Question No. 5 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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                            MBA and MBA (Banking & Finance)

MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 5. What are the main components of Balance of Payments (BoP)? Discuss the factors affecting the BoP.

The Balance of Payments (BoP) for a country can be defined as a systematic record of all the transactions between the economic units of one country (such as households, firms and the government) and the rest of the world in any given period of time. This includes all the transaction records made among the individuals, corporates and the government and helps in keeping the flow of funds in track, to develop the economy as a whole.

There are two main components of Balance of Payments (BoP): 

- Current Account 

- Capital Account 

1. Current Account 

The current account in the BoP, comprises of the transactions in goods and services, alongside transfers during the current time period. 

The net exports are also termed as the trade balance, which is the net sum of a country’s exports and imports in goods as well as in services. Trade in services is often said to be invisible as they cannot be seen to cross national borders. For instance, when a foreign country pays for the maintenance of its factory in the domestic home (or domestic) country or for the services by a home resident who is working in that foreign country, then the home country is said to be exporting a service. Tourism, is one major service export. The trade balance reflects a surplus (positive) if the value of exports of a country exceeds its imports while it is said to reflect a deficit (negative) if the value of imports of a country is higher than its exports. Transfers to and from abroad may be in the form of gifts or remittances that residents of one country might send (receive) to (from) another country. If the net transfers from abroad is positive, it means that transfers from residents in abroad are greater than that sent by domestic residents to abroad. Similarly, the net transfers from abroad is negative, if transfers from foreign countries are lesser than the transfers to abroad. Net foreign aid received by a country during a particular period is also a part of transfers. If the right-hand side of the equation (i) is positive (negative), then the current account is in surplus (deficit). It must be noted that large transfers from abroad may put the current account in surplus, even if the net exports is negative. However, to keep things simple, the term “net transfers” will be ignored in the subsequent analysis and hence, the current account will comprise of net exports or trade balance only. 

2. Capital Account 

The capital account records all transactions in assets. An asset may include any one of the type in which wealth can be held, for instance, stocks, bonds, government debt, etc. Purchase of an asset records a deduction in the capital account. If an Indian is purchasing a US Car company, then it is recorded as debit in the capital account of India (as the Indian has to pay in dollars which means that the foreign exchange is going out of India). The sale of assets, for instance, the sale of share of an Indian company to a US customer is recorded as a surplus in India’s capital account (as sale of assets to foreign country will bring foreign exchange into the country). Taking the two accounts together, the BoP can be summed up as:

Balance of Payments = current account + capital account…… (ii)

BoP is in surplus (deficit) if both the current and the capital account (combined) has a surplus (deficit). Thus, a deficit in current (capital) account doesn’t alone lead to a BoP deficit. It has to be outweighed by a large surplus in the capital (current) account. Thus, it is very important to keep the basic rule of BoP accounting in mind. 

FACTORS AFFECTING THE BALANCE OF PAYMENTS (BoP)

The factors which affect the Balance of Payments (BoP) are divided into two groups: 

A. The factors affecting the current account 

B. The factors affecting the capital account 

A. The factors affecting the Current Account 

The current account may be affected by the following factors:

1. Rate of Inflation in the Resident (domestic) Country: 

A higher rate of inflation in the domestic economy, compared to its trading partners, lead to: 

• cheaper imports which lead to increase in purchase of foreign goods. Imports therefore, tend to rise with rise in the inflation rate; and 

• rise in cost of the exports in the foreign market, as a result of which the foreign nationals will less likely be purchasing the domestic country’s goods. Exports, therefore tend to decline. 

Thus, rise in imports and fall in exports will lead to a current account deficit. 

2. National Income: According to most of the empirical studies, an increase in national income of a country, in comparison with its trading partners, may lead to: 

• higher tendency among domestic residents to purchase more of foreign products which will generate a significant rise in imports and thus, more outflow of foreign reserves from the country leading to current account deficit; and 

• in some exceptional cases, a rise in national income may also lead to improvement in the current account as it may be associated with increase in production capacity in the economy and surplus generation of exports. 

3. Import Restrictions by Government: Imposition of taxes (such as tariffs) by the government on the goods imported, leads to a rise in its prices in the domestic economy. As a result, domestic residents will reduce their purchase of foreign products, thereby improving the current account. Sometimes, the government also imposes quota restrictions on its imports which again, lead to decline in the imports and generates a current account surplus.

 4. Exchange Rate: The Exchange rates measure the prices of the domestic currencies in terms of the foreign currencies. The Current account is a function of Real Exchange Rate (RER). A higher RER is associated with lowering of exports and increase in imports whereas a lower RER is associated with higher number of exports and decline in imports. Thus, it can be interpreted that lowering of RER (which might happen through devaluation of currency) might lead to improvement of current account.

B. The factors affecting the Capital Account 

Capital movement across borders are affected by the following factors: 

1. Imposition of tax by the government on the income accumulated by the domestic investors, who have invested in the foreign markets. This will lead to lower outflow of capital. 

2. Economic liberalization might have an impact on the capital account. 

3. An expected change in the exchange rates may affect the flow of capital as it tends to have an impact on the expected rate of return in the foreign investment. 

4. Changes in the interest rates, in comparison to other countries, may tend to affect capital flows across borders. A higher domestic interest rate may lead to lower capital flows into the country whereas a reduction in domestic interest rates may tend to have greater capital flows into the country.

Question No. 4 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 4. Describe the key players in the agricultural sector and discuss the role and importance of agricultural marketing.    

With growth and increase in production, the active role of middlemen in the movement of agricultural commodities which specialise in performing marketing roles and are involved in marketing of products has increased. The number of mediators can be classified into five groups as follows.

1. Merchant Middlemen 

Merchant middlemen are the ones who take title of the goods they deal in while buying and selling. Their earning or loss depends on the sale and purchase prices. They are of four types:

a) Wholesalers: Those who buy agricultural commodities in large quantities directly from farmers or from other wholesalers. They mainly assemble the goods from various localities and store produce and often release them in the off-season since they store them in the peak arrival season. 

b) Retailers: They buy from wholesalers and sell it directly to consumers in small quantities. Retailers are the closest to consumers in the marketing channel. 

c) Village merchants: The vendors or retailers who move from village to village to directly purchase the produce from the cultivators. Village merchants purchase the produce of those farmers who have either taken finance from them or those who are not able to go to the market. Village merchants also supply essential consumption goods to the farmers. They often act as the financers of poor farmers and sell the collected produce in the nearby market or the villages. 

d) Mashakakhores: It is a colloquial term for big retailers who often act as small wholesalers and majorly deal in fruits and vegetables. They usually sell to bulk consumers like hotels, para-military units or small retailers/vendors. Over the years, they have started dealing with all types of customers without the condition of a minimum quantity and are working like ordinary retailers. 

2. Agent Middlemen 

They are basically representatives of clients and do not own the products. They act as negotiators between sellers and buyers and help them in sale and purchase of products. They usually receive commission or brokerage on sale. Agent middlemen are of two types: 

a) Commission Agents: A commission agent generally operates in the wholesale market and acts as the proxy of either a seller or a buyer by representing them in buying and selling of products. 

b) Brokers: They act as communicators between buyers and sellers to bring them on the same platform while facilitating personal services to their clients in the market. They may claim brokerage from buyer, sellers or both depending upon the market situation as they simply wander to render their services to clients.

3. Speculative Middlemen 

These middlemen are the ones who buy products at a low price when arrivals are sizable usually in off-season when prices are high. They take claim of the product and risk associated with an aim to make a profit on it. 

4. Processors Processors are the ones who hire agents to buy for them from areas where production is high either and bring on their businesses either on their own or on custom basis. Agents may also store the products and may deal with it throughout the year on continuous basis. They often are involved in advertising to generate demand for their managed goods and add form utility to farm goods.

5. Facilitative Middlemen 

As the name suggests, these middlemen facilitate buying and selling while assisting in the marketing process. They get their income in the form of fees or service charge since most of them are labourers who help in physical movement of goods and products while loading and unloading them. Weighmen and graders also fall into this category since they facilitate weighing of produce and grade products according to different categories. They are often termed as the core of the marketing wheel. Transporters who assist in movement of the produce from one market to another and communication agencies including advertising agencies that majorly help in decision making about the purchase of goods are a part of this group. Auctioneers who help in exchange of produce by putting the produce for public sale and bidding by the consumers or buyers are equally important and help in ironing out the marketing system.

ROLE AND IMPORTANCE OF AGRICULTURAL MARKETING

Agricultural marketing has a vital role as it helps in encouraging the process of production and consumption. It equally helps in accelerating the pace of fiscal development since it is an important multiplier of agricultural development. A shift from traditional to modern agriculture system has been a challenge and marketing has been a big experiment in the entire process. But the role of marketing remains utmost important. The importance of agricultural marketing is revealed from the following.

1. Optimization of Resource use and Output Management 

The key role of an efficient marketing system is to help the market in pulling down the losses and accelerating the marketable surplus. The marketing losses often arise due to inefficiency in processing, storage and transportation of products. An efficient marketing wheel will help in optimization of resources and output management and a well-thought out system of marketing can help in even distribution of available stocks. Taking everything into account, it is indeed a modern approach to sustainable growth and sustains it. 

2. Increase in Farm Income 

Reducing the number of middlemen while ensuring higher level of income to restrict the cost of marketing services and the malpractices is what a good marketing system would aim at achieving. An efficient system assures improved prices for farm products and encourages them to invest their surpluses in buying modern inputs so that yield and produce may increase. 

3. Widening of Markets 

When a system widens the market by taking the products to remote corners both within and outside the country is considered profitable since it increases the demand on a continuous basis while guaranteeing a higher income to the producer.

4. Growth of Agro-based Industries 

Agri-dependant industries rely on the supply of raw materials such as cotton, sugar, edible oils, food processing and jute on farm produce and therefore require an efficient system to help in the growth to encourage the overall development process of the economy.

5. Price Signals 

Efficient marketing systems allow farmers in scheduling and arranging their production in accordance with the needs of the economy. This work is carried out through transmitting price signals.

6. Adoption and Spread of New Technology 

Adapting to demands and adopting latest technologies and scientific knowledge always leads to growth. But a technology upgrade requires greater investment and farmers would invest only if they are guaranteed of ago-ahead at remunerative price.

7. Employment Creation 

This is a system of marketing which focuses on employment generation and engages millions of people in activities, such as wrapping, packing, transferring, storing and doling out. Persons like commission agents, brokers, traders, retailers, weighmen, hamals, packagers and regulating staff are directly employed in the marketing system. Apart from them, several others are able to look for employment opportunities when dealing with supply of goods and services.

8. Addition to National Income 

Marketing events are value additions to the product since they increase the nation's gross national product and net national product.

9. Improved Living 

Development that adds to growth while diminishing poverty of the population and adds to foreign exchange while eliminating economic waste should be given special attention. The development of an efficient marketing for food and agricultural products is also vital to overall economic development. The marketing system is the key for the success of the development programmes which are aimed to uplift people.

Question No. 6 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 6. Write notes on the following:                              
a) Measures to reduce barriers to foreign trade. 

Free trade refers to elimination of all barriers to international trade. Several numbers of organizations and trade agreements are working out to ease the barriers to trade, thereby promoting more of trade and mutual economic gains from it. Some of the important initiatives taken to remove those barriers are discussed below:

1. General Agreement on Tariffs and Trade (GATT): Post the Great Depression and World War II, international trade faced stringent cross-border restrictions. To eliminate those, twenty-three nations came forward and united in 1947 to sign the General Agreement on Tariffs and Trade (GATT). GATT encouraged free trade through proper regulation and reduction in tariffs and also provided a forum for resolving trade related disputes among its signatories. 

2. World Trade Organization (WTO) and Regional Trading Agreements (RTAs): Founded in 1995 by the members of GATT, located in Geneva, Switzerland and with approximately 159 member countries at present, WTO encourages global trade through lowering of trade barriers, introducing multilateral trading systems through Regional Trading Agreements (RTAs), enforcement of international trade rules and providing a forum for resolving trade disputes. It is also empowered to monitor a country’s trade policy and can guide the “guilty” members in eliminating all disputed trade restrictions imposed, if any. Non-discrimination is the core principle of WTO, and its members have committed not to favour any one trading partner over others. An exception to these is the Regional Trade Agreements (RTAs), which are discriminatory by nature – in the sense that only its member signatories can enjoy more favourable market-access conditions. The RTAs aim at facilitating trade between its signatories but do not raise trade barriers with the other trading countries. WTO member countries can enter into the RTAs under specific conditions which will cover: i) formation and operations of customs unions and free trade areas covering trade in goods, ii) regional or global arrangements for trade in goods between developing member countries and iii) agreements covering trade in services. In general, RTAs must cover all trade in goods and services and help in promoting more of free trade among the countries under RTA. As of June 2016, all WTO member countries now have an RTA in force. 

3. The World Bank and the IMF: The primary determinant in helping the poorer nations or the less developing economies to involve as active members in the global trading system is by providing financial assistance. This has been a major shared goal of two international organizations – The International Monetary Fund (IMF) and the World Bank. The IMF lends financial assistance to the needy economies, with conditions imposed, which might include some of the tender financial or economic reforms. The World Bank, on the other hand, provides economic assistance to the poor and the least developing economies so as to ameliorate the lives of the people through communitysupport programs which are mainly designed to ensure the provision of better health, education, nutrition, infrastructure and other social services. 

4. Trading Blocs: In some parts of the world, a group of countries have integrated to allow free flow of commodities and services among their mutual boundaries. Such groups of countries are known as Trading Blocs. The North American Free Trade Association (NAFTA) – (agreement signed for mutual flow of trade among the US, Mexico and Canada) and the European Union ( EU) (signed by 27 countries of Europe to open their borders for free trade) are the two most powerful trading blocs at present. 

b) Impact of technological environment on international business.

Every businessman or marketer around the globe is now well aware of how important technology is for the businesses and what are its effects on a business environment? There are both negative and positive effects of technology for a business. Initially, the businesses were dependent on a labour force. But with the rise in technology, businesses do not want to lag behind. They have already started implementing newer technologies to flourish worldwide. Here are some of the ways in which the technology affects the global business environment.

1. Technology helps in diminishing business security risks by hiring best of security specialists for preventing sudden cyber-attacks and with the use of AI and ML, such threats are being minimized. 

2. Technology ensures business growth by enabling almost all business actions to be automated, thereby reducing involvement of human labour. This has helped in increasing the sales, revenue and profit for the businesses and the usage of internet have enabled them to grow online and expand worldwide. 

3. Online presence through social media channels is one of the business-oriented targets that the enterprises are trying to fulfil to grow along with the broadening of its client base. Technological tools that help businesses identify their preferred content, optimum time of posting their service contents, automated posting and location- specific targeting to expand their business, are actually helping to establish the business better in the online world. Tools like Google analytics are playing a major role in this. 

4. Technology helps in increasing employee productivity for a business through various computer programming and software such as AI, ML, and cloud computing that helps businesses to process more information, sitting anywhere in the world, than manual methods, thereby reducing much of human involvement in such tasks. Organizations are also using fundamental business technologies for employee performance appraisal information in the online framework to supervise the performance of its employees and create measurable goals for their employees to achieve and thereby sustain the business objectives. 

5. Business technologies are now allowing companies to outsource certain business functions to other businesses in the national and global business framework. Technical support and customer service are the two most common outsourced functions. Outsourcing therefore helps companies lower their business costs and focus on completing their business functions, which they are best at. With the help of several technological innovations, businesses can also outsource their functions to the least expensive areas possible, including those in foreign countries as well. 

Question No. 3 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 3. Discuss the structure of capital market in detail.   

However, business units and investors need funds for a longer duration also for undertaking business expansions or technology upgrading and in this regard they approach the capital market. A capital market is a market for long term securities or financial instruments having a maturity period of more than one year. Capital markets are important for channelising savings, capital formation and industrial growth. The structure of the capital market in India can be better understood with the help of Figure

Capital markets comprised of two markets i) Primary Market and ii) Secondary Market. The primary market is also known as the New Issue Market (NIM) where the issuer of the securities (shares and bonds) sell the new securities to the investors directly without any intermediaries. Whenever the securities are offered for sale for the first time by the companies they are called Initial Public Offering (IPO). IPO is issued to raise capital for funding purpose. Both the companies and government raise funds by the sale of new stocks in the primary market.

The secondary market is also known as the stock market. It is a place where shares, bonds, options, etc which were sold earlier are sold and purchased. In India, you must have heard about the Bombay Stock Exchange (BSE), National Stock Exchange (NSE) they are some of examples of stock exchanges. The secondary market can be either an auction market or Overthe-Counter. In the auction market, trading of securities is done through the stock exchange. In Over-the-Counter the trading is conducted without using the platform of stock exchange, it does not have any physical location and trading is done electronically

a. Financial Instruments 

Some of the major financial instruments used in capital markets are discussed below. 

i) Shares 

A share indicates a unit of ownership by the buyer of shares called shareholder/holers of the company. A shareholder has ownership in the company and has voting rights and shares the company profit or loss. The benefit which a shareholder receives out of company profit is called a dividend. Let us understand it with an example. Assume that there is a company know as XYZ limited and it needs funds (Rs 100 crore ) for further expansion. For raising this fund the company will go to the public. This capital of Rs 100 crores is divided into 1,000,000 shares of Rs. 1000 per share. Now assume that there are two investors A and B and they want to invest in this company so they will buy some shares. Investor A buys 500 shares and investor B buys 800 shares so they are investing Rs 500000 and Rs 8000000 in this company and have become the shareholders and will share the profit or loss of the company in the proportion to their holdings. Further, shares are of two types namely equity shares and preference shares. 

ii) Bonds 

Bonds are issued by state and central governments, companies and municipalities to raise money for a variety of projects and activities. They are debt instruments in which the entities borrow the funds for a defined period of time at a variable or fixed interest rate. It is fixedincome security and essentially a loan agreement between a bond issuer and an investor. The bondholders unlike shareholders do not have any ownership of the company or have voting rights. 

iii) Debentures

Debentures are also a type of debt instrument which is issued by companies for raising funds but they are not secured by physical assets or collateral. An investor buys debentures based on the reputations and the creditworthiness of the issuer. The interest rate on debentures is higher than that of bonds.

b. Capital Market Intermediaries 

There is a large number of intermediaries in the capital markets some of which are discussed below: 

i) Merchant Bankers 

Merchant Bankers are intermediaries between the investors and the company. They act as an advisor who advises the entrepreneurs from the stage of the conception of the project till the production begins. SEBI defines merchant bankers as “any person who is engaged in the business of issue management either by arranging for buying, selling or subscribing to securities or acting as manager, consultant or rendering corporate advisory services in relation to such issue management”.

ii) Underwriters 

When a company decides to go public to raise funds all of its securities maybe not fully subscribed by the public, so there is a need for someone who can subscribe to those securities. This work is done by the underwriter he agrees with the issuer company that in the case of securities that are not subscribed then the underwriter would subscribe to the securities itself or by others the unsubscribed securities. He is paid a fee called ‘underwriting commission’ for this job. Underwriters can be both institutional (for example IDBI, UTI) or non-institutional. All underwriters need to be registered with SEBI.

iii) Portfolio Managers or Portfolio Management Services (PMS) 

A professional who enters into a contract with the client to advise or direct or undertake investment decisions on behalf of the client. Portfolio managers are of two types discretionary portfolio managers and non-discretionary portfolio managers. When the portfolio manager manages the funds of the client independently according to the needs of the client they are called discretionary portfolio managers. Whereas non-discretionary portfolio manager manages the funds following the directions of the client. Some of the examples of major Portfolio Management Services in India are Motilal Oswal PMS, Kotak PMS, ICICI Prudential PMS, etc.

iv) Stock Brokers 

A stockbroker is an individual or firm which is an intermediary between an investor and a securities exchange. The stockbroker trades in the stock exchange on the behalf of their clients. In return for their services, they are paid commissions of fees. They handle all the paperwork and maintain records of all transaction, manages their client's portfolio and advise the investors on formulating different investment strategies in the dynamic world of financial markets. All stockbrokers are registered with the SEBI.

v) Regulator of the Capital Market /SEBI 

In India, the capital market is regulated by the Securities and Exchange Board of India (SEBI). SEBI was established in 1988 as a non -statutory body but with the passing of SEBI Act 1992, it was accorded statutory power. The major objectives of SEBI are to protect the interest of investors and development and regulation of stock exchange, to prevent deceitful malpractices and to regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc. SEBI performs various functions like registration of stock exchanges, mutual funds, underwriters, brokers and sub-brokers. Levys various fees and other charges promote investors educations, audit and inspection of stock exchanges and various intermediaries, prohibits unfair trade practices relating to the securities market and insider trading.

Question No. 2 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 2. What do you understand by business ethics? Discuss the importance of business ethics and the ethical issues involved in business.  

Business ethics are a kind of applied ethics. It is the application of moral or ethical norms to business. The term ethics has its origin from the Greek word ‘ethos’, which means character or custom- the distinguishing character, sentiment, moral nature, or guiding beliefs of a person, group, or institution. Ethics are a set of principles or standards of human conduct that govern the behaviour of individuals or organisations. Ethics can be defined as the discipline dealing with moral duties and obligations, and explanation regarding what is good or not good for others and for us. Ethics is the study of moral decisions that are made by us in the course of performance of our duties. Ethics is the study of characteristics of morals and it also deals with moral choices that are made in relationship with others. Business ethics comprises the principles and standards that guide behaviour in the conduct of business. Businesses must balance their desire to maximize profits against needs of its stakeholders. Maintaining this balance often requires trade-offs. To address these unique aspects of businesses, rules, articulated and implicit, are developed to guide the businesses to earn profits without harming individuals or society as a whole.

Now, let us understand why Corporate Ethics matter to business. Ethics matter because ethical conduct is the right conduct. However, in the absence of a time-culture, and context-neutral definition of ‘right’, it is very difficult to develop a code of conduct on this basis alone. It basically says that businesses avoid many risks and gain reputation by acting in an ethical manner. A good ethics process, operationalised in such a way that all decision making procedures and structures support it on a day-to-day basis, will give an organisation the best chance possible for finding out about potential problems early so that they can be dealt with before they become a disaster. There are also market advantages to be gained from an ethical reputation.

Ways in which Ethics are Important - Major scandals such as WorldCom, Enron, Lehman Brothers etc., in the US and Satyam in India tell us why ethical business practices are becoming increasingly important. There are several reasons why ethics are important to business:

• To understand reasons behind increasing influence of corporates in society. 
• To ensure that no harm is done to society. 
• To meet ethical expectations more effectively. 
• To enable companies to identify employee and customer concerns at an early stage.
• To improve the quality of a firm’s relationships with its key stakeholders. 

The government is interested in ensuring ethical business practices to ensure a basic level of integrity in the market place. This promotes international competitiveness of the economy and improves a country’s image concerning ease of doing business. Even domestically, predictable levels of ethical behaviour ensures that costs of business such as transaction costs, hedging and insurance etc., are kept to a minimum.

Unethical behaviour imposes costs on the government and taxpayers. Bad behaviour by a few impacts on all businesses and might also have an adverse impact on the country’s international competitiveness. Ethics can help improve decision making by providing managers with the appropriate knowledge and tools that allow them to correctly identify, diagnose, analyse, and provide solutions to the ethical problems and dilemmas they are confronted with.

Ethics help in analysing the reasons behind this, and the ways in which such problems might be dealt with by managers, and regulators in improving business ethics. Business ethics can provide us with the ability to assess the benefits and problems associated with different ways of managing ethics in organisations. Business ethics also equips us with knowledge that goes beyond the traditional boundaries of business studies.

ETHICAL ISSUES IN BUSINESS 

You have understood that business has various motives. Some of the motives are: wealth motive, profit motive, societal benefit and overall benefit of shareholders and stakeholders. The dilemma remains between striking the balance between profits and ethics. The organisations practice ethics as it bolsters their goodwill and reputation of being fair, honest and integral both at the business and the corporate level thereby, fortifying their image. Organisations expect the employees at all levels carry this legacy of identity with utmost care. Ethics provide the framework within which the organisation makes ethical investment. Ethical investment is followed in management of investment portfolio which consists of company shares. Profit is an inherent motive of business. But various economic thinkers have propagated various business motives varying from profitability, wealth, utility maximization, etc. But there are differences of opinion too. On the one hand there is the ideology of Karl Marx, according to which it is unethical to do business to accumulate wealth. On the other hand, Mahatma Gandhi believed in business but preached trusteeship according to which a businessman should look after the welfare of his employees.

Let us discuss this further with examples from various companies. In the early 1980s the Indian automobile industry had two leading brands namely the Ambassador from HM and the FIAT. The Japanese entered with Suzuki and Maruti became a household name. Subsequently we saw a lot of foreign brands like the Daewoo, Hyundai, General Motors, Toyota, etc. entering the fray. Each of these multi-national companies had their own management style and ethic orientation. Few worked on vendor relations, Research and Development aiming at cost reduction, while others worked on advertising and creating a robust distribution network. Within all this high level marketing impact the Indica model from the national brand Tata was launched. Though the model didn’t compete much with the elite MNC brands but it was able to create a significant presence for the customers who believed in Tata’s ethical philosophy. So a low advertised product also garnered a market share as the word of mouth from the customers spread fast thereby creating a brand identity for Tata.

The advantages of being ethical: 

1. Preferred by prospective employees and creation of quality talent pool. 

2. Less number of employees leaving the organisation i.e lower attrition rate. 

3. Less number of employee strike or labour unrest. 

4. Corporate goodwill enables bargaining power which results in cost reduction 

- increase in production

- achieving economies of scale

- more revenue and profits

- longer business viability. 

Question no. 1 - MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

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                            MBA and MBA (Banking & Finance)

MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Question No. 1. Define inflation. What are the different methods of measuring inflation and what are the effects of inflation.   

One of the most daunting task before economists is to define Inflation as there are multitudes of problems in penning down one definition. Therefore there is no universal definition for this problem. Many economists have given different definition like according to Coulborn, Inflation can be understood as a situation whereby “too much money chases too few goods”. A situation in which the value of money falls and price rises is inflation according to Crowther. These and other definitions have one or another deficiency. Economists are unanimous that inflation refers to a ‘persistent’ and ‘appreciable’ rise in the general price level. However, the word persistent and appreciable are not clearly defined so there is space for ambiguity. For example, whether the rate of price rise by 1 %, 5 % or 30 % is considerable or there is some other rate which is deemed to be considerable. The issue of inflation is of utmost importance because it is both boon as well as bane. A rise in prices is necessary for producers to induce them to supply more in the market. But higher prices lead to more burden on the consumer pocket and it may also create many political and social problems. So, what an economy needs is a moderate rate of inflation. This takes us to another question, what is a moderate rate of inflation? The answer to this question varies from country to country depending on the level of development. For instance, in the case of India, a committee set up by the Reserve Bank of India (RBI) to review the monetary system which is popularly known as Chakravarty Committee (1985) recommended that 4 percent rate of Inflation is desirable for India’s economic growth.

Different Methods of Measuring Inflation 

There are two common methods of measuring inflation.

Effects of Inflation 

Inflation affects almost all the economic agents of the economy be it consumer, producer or government. The favourable or unfavourable effect depends upon the rate of inflation. In this section, you will understand how does it impact the distribution of income and wealth, producers, wage earners, borrowers and lenders and some other segments of the economy. 

Impact on Income Distribution 

How will inflation affect income and wealth distribution depends upon the prices of the output which the producer produces and the prices of the inputs like labour and land. If output prices rise more than input prices, then income will be distributed in the favour of the producer or the profit earner or the employer. The plausible explanation is when the price of output rises, it translates to higher revenue and profit of the producer. So the revenue-wage gap increases and the larger share of the national income goes to the employer. The overall impact is that firm/producer who was already rich they get even richer and the poor (especially labour) get poorer.

 

Deterioration in the Value of Money 

Inflation erodes the purchasing power of money. It implies that the real wages or real income decline with a rise in prices. For example, let us suppose that the price of good X was Rs 10 per piece and you have Rs 500 as your money income. So if you spend your entire income on good X, you could buy 50 units/pieces. Now keeping other things constant the price of good X rise to Rs 20 per piece. Now the same Rs 500 can fetch you only 25 units of X good. So the currency denomination remains the same but its purchasing power reduces. You can buy fewer goods with the same income. This type of effect is most harmful to daily wage earners, persons with fixed income and employees working in the unorganised sector, as they do not have any safeguard against this price rise.

Impact on Borrowers and Lenders 

It is the borrowers who tend to gain due to inflation and lenders lose. Now suppose you are a borrower and you borrow money at the prevailing rate of inflation. Now when you repay the same amount to your lender no doubt you are paying the same amount with the rate of interest but the real value of money has reduced. More specifically you pay less in terms of purchasing power or goods and services. So you(borrower) gain and your lender losses.

 

Methods of Taming Inflation 

Monetary policy is one of the policy option and direct method of controlling inflation. Reserve Bank of India makes use of monetary policy to regulate the supply of credit in the market.

MMPC 03 - Business Environment - MBA and MBA (Banking & Finance)

Solutions to Assignments

                            MBA and MBA (Banking & Finance)

MMPC 03 - Business Environment

MMPC-003/TMA/JULY/2022

Note: Attempt all the questions and submit this assignment to the coordinator of your study centre. Last date of submission for July 2022 session is 31st October, 2022 and for January 2023 session is 30th April, 2023. 

Question No. 1. Define inflation. What are the different methods of measuring inflation and what are the effects of inflation.                                 CLICK HERE

Question No. 2. What do you understand by business ethics? Discuss the importance of business ethics and the ethical issues involved in business.                               CLICK HERE

Question No. 3. Discuss the structure of capital market in detail.                               CLICK HERE

Question No. 4. Describe the key players in the agricultural sector and discuss the role and importance of agricultural marketing.                               CLICK HERE

Question No. 5. What are the main components of Balance of Payments (BoP)? Discuss the factors affecting the BoP.                               CLICK HERE

Question No. 6. Write notes on the following:                               CLICK HERE

a) Measures to reduce barriers to foreign trade. 

b) Impact of technological environment on international business.