Question No. 5 IBO - 01 International Business Environment Mcom 1st Year

 

Solutions to Assignments

IBO-01 International Business Environment

Question No. 5 A) 

Political Risks

Geopolitical risk, also known as political risk, transpires when a country's government unexpectedly changes its policies, which now negatively affect the foreign company. These policy changes can include such things as trade barriers, which serve to limit or prevent international trade.

Some governments will request additional funds or tariffs in exchange for the right to export items into their country. Tariffs and quotas are used to protect domestic producers from foreign competition. This also can have a huge effect on the profits of an organization because it either cuts revenues from the result of a tax on exports or restricts the amount of revenues that can be earned.

Countries have implemented free-trade agreements, such as the North American Free Trade Agreement (NAFTA) and other similar measures, in an effort to reduce the number of trade barriers. However, not all of these measures are successful, and ongoing trade wars can disrupt an international company's business and market efficiency. Thus, the everyday differences in the laws of foreign countries continue to influence the profits and overall success of a company doing business transactions abroad.

Question No. 5 B) 

Alternative Dispute Resolution (ADR)

Alternative dispute resolution (ADR) is, in an insurance sense, a number of disparate processes used by companies to resolve claims and contractual disputes. Insured clients who are denied a claim are offered this course of action as a form of recourse. It is employed to avoid expensive and time-consuming litigation and arbitration.

Alternative dispute resolution (ADR) is designed to settle disputes outside of the courtroom with the help of an impartial third party. This path is generally accessible after efforts between the client and the insurer to resolve any differences between themselves fails and reaches an impasse.

Many insurance policies contain mandatory alternative dispute resolution (ADR) clauses, depending on the state. The two most common forms of alternative dispute resolution (ADR) are:

1. Mediation: An independent third party steps in to try and find a way for the insured and the insurer to agree on a mutually acceptable outcome. The mediator is not called upon to decide who is right but rather to add structure to communication between the disputing parties, so that they can, hopefully, eventually reach a resolution between themselves.
2. Arbitration: A neutral independent party called an arbitrator listens to arguments from both sides, collects evidence, and then decides on the outcome of the dispute, similar to a court ruling. Arbitration can either be non-binding or binding. The latter means the decision is final and enforceable, while the former implies that the arbitrator’s ruling is advisory and only set in stone if both parties agree to it.

Question No. 5 C) 

Wagering Agreement

Agreements entered into between parties under the condition that money is payable by the first party to the second party on the happening of a future uncertain event, and the second party to the first party when the event does not happen, are called Wagering Agreements or Wager. There should be mutual chance of profit and loss in a wagering agreement. Generally wagering agreements are void.

Wager means a bet. It is a game of chance where the probability of winning or losing is uncertain. The chance of either winning or losing is wholly dependent on an uncertain event.

Parties involved in a wagering contract mutually agree upon the nature of the agreement that either one will win. Each party stands equally to win or lose the bet. The chance of gain or the risk of loss is not one sided. If either of the parties may win but not lose, or may lose but cannot win, it is a wagering contract.

The essence of a wagering contract is that neither of the parties should have any interest in the contract other than the sum, which he will win or lose. Parties to a wagering contract focus mainly on the profit or loss they earn.

Question No. 5 D) 

Code of Ethics for International Marketing

A large amount of international trade is carried out by MNCs that are under conflicting pressures of their stakeholders. Some of the notable pressures on them are listed below.

Pressure to meet demands of consumers of their products, having apparently similar characteristics and expectations from products and services, but differing in their lifestyles and environmental factors. Pressure to meet the expectations of shareholders about rate of return on investment, requiring them to be prudent investors and to effectively handle various risks of their activities. Pressure to do effective financial management including availing all legally permissible tax benefits. Pressure to compete effectively in their markets.

A review of various pressures on major player in international trade shows the need to clearly lay down guidelines, in form of code ethics, for their employees. Such code of ethics should lay down guidelines for operating in various markets, particularly focusing on places where unethical behaviour is more common. However, as the player have been more concerned with growth and development of their business, the code of conduct has been emphasized and laid down by outside agencies such as OECD, International Chamber of commerce, International Labour Organization and UN Committee on Transnational Corporations. These codes address issues related to MNCs and their stakeholders such as host government, the public, consumers and employees.

Apart from conforming to general ethical behaviour, the ethical codes of the companies active in international trade should ensure the following.

i) Need to respect laws and regulations of the host countries and do nothing to compromise with the health and safety of consumers. US laws on product liability, a big litigation issue, is an extreme case that affects the development of new products, especially the pharmaceuticals. Such legislation makes small firms reluctant to export to USA due to prohibitive cost of litigation.

ii) Firms should not exploit the weakness in legislation in host countries such as selling products in these markets that are banned elsewhere.

 iii) The firms can be proactive and assist the governments in preventing marketing of unsafe products. However, the close relationship developed by firm with the local government, should not be misused such as gaining competitive advantage through adaptation of company's product specification, taking advantage of local lack of expertise in a particular area.

Question No. 4 IBO - 01 International Business Environment Mcom 1st Year

Solutions to Assignments

IBO-01 International Business Environment

Question No. 4 A) 

Indian foreign trade policy does not facilitate the import of technology. 

The foreign trade policy is constitutionally a set of guidelines for the import and line of goods and services. These are established by the Indian foreign trade policy does not facilitate the import of technology Directorate General of Foreign Trade (DGFT), the governing body for the advancement and facilitation of exports and contents under the Ministry of Commerce and Industry. The policy is notified for a period of five generations. It's contemporized every generation on March 31, and the changes come into effect from April 1.

The problem may lie in the low penalty assessed on companies that don't meet their line obligation. Reports say that there are cases of conscious delinquency, where companies find that it’s cheaper to import under the EPCG yea after considering government- Indian foreign trade policy does not facilitate the import of technology assessed penalties. That defeats the ambition of the scheme, which is to increase exports. The new FTP should either strengthen the being scheme or revamp it to promote exports.

The being FTP focuses on the Commodities Exports from India Scheme (MEIS)-- an blend of anterior staples creation schemes. The MEIS is constitutionally an impetus scheme, where exporters admit duty credit scrips for a chance of the value of the goods exported. These scrips can be used to pay a variety of duties and duties.

The government also has the duty disbenefit scheme (DBK) in place to help exporters. Notwithstanding, Indian foreign trade policy does not facilitate the import of technology as it stands, the DBK scheme is n’t like effective, and we'd like to see it caught in the new FTP. It offers a duty disbenefit as a chance of the exported price-- but with a cap. Effectively, this gives an exporter of extravagant, high- quality goods the same DBK as an exporter of cheap goods. The new DBK (or its substitutive) should count for the value of exports and promote it therefore.

WTO docile schemes This should be at the core of the FTP. The WTO works to discourage governments from heavily subsidizing exporters to give a ranking playing field to all nations. The Indian government is well mindful of the need to stay within the WTO morality and has before taken significant pathway to withdraw appropriation- led schemes.

Fabric breakthrough An fruitful and far-reaching fabric network-- magazines, harborages, SEZs, quality testing labs, document centers, and so on-- will help exporters stay competitive in a cut-throat demand. The Trade Fabric for Indian foreign trade policy does not facilitate the import of technology Export Sector (TIES) is a good drive set up to give backing hand for commodity fabric including cold chains, quality testing labs, havens, payload fence, and so on. TIES was launched in 2017 for three whiles.

Exports are a vital part of the country’s GDP. Foreign trade must be given sufficient weightiness and investment. Several good way have before been taken, but there’s a long way to go. Rather than take reactive makeshift measures, the Indian foreign trade policy does not facilitate the import of technology FTP could take visionary way to secure that exports are sustainable for Indian companies and in line with WTO standards. The new FTP could be one other step on the path to a vibrant, durables- led thrift.

Question No. 4 B)

ICC has no role in arbitration and conciliation. 

During the last quarter of the twentieth century, multinational mass-market arbitration has gained worldwide acceptance as the normal means of resolving multinational mass-market dissensions. National laws on arbitration have been modernised on all mainlands. International conventions on arbitration have been inked or hewed to with poignant success. ICC has no role in arbitration and conciliation. Arbitration has run part of the institute of large math of law academies. With the piecemeal junking of political and trade hedges and the quick globalisation of the world scrimping, new challenges have been created for arbitration institutions in response to the growing demand of parties for certainty and pungency, lower speed and pliantness as well as justice and efficacity in the resolution of multinational dissensions. There has been a substantial increase not only in the number of cases, their complexity, the quantities in dissension and the diversity of the parties, but also in the demands made on the process by the parties.

 Since the International Court of Arbitration was established in 1923, ICC arbitration has been constantly nourished by the experience gathered by the ICC International Court of Arbitration in the course of administering some ICC has no role in arbitration and conciliation. ten thousand multinational arbitration cases, now involving each span parties and referees from over 100 countries and from a diversity of legal, moneymaking, artistic and vocabular backgrounds.

The present ICC Rules of Arbitration, in effect as of January 1, 1998, constitute the first major review of the Rules in fresh than 20 spells, following an intense, worldwide dialogue process. The changes made are designed to reduce holdups and obliqueness and to fill certain gaps, taking into account the progress of arbitration practice. ICC has no role in arbitration and conciliation. The meat-and-potatoes features of the ICC arbitration system haven't been altered, notwithstanding, notably its universality and suppleness, as well as the central purpose played by the International Court of Arbitration in the administration of arbitral cases.

 Every ICC arbitration is conducted by an arbitral court with responsibility for examining the values of the case and rendering a final award. Each spell, ICC arbitrations are held in some 40 countries, in several languages and with referees of some 60 different races. The work of those arbitral courts is watched by the ICC International Court of Arbitration, which meets at least three (and hourly four) times a month all spell round. ICC has no role in arbitration and conciliation. Presently composed of some 65 members from over 55 countries, the Court's function is to organise and supervise arbitrations held under the ICC Rules of Arbitration. The Court must remain constantly alert to changes in the law and the practice of arbitration in all tract of the world and must put its working tacks to the evolving requirements of parties and referees. For the day-to- day regulation of cases in several languages, the ICC Court is supported by a Secretariat predicated at the headquarters of the International Chamber of Commerce, in Paris.

The current ICC Rules of Conciliation entered into force on January 1, 1988. Conciliation is a process independent of arbitration. ICC has no role in arbitration and conciliation. It remains entirely voluntary unless the parties have otherwise agreed. The ICC Rules of Arbitration don't warrant the parties to try war previous to commencing an arbitration. So, too, the Rules permit war to be tried without warranting that the nonconcurrence be related to arbitration subsequently if the war work is vain.

 The ICC recommends that all parties wishing to make reference to ICC arbitration in their contracts use the succeeding standard clause.

"All dissensuses arising out of or in connection with the present contract shall be ultimately settled under the Rules of Arbitration of the International Chamber of Commerce by one or further referees appointed in consonance with the said Rules."

Question No. 4 C) 

All contracts are agreements but all agreements are not contracts.

All Contracts are Agreements

All Contracts are agreements as for the formation of a contract, an agreement is always necessary. There cannot be a contract where there is no agreement. Without an agreement, a contract cannot be formed. Therefore, All Contracts are Agreements. 

All Agreements are not Contracts 

Only those agreements become contract which gives rise to a legal obligation. If no legal duty is enforceable by an agreement, it can never be a contract. And hence agreement is a broader term than Contract.

When Agreement becomes Contract

An agreement is regarded as a contract when it is enforceable by law. The conditions of enforceability are stated in S. 10 of the Indian contract act 1872. According to this section, an agreement becomes a contract when the agreement is made for some consideration between the parties which are competent to contract and are entering into Contract with their free consent and has a lawful objective. A lease agreement between two bodies corporate was held legal where it was signed by one only, representing both sides because he was a director in both the legal entities. 

What Agreements are Contracts?

All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void.

Question No. 4 D)

World Trade is not concentrated in a few countries and products.

Integration into the world economy has proven a powerful means for countries to promote economic growth, development, and poverty reduction. Over the past 20 years, the growth of world trade has averaged 6 percent per year, twice as fast as world output. But trade has been an engine of growth for much longer. Since 1947, when the General Agreement on Tariffs and Trade (GATT) was created, the world trading system has benefited from eight rounds of multilateral trade liberalization, as well as from unilateral and regional liberalization. Indeed, the last of these eight rounds (the so-called "Uruguay Round" completed in 1994) led to the establishment of the World Trade Organization to help administer the growing body of multilateral trade agreements.

The resulting integration of the world economy has raised living standards around the world. Most developing countries have shared in this prosperity; in some, incomes have risen dramatically. As a group, developing countries have become much more important in world trade—they now account for one-third of world trade, up from about a quarter in the early 1970s. Many developing countries have substantially increased their exports of manufactures and services relative to traditional commodity exports: manufactures have risen to 80 percent of developing country exports. Moreover, trade between developing countries has grown rapidly, with 40 percent of their exports now going to other developing countries.

However, the progress of integration has been uneven in recent decades. Progress has been very impressive for a number of developing countries in Asia and, to a lesser extent, in Latin America. These countries have become successful because they chose to participate in global trade, helping them to attract the bulk of foreign direct investment in developing countries. This is true of China and India since they embraced trade liberalization and other market-oriented reforms, and also of higher-income countries in Asia—like Korea and Singapore—that were themselves poor up to the 1970s.

But progress has been less rapid for many other countries, particularly in Africa and the Middle East. The poorest countries have seen their share of world trade decline substantially, and without lowering their own barriers to trade, they risk further marginalization. About 75 developing and transition economies, including virtually all of the least developed countries, fit this description. In contrast to the successful integrators, they depend disproportionately on production and exports of traditional commodities. The reasons for their marginalization are complex, including deep-seated structural problems, weak policy frameworks and institutions, and protection at home and abroad.

Question No. 3 IBO - 01 International Business Environment Mcom 1st Year

 Solutions to Assignments 

IBO-01 International Business Environment

Question No. 3 A) 

Every business organization is a part of the business environment, within which it operates. No entity can function in isolation because there are many factors that closely or distantly surrounds the business, which is known as a business environment. It is broadly classified into two categories, i.e. microenvironment, and macro environment. The former affects the working of a particular business only, to which they relate to, while the latter affects the functioning of all the business entities, operating in the economy.

The following are the major difference between micro and macro environment:

1. The microenvironment is the environment which is in immediate contact with the firm. The environment which is not specific to a particular firm but can influence the working of all the business groups is known as Macro Environment.

2. The factors of the microenvironment affect the particular business only, but the macro-environmental factors affect all the business entities.

3. The microenvironmental factors are controllable by the business but to some extent only. However, the macroeconomic variables are uncontrollable.

4. The elements of the microenvironment affect directly and regularly to the firm which is just opposite in the case of the macro environment.

5. The study of the microenvironment is described as COSMIC analysis. Conversely, PESTLE Analysis is a study of the macro environment.

Question No. 3 B) 

 Fixed exchange rate and flexible exchange rate are two exchange rate systems, differ in the sense that when the exchange rate of the country is attached to the another currency or gold prices, is called fixed exchange rate, whereas if it depends on the supply and demand of money in the market is called flexible exchange rate.

The depreciation of Indian Rupee against US dollar is the common headline of almost all news dailies, since past few years. Not only India but the primary concern of the monetary policy of all the countries focus on stabilising the exchange rate. However, still, a major section of society is unaware about currency fluctuations in the international market, as they do not have sufficient knowledge.

The following points are noteworthy so far as the difference between fixed and flexible exchange rates is concerned:

1. The exchange rate which the government sets and maintains at the same level is called fixed exchange rate. The exchange rate that variates with the variation in market forces is called flexible exchange rate.

2. The fixed exchange rate is determined by government or the central bank of the country. On the other hand, the flexible exchange rate is fixed by demand and supply forces.

3. In fixed exchange rate regime, a reduction in the par value of the currency is termed as devaluation and a rise as the revaluation. On the other hand, in the flexible exchange rate system, the decrease in currency price is regarded as depreciation and increase, as appreciation.

4. Speculation is common in the flexible exchange rate. Conversely, in the case of fixed exchange rate speculation takes place when there is a rumour about change in government policy.

5. In fixed exchange rate, the self-adjusting mechanism operates through variation in the supply of money, domestic interest rate and price. As opposed to the flexible exchange rate that operates to remove external instability by the change in forex rate.

Question No. 3 C)

General Agreement on Tariffs and Trade (GATT) was made in the year 1947, that aimed at initiating an international trade, by liberalizing policies and removing tariffs. It was succeeded by World Trade Organization (WTO), which is a global organization, that encourages and facilitates inter-country trade and also helps in resolving trade disputes.

GATT is a multilateral agreement, between several nations of the world, that regulates international trade. Its primary objective is to reduce tariffs to a substantial amount along with abolishing other trade barriers. But, in the year 1995, WTO replaced GATT. WTO has more powers and augmented functions in dealing with the international economic affairs.

The points given below explain the difference between GATT and WTO in detail:

1. GATT refers to an international multilateral treaty, signed by 23 nations to promote international trade and remove cross-country trade barriers. On the contrary, WTO is a global body, which superseded GATT and deals with the rules of international trade between member nations.

2. While GATT is a simple agreement, there is no institutional existence, but have a small secretariat. Conversely, WTO is a permanent institution along with a secretariat.

3. The participating nations are called as contracting parties in GATT, whereas for WTO, they are called as member nations.

4. GATT commitments are provisional in nature, which after 47 years the government can make a choice to treat it as a permanent commitment or not. On the other hand, WTO commitments are permanent, since the very beginning.

5. The scope of WTO is wider than that of WTO in the sense that the rules of GATT are applied only when the trade is made in goods. As opposed to, WTO whose rules are applicable to services and aspects of intellectual property along with the goods.

6. GATT agreement is primarily multilateral, but plurilateral agreement is added to it later. In contrast, WTO agreements are purely multilateral.

7. The domestic legislation is allowed to continue in GATT, while the same is not possible in the case of WTO.

8. The dispute settlement system of GATT was slower, less automatic and susceptible to blockages. Unlike WTO, whose dispute settlement system is very effective.

Question No. 3 D)

A major point of distinction between a domestic and export contract lies in identifying the proper law governing the export contract. This is not a problem for domestic sales contracts because the proper law will always be the Indian law in India. It will be the respective national laws in each country so far as their domestic transactions are concerned. But in export transactions, there are two nations, that of the exporter and importer. Therefore, the question arises, which country’s law will apply to an export contract.

This is a very complex problem but the principle generally followed is that the parties to the contract may agree mutually about the applicability of particular country’s law. The country chosen must be either that of the exporter or the importer. In special circumstances, a third country’s law may be chosen, provided that the country has something to do with the contract. For example, that may be the country where the goods will be re-exported by the importer subsequently. Only when the parties fail to mention the applicable law and a dispute arises later on, the court will decide which law should apply.

Each country’s law has developed a set of rules which the courts consider while deciding on this issue. This is commonly known as ‘conflict of laws’ situation. Some of the factors considered by the courts are: the place where the contract is signed, the language the contract is written, the place of business of the parties, etc. However, these days, the courts normally identify as ‘proper law, i.e., the law applicable to the contract (as the one where the contract is to be carried. out, i.e., the place where the delivery is to take place). Since in most export transactions, delivery IS made n the exporter’s country (normally when the goods are placed on the carrier in the exporter’s country), the applicable law becomes the exporting countries law.

Question No. 2B) IBO - 01 International Business Environment Mcom 1st Year

Solutions to Assignments 

IBO-01 International Business Environment

Solutions to Question No. 2 (B)

• Advantages of Foreign Direct Investment.

1. Economic Development Stimulation. 

Foreign direct investment can stimulate the target country’s economic development, creating a more conducive environment for you as the investor and benefits for the local industry.

2. Easy International Trade.

Commonly, a country has its own import tariff, and this is one of the reasons why trading with it is quite difficult. Also, there are industries that usually require their presence in the international markets to ensure their sales and goals will be completely met. With FDI, all these will be made easier.

3. Employment and Economic Boost. 

Foreign direct investment creates new jobs, as investors build new companies in the target country, create new opportunities. This leads to an increase in income and more buying power to the people, which in turn leads to an economic boost.

4. Development of Human Capital Resources. 

One big advantage brought about by FDI is the development of human capital resources, which is also often understated as it is not immediately apparent. Human capital is the competence and knowledge of those able to perform labor, more known to us as the workforce. The attributes gained by training and sharing experience would increase the education and overall human capital of a country. Its resource is not a tangible asset that is owned by companies, but instead something that is on loan. With this in mind, a country with FDI can benefit greatly by developing its human resources while maintaining ownership.

5. Tax Incentives. 

Parent enterprises would also provide foreign direct investment to get additional expertise, technology and products. As the foreign investor, you can receive tax incentives that will be highly useful in your selected field of business.

6. Resource Transfer. 

Foreign direct investment will allow resource transfer and other exchanges of knowledge, where various countries are given access to new technologies and skills.

• Disadvantages of Foreign Direct Investment

1. Hindrance to Domestic Investment. 

As it focuses its resources elsewhere other than the investor’s home country, foreign direct investment can sometimes hinder domestic investment.

2. Risk from Political Changes. 

Because political issues in other countries can instantly change, foreign direct investment is very risky. Plus, most of the risk factors that you are going to experience are extremely high.

3. Negative Influence on Exchange Rates. 

Foreign direct investments can occasionally affect exchange rates to the advantage of one country and the detriment of another.

4. Higher Costs. 

If you invest in some foreign countries, you might notice that it is more expensive than when you export goods. So, it is very imperative to prepare sufficient money to set up your operations.

5. Economic Non-Viability. 

Considering that foreign direct investments may be capital-intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable.

6. Expropriation. 

Remember that political changes can also lead to expropriation, which is a scenario where the government will have control over your property and assets.

• Role of FDI in economic development 

FDI plays an important role in the economic development of a country. The capital inflow of foreign investors allows strengthening infrastructure, increasing productivity and creating employment opportunities in India. Additionally, FDI acts as a medium to acquire advanced technology and mobilize foreign exchange resources. Availability of foreign exchange reserves in the country allows RBI (the central banking institution of India) to intervene in the foreign exchange market and control any adverse movement in order to stabilize the foreign exchange rates. As a result, it provides a more favourable economic environment for the development of Indian economy.

The Indian government has initiated steps to promote FDI as they set an investor-friendly policy where most of the sectors are open for FDI under the automatic route (meaning no need to take prior approval for investment by the Government or the Reserve Bank of India). The FDI policy is reviewed on a continuous basis with the purpose that India remains an investor-friendly and attractive FDI destination. FDI covers various sectors such as Defence, Pharmaceuticals, Asset Reconstruction Companies, Broadcasting, Trading, Civil Aviation, Construction and Retail, etc.

In the Union Budget 2018, the cabinet approved 100% FDI under the automatic route for single-brand retail trading. Under this change, the non-resident entity is permitted to commence retail trading of ‘single brand’ product in India for a particular brand. Additionally, the Indian government has also permitted 100% FDI for construction sector under the automatic route. Foreign airlines are permitted to invest up to 49% under the approval route in Air India.

The main purpose of these relaxations in foreign investment by the government is to bring international best practices and employee the latest technologies which propel manufacturing sector and employment generation in India. To boost manufacturing sector with a focus on ‘Make in India’ initiative, the government has allowed manufacturers to sell their products through the medium of wholesale and retail, including e-commerce under the automatic route.

Question No. 2A) IBO - 01 International Business Environment Mcom 1st Year

 

Solutions to Assignments 

IBO-01 International Business Environment

Solutions to Question No. 2 (A)

The main cause of the disequilibrium in the balance of payments arises from imbalance between exports and imports of goods and services. When for one reason or another exports of goods and services of a country are smaller than their imports, disequilibrium in the balance of payments is the likely result.

When the prices of goods are high in the country, its exports are discouraged and imports encouraged. If it is not matched by other items in the balance of payments, disequilib­rium emerges.

• Cyclical Disequilibrium:

Cyclical disequilibrium is caused by the fluctuations in the economic activity or what are known as trade cycles. During the periods of prosperity, prices of goods fall and incomes of the people go down. These changes in incomes of the people and prices of goods affect exports and imports of goods and thereby influence the balance of payments.

“If prices rise in prosperity and decline in depression, a country with a price elasticity for imports greater than unity will experience a tendency for a decline in the value of imports in prosperity, while those for which imports price elasticity is less than one will experience a tendency for increase. These tendencies may be overshadowed by the effects of income changes, of course. Conversely, as prices decline in depression, the elastic demand will bring about an increase in imports, the inelastic demand a decrease.”

• Secular or Long-Run Disequilibrium:

Secular (long-run) disequilibrium in balance of payments occurs because of long-run and deep-seated changes in an economy as it develops from one stage of growth to another. The current account in the balance of payments follows a varying pattern from one stage to another.

In the initial stages of development, domestic investment exceeds domestic savings and imports exceed exports. Disequilibrium arises due to lack of sufficient funds available to finance the import surplus, or the import surplus is not covered by available capital from abroad.

Then comes a stage of growth when domestic savings tend to exceed domestic investment and export outrun imports. Disequilibrium may result because the long-term capital outflow falls short of the surplus savings or because surplus savings exceed the amount of investment opportunities abroad. At a still later stage of growth domestic savings tend to equal domestic investment and long-term capital movements are on balance, zero.

• Technological Disequilibrium:

Technological disequilibrium in the balance of payments is caused by various technological changes. Technological changes involve inventions or innovations of new goods or new tech­niques of production. These technological changes affect the demand for goods and productive factors which in turn influence the various items in the balance of payments. Each technological change implies a new comparative advantage to which a country adjusts to.

The innovation leads to increased exports if it is a new good and export-biased innovation. The innovation may lead to decline in imports if it is import-biased. This will create disequilibrium. A new equilibrium will require either increased imports or reduced exports.

• Structural Disequilibrium:

Let us see how the structural type of disequilibrium is caused. “Structural disequilibrium at the goods level occurs, when a change in demand or supply of exports alters a previously existing equilibrium, or when a change occurs in the basic circumstances under which income is earned or spent abroad, in both cases without the requisite parallel changes elsewhere in the economy.”

A change in supply may also cause a structural disequilibrium. Suppose Indian jute crop falls because of the change in the shift in the crop-pattern, Indian jute exports will fall and disequilibrium will be created. Apart from goods, a loss of service income may also upset the balance-of-payments position on current account.

Here we detail about the four methods adopted to correct disequilibrium in balance of payments.

1. Trade Policy Measures: Expanding Exports and Restraining Imports:

Trade policy measures to improve the balance of payments refer to the measures adopted to promote exports and reduce imports.

Exports may be encouraged by reducing or abolishing export duties and lowering the interest rate on credit used for financing exports. Exports are also encour­aged by granting subsidies to manufacturers and exporters.

Therefore, India had to face great difficulties with regard to balance of payments. At several occasions it approached IMF to bail it out of the foreign exchange crisis that emerged as a result of huge deficits in the balance of payments. At long last, economic crisis caused by persistent deficits in balance of payments forced India to introduce structural reforms to achieve a long-lasting solution of balance of payments problem.

2. Expenditure-Reducing Policies:

The important way to reduce imports and thereby reduce deficit in balance of payments is to adopt monetary and fiscal policies that aim at reducing aggregate expenditure in the economy. The fall in aggregate expenditure or aggregate demand in the economy works to reduce imports and help in solving the balance of payments problem.

3. Expenditure – Switching Policies: Devaluation:

A significant method which is quite often used to correct fundamental disequilibrium in balance of payments is the use of expenditure-switching policies. Expenditure switching policies work through changes in relative prices. Prices of imports are increased by making domestically produced goods relatively cheaper. Expenditure switching policies may lower the prices of exports which will encourage exports of a country. In this way by changing relative prices, expenditure-switching poli­cies help in correcting disequilibrium in balance of payments.

The important form of expenditure switching policy is the reduction in foreign exchange rate of the national currency, namely, devaluation. By devaluation we mean reducing the value or exchange rate of a national currency with respect to other foreign currencies. It should be remembered that devaluation is made when a country is under fixed exchange rate system and occasionally decides to lower the exchange rate of its currency to improve its balance of payments.

Under the Bretton Woods System adopted in 1946, fixed exchange rate system was adopted, but to correct fundamen­tal disequilibrium in the balance of payments, the countries were allowed to make devaluation of their currencies with the permission of IMF. Now, Bretton Woods System has been abandoned and most of the countries of the world have floated their currencies and have thus adopted the system of flexible exchange rates as determined by market forces of demand for and supply of them.

4. Exchange Control:

We know that deflation is dangerous; devalu­ation has a temporary effect and may provoke others also to devalue. Devaluation also hits the prestige of a country. These methods are, therefore, avoided and instead foreign exchange is controlled by the government.

Under it, all the exporters are ordered to surrender their foreign exchange to the central bank of a country and it is then rationed out among the licensed importers. None else is allowed to import goods without a licence. The balance of payments is thus rectified by keeping the imports within limits.

After the Second War World a new international institution’ International Monetary Fund (IMF)’ was set up for maintaining equilibrium in the balance of payments of member countries for a short term. Member countries borrow from it for a short period to maintain equilibrium in the balance of payments. IMF also advises member countries how to correct fundamental disequilibrium in the balance of Payments when it does arise. It may, however, be mentioned here that no country now needs to be forced into deflation (and so depression) to root out the causes underlying disequilib­rium as had to be done under the gold standard. On the contrary, the IMF provides a mechanism by which changes in the rates of foreign exchange can be made in an orderly fashion.