent costs.
5. What are common mistakes when pricing?
The most common mistakes are:
 Pricing is too cost oriented.
 Pricing is not revised often enough to capitalize on market changes.
  Price is set independently of the rest of the marketing mix rather than as
an intrinsic element of market-positioning strategy.
 Price is not varied enough for different product items and market
segments.
6. What should companies do to handle pricing well?
In order to handle pricing well, companies should avoid making common
mistakes in setting the price. The common mistakes companies usually make are
that:
 Pricing is too cost oriented.
 Pricing is not revised often enough to capitalize on market changes.
 Price is set independently of the rest of the marketing mix rather than as
an intrinsic element of market-positioning strategy.
 Price is not varied enough for different product items and market
segments.
7. How do organizations handle pricing?
In organizations/ large companies: Pricing is typically handled by divisional and
product-line managers.
8. How do small companies handle pricing?
In small companies, prices are often set by top management rather than by the
marketing or sales department.
9. How do industries where pricing is a key factor handle pricing?
In industries where pricing is a key factor: Prices are set by pricing departments.
10. What are different ways of setting prices in different organizations?
In small companies, prices are often set by top management.
In large companies, pricing is handled by divisional and product-line managers.
In industries, prices are determined by a pricing department.

UNIT 21: WHAT IS ACCOUNTING?

1. What is accounting information?
Accounting information is the means by which we measure and communicate
economic events.
2. What is the accounting process?
The accounting process produces accounting information used by decision
makers in making economic decisions and taking specific actions.
These actions and decisions result in economic activities that continue the cycle.
3. For what purposes do decision makers use the accounting information?
Decision makers use accounting information in making economic decisions and
taking specific actions. These decisions and actions will result in economic
activities that continue the cycle.
4. What is the basic purpose of accounting?
 The basic purpose of accounting is to provide decision makers with useful
accounting information in making economic decisions.
5. What do you need to understand when using accounting information in
making business decisions?
You need to understand:
 The nature of economic activities that accounting information describes.
 The assumption and measurement techniques involved in developing
accounting information.
 The information that is the most relevant for making various types of
decisions.
6. What is the input/ output of the accounting process?
The input of the accounting process is economic activities.
The output of the accounting process is accounting information.
7. How many types of accounting information are there?
There are 3 types of accounting information: Financial accounting, tax
accounting, management accounting.
8. What does financial accounting refer to?
Financial accounting refers to information describing the financial resources,
obligations, and activities of an economic entity.
9. What does the term financial position mean?
The term financial position describes the financial resources and obligations at
one point in time.
10. What does the term results of operations mean?
The term results of operations describes the financial activities during the year.
11. What is the purpose of financial accounting information?
It is used for many different purposes.
12. Who uses financial accounting information?
Both people inside and outside the company (creditors, investors, audiors,
competitors,...) use financial accounting information.
13. Why is financial accounting information called “general purpose”
accounting information?
Because financial accounting information is used for so many different purposes.
It is used to assist investors and creditors in deciding where to place their scarce
investment resources. It also is used by managers and in income tax returns.
14. Why are financial decisions important?
Because they determine which companies and industries will receive the
financial resources necessary for growth and which will not.
15. What does management accounting refer to?
Management accounting involves the development and interpretation of
accounting information intended specifically to assist management in running the
business.
16. What is the purpose of management accounting information?
It is used only by company’s managers such as setting the company’s overall
goals, evaluating the performance of departments and individuals, and deciding
whether to introduce a new line of products.
17. Who uses management accounting information?
 People inside the company such as managers, employees,... use management
accounting information.
18. What does tax accounting refer to?
Tax accounting refers to calculating how much tax an individual or a company
should pay or trying to reduce this figure.
19. For what purposes tax accounting is used?
Tax accounting is used for the preparation of income tax return and tax planning.
20. Who used tax accounting?
Tax accounting is used by individuals, businesses and tax authorities.
(Therefore, it's public).
21. What is the most challenging aspect of tax accounting?
The most challenging aspect of tax accounting is tax planning.
22. What is tax planning?
Tax planning means anticipating the “tax effects” of business transactions and
structuring these transactions in a manner that will minimize the income tax
burden.

UNIT 22: FINANCIAL STATEMENTS

1. What are financial statements?
Financial statements are former records of financial activities and position of a
company.
2. Why do all businesses need to maintain financial statements?
They need to maintain financial statements to find out if they are making a profit.
3. How many types of records are there?
There are 2 types of records: journals and ledgers.
4. What is a journal?
Journal is a book recording daily business transactions.
5. What are examples of daily business transactions recorded in a journal?
Sales, uses of raw materials and purchases.
6. What is a ledger?
Ledger is used to record all the accounts of a company.
7. What is posting?
Periodically, the bookkeepers transfer figures from the journals to ledgers. This
activity is known as posting.
8. What is an account?
An account is a financial record which contains information about a group of
similar transactions.
9. What is accounting?
Accounting is the design, maintenance and interpretation of the information
recorded in the accounts.
10. How many types of financial statements are there?
There are 3 types of financial statements: Income statements (The profit and loss
account), Statement of cash flow, Balance sheet.
11. What are the functions of financial statements?
 They are used as a basis for business decisions such as allocation of financial
resources, development of new products, and expansion of operations.
They are also used for determining income tax liabilities.
12. What is an income statement?
Income statement is one of the financial statements of a company which shows
the company’s revenue and expenses during a particular time.
13. What does an income statement show?
It shows figures for total sales/ turnover and costs/ overhead.
14. What does an income statement list?
Income statement lists categories of sales and expenses such as: net sales, cost
of goods sold and selling and administrative expenses.
15. How are profits split in an income statement?
Profits are split into 3 parts:
 Taxation (goes to the government)
 Dividend (distributed to shareholders)
 Retained earnings profits (retained by the company)
16. Where does a company put the retained profit?
The company usually puts the retained profit in reserve.
17. What is a balance sheet? (U23)
A balance sheet is one of the major financial statements used by accountants
and business owners.
18. What does a balance sheet show?
The balance sheet shows a company’s financial situation on a particular date,
generally the last day of the financial year.
19. What does a balance sheet list?
A balance sheet lists:
 Company’s assets
 Company’s liabilities
 Shareholders funds
20. What do a business’s assets include?
A business’s assets include debtors or accounts receivable as it is assumed that
these will be paid.
21. What do assets include?
Assets include liabilities and owner’s equity.
22. What do liabilities include?
Liabilities include creditors or accounts payable, as these will have to be paid.
23. What is double-entry bookkeeping?
Double-entry bookkeeping is when all the transactions are entered as a credit in
one account and as a debit in another.
24. What is the accounting equation?
The accounting equation is Assets = Liabilities + owners’ equity
25. What do net assets include?
Net assets include share capital, share premium and the company’ reserves.
26. What is share capital?
Share capital is money received from the issue of shares.
27. What is share-premium?
 Share premium is any money realized by selling shares at above their nominal
value.
28. What is a company’s market capitalization?
A company’s market capitalization is the total value of its shares at any given
moment, the number of shares times their market price.
29. When the company does well/ is successful, the market price of shares is
higher or lower than its face value?
When a company is successful, the market price of shares is higher than its face
value.
30. What does a cash flow show?
The cash flow shows the flow of cash in and out of the business between
balance sheet dates.
31. What are the other names of the clash flow statement?
They are the source and application of funds statements and. the statement of
changes in financial position
32. What are sources of cash in?
They are trading profits, depreciation provisions, sales of assets, borrowing and
the issuing of shares.
33. What are applications of funds (cash out)?
They are purchases of fixed assets or financial assets, payment of dividends ,
repayment of loans and in a bad year- trading losses.
34. Where is the flow of cash both in and out of the company recorded?
Flow of cash both in and out of the company is recorded on the cash flow
statement.

UNIT 25: FINANCIAL ANALYSIS

1. What is financial analysis?
Financial analysis is the selection, evaluation, and interpretation of financial data,
along with other pertinent information, to assist in investment and financial
decision making.
2. What are functions of financial analysis?
Financial analysis has 2 functions: internal analysis and external function.
The internal function is to evaluate issues such as: employee performance, the
efficiency of operations, and credit policies.
The external function is to evaluate potential investments and the credit -
worthiness of borrowers among other things.
3. How many sources of financial data are there? What are they?
There are 4 sources of financial data: Financial statements, Market data,
Economic data, Company events.
4. What is the primary source of data needed in financial analysis?
It is financial statement data.
5. What is financial statement data?
Financial statement data is data provided by the company itself in its annual
reports.
6. What are examples of financial statement data?
Examples of financial statement data are the income statement, the balance
sheet and the cash flow statement.
7. Where can financial statement data be found?
Financial statement data can be found in the company's annual reports.
8. Who provides financial data about the company’s operating performance
and financial position?
The company itself provides financial data about the company’s operating
performance and financial position through its annual report and required
disclosures.
9. What is economic data?
Economic data is data available from government and private sources.
10. What is included in economic data?
Economic data includes: the Gross Domestic Product (GDP), Consumer Price
Index (CPI), consumer spending, producer prices, consumer prices, and the
competition….
11. Where can we find economic data?
We can find economic data from government and private sources.
= Economic data is available from government and private sources.
12. What is included in market data?
Market data includes: the market price of listed securities, stock price indices.
13. Where can we find market data?
We can find market data in the financial press and the electronic media daily.
14. What are included in company events?
Company events include: New product development, company regulation,
acquiring another company, extraordinary losses.
15. What is a ratio?
A ratio is a mathematical relation between one quantity and another.
16. What is a financial ratio?
A financial ratio is a comparison between one bit of financial information and
another.
17. How are financial ratios classified?
According to construction and general characteristics: financial ratios are
classified as a coverage ratio, a return ratio, a turnover ratio and a component
percentage.
According to the operating performance and financial condition: financial ratios
are classified as a liquidity ratio, a profitability ratio, an activity ratio, a financial
leverage ratio, a shareholder ratio, a return on investment ratio.
18. According to constructions, how are financial ratios classified?
By construction, ratios can be classified as coverage ratio, a return ratio, a
turnover ratio or a component percentage.
 A coverage ratio is a measure of a company’s ability to satisfy (meet)
particular obligations.
 A return ratio is a measure of the net benefit, relative to the resources
expended.
  A turnover ratio is a measure of the gross benefit, relative to the resources
expended.
 A component percentage is the ratio of a component of an item to the
item.
19. According to operating performance and financial condition, how are
financial ratios classified?
According to the operating performance and financial condition: classified as a
liquidity ratio, a profitability ratio, an activity ratio, a financial leverage ratio, a
shareholder ratio, a return on investment ratio.
 A liquidity ratio provides information on a company’s ability to meet its
short-term, immediate obligations.
 A profitability ratio provides information on the amount of income from
each dollar of sales.
 An activity ratio relates information on a company’s ability to manage its
resources (that is its assets) efficiently.
 A financial leverage ratio provides information on the degree of a
company’s fixed financing obligations and its ability to satisfy these
financing obligations.
 A shareholder ratio describes the company’s financial condition in terms of
amounts per share of stock.
 A return on investment ratio provides information on the amount of profit,
relative to the assets employed to produce that profit.

UNIT 26: AUDITING

1. What is auditing?
Auditing is an accounting function that involves the review and evaluation of
financial records.
2. What internal auditing in general?
Internal auditing is an accounting function that involves the review and evaluation
of financial records and is done by accountants of the company.
3. How is (internal) auditing done?
Internal auditing is done by someone other than the person who entered the
transactions in the records.
4. What kind of system for checking on operating and recording jobs is
maintained by many organizations?
Corporations usually maintain a continuous internal audit or internal control by
their own accounting departments.
5. What do accountants do to maintain an internal audit?
They:
 continuously review operating procedures and financial records.
 report to management on the current state of the company’s fiscal affairs.
 also make suggestions to management for improvements in the standard
operating procedures.
 check the accounting records in the regard to completeness and accuracy.
 make sure that irregularities are corrected.
  seek to ensure that the various departments of the company follow the
policies and procedures established by management.
6. What is the aim of internal auditors?
The internal auditors seek to ensure that the various departments of the
company follow the policies and procedures established by management.
7. What different emphases can be placed on an internal auditor's report ?
 In some organizations, the auditor's major or even sole (= only) function is
to report on the completeness and accuracy of the books of account.
 In more progressive companies, greater attention may be paid to the
auditor's suggestions.
8. What are advantages and disadvantages of internal auditing?
Advantages:
 Internal auditing provides accounting controls against errors, as well as
division of duties to reduce the possibility of misappropriations.
 Thanks to the internal auditor, the management knows the current state of
the company’s fiscal affairs, and any deviations from the standard
operating procedures.
 The management receives suggestions for improvements in the standard
operating procedures.
Disadvantages:
If a report is unfavorable, it may not be shown to the person in management who
can correct the problem. As a result, the management receives the false
impression on the company’s operation.
9. What weakness exists in the internal auditing system?
When a report is unfavorable for internal auditors, they don’t show it to the
managers to correct them. It results in managers making unsuitable decisions for
the company. In order to overcome this weakness, managers must ensure that
reports are received with an objective attitude at all levels.
10. What happens if management receives the incorrect information?
Managers will make unsuitable decisions for the company because they don’t
know about the problems that internal audit has uncovered.
11. How can the management overcome this weakness?
To make effective use of an internal auditing function, management must ensure
that reports are received at all levels with an absolutely objective attitude.

UNIT 27: INTERNATIONAL BUSINESS

1. What countries benefit from world trade?
They can develop their economies, increase production of goods, meet market
demands and raise business opportunities.
2. What types of business opportunities are presented as a result of
interdependence among trading nations?
They are transportation, distribution and marketing.
3. Why does international trade develop?
 Because certain countries are able to produce some goods more efficiently than
other countries.
4. What are factors of efficient production?
They are climate, natural resources, labor force and geographical location.
5. What is Adam Smith’s theory about?
Smith theorized that in a free market, countries import products most efficiently
manufactured abroad and export products most efficiently produced
domestically.
→ A theory of absolute advantage.
6. What is David Ricado’s theory about?
Ricardo theorized that an exporting country doesn’t have to be the most efficient
producer, it’s only more efficient than the country importing the product.
→ A theory of comparative advantage.
7. What is the main difference between Adam Smith’s theory and Ricardo’s
theory?
 Adam Smith’s theory is theory of absolute advantage, but David Ricardo’s
theory is theory of comparative advantage.
 According to Adam Smith’s theory, an exporting country is the most
efficient producer of the product. While David Ricardo theorized that an
exporting country is more efficient than the country which imports the
product.
8. Why do governments control imports and exports?
Because a country enjoys an advantage if it exports more than it imports, wealth
accrues to the exporting country.
9. Explain how exporting countries become wealthy?
Because they receive money for selling goods.
10. How do governments control imports?
Government imposes taxes and quotas to control imports.
11. How do governments control exports?
Government controls exports by providing marketing information, establishing
trade missions, subsidizing exports and providing tax benefits or incentives.
12. What is dumping?
Dumping is selling on a foreign market at a price below the cost of production.
13. Why would a country object to foreign countries dumping goods?
Because dumping goods would damage local/ domestic industries.
14. What are two forms of protectionism?
They are taxes (= tariffs) and quotas.
15. What is one advantage of tariffs over quotas to the government?
Tariffs raise revenue to the government.
16. Why do tariffs and quotas have different effects on the market?
Tariffs increase the price, quotas restrict the supply of goods.
17. What are two forms of import tariffs?
Two forms of import tariffs are specific tariff and ad valorem.
18. What is a specific tariff?
A specific tariff is the certain amount of tax for each unit of product
19. What is ad valorem?
 Ad valorem is based on the value of the product.
20. What are similarities and differences when imposing taxes and quotas?
The similarity is that both imposing taxes and quotas cause the increase in the
price of the product.
About the differences, under tariffs, supply is not limited while under quotas,
supply is limited.
21. What does FOB stand for?
FOB stands for the free on board.
22. What is the free on board (FOB)?
The free on board (FOB) method which is the cost of product as it leaves the
exporting countries.
23. What does CIF stand for?
CIF stands for the cost insurance freight.
24. What is the cost insurance freight (CIF)?
The cost insurance freight (CIF) method which adds the value of place utility to
the cost of the product.
25. What is international monetary/currency exchange?
International monetary exchange involves the exchange of one currency for
another.
26. What is a floating exchange rate?
A floating exchange rate is the kind of exchange rate which fluctuates according
to market forces.
27. With a floating exchange rate, what would happen to the exchange value of
currency from a country that exports more than it imports ?
The exchange value of currency would tend to increase.
28. Explain why the value of the currency of a country that imports more than it
exports would tend to decrease?
Because the currency would become weaker.
29. What is the balance of payment?
The balance of payment is the amount of money that goes in and out of a
country.
30. What is the balance of trade?
The balance of trade is the difference between a country's imports and its
exports.
31. When does a country have a balance of trade surplus?
A country has a balance of trade surplus when it exports more than it imports.
32. When does a country have a balance of trade deficit?
A country has a balance of trade deficit when it imports more than it exports
33. Why does the comparative advantage which a country enjoys sometimes
change?
Because transportation costs increase. And currency exchange rates change.
34. What is a multinational company?
A multinational corporation is a large company setting up production facilities in
several different countries.
35. What is a parent company?
 Exporting companies sometimes set up subsidiaries in the market countries. The
larger company is referred to as the parent company.
36. What is a subsidiary?
A subsidiary is the company which is owned and controlled by another company
(parent company)
37. Why do exporting countries sometimes set up subsidiaries in the market
countries?
Because the comparative advantages which exporting countries enjoy
sometimes change. Transportation costs may increase or currency exchange
rates may change.

UNIT 29: TRADE BARRIERS

1. What are trade barriers?
Trade barriers are any of a number of government-placed restrictions on trade
between nations.
2. What are common sorts/ types of trade barriers?
There are 4 common used trade barriers: tariffs, quotas, subsidies and
embargoes.
 Tariffs are simply taxes placed on imports
 Quotas are simply a quantity restriction placed on a good, service and
activity.
 A subsidy is a grant paid by a government to an enterprise to benefit the
public or to keep prices low. Subsidies are often placed to protect
domestic industries.
 Embargoes basically prohibit the import and export of anything with
another country. Embargoes are often done as a form of punishment.
3. What does the term free trade mean?
Free trade refers to the theoretical removal of all trade barriers, allowing for
completely free and unfettered trade.
4. What do domestic firms benefit from trade barriers?
Domestic firms get benefits from trade barriers such as: higher sales, greater
profits, more income to resource owners.
5. What are the disadvantages of trade barriers?
Domestic consumers bear disadvantages: higher prices, limited access to
imports.
6. Why does every nation in the global economy impose trade barriers?
 To protect domestic employment.
 To protect relatively young domestic industries.
 To protect firms and industries that produce output vital to the security and
defense of the nation.
 To prevent dumping.
 Other countries in the foreign sector gain a comparative advantage due to
low wages paid to workers.
7. What are tariffs?
Tariff is a financial tool used by the state to regulate import and export activities
or protect domestic production.
8. What are the purposes of tariffs?
Tariffs are used to raise prices of imported goods which leads to fewer imports
purchased and then more domestic product is sold.
9. What are quotas?
Quotas is a quantity restriction placed on a good, service or activity.
10. What are the purposes of quotas?
Quotas are used to restrict the quantity of imports.
11. What are subsidies?
Subsidies may be intended simply to make certain key goods affordable to
citizens of the nation but it can make imports non-competitive. They are placed to
protect domestic industries.
12. What are the purposes of subsidies?
Subsidies make certain key goods affordable to citizens of a nation, but it can
make imports non-competitive.
13. What are embargoes?
Embargoes can be seen as the most extreme of the trade barriers and prohibit
the export or import of anything with another country.
14. What are the purposes of embargoes?
Embargoes are used to prohibit the import and export of anything with another
country.
15. What does WTO stand for?
WTO stands for the World Trade Organization.