UGC NET Commerce Business Environment and International Business Syllabus

State Adam Smith's Theory of Absolute Advantage.

A country should specialize in producing and exporting goods it can produce more efficiently (at lower absolute cost) than others, and import goods that other countries produce more efficiently.

State David Ricardo's Theory of Comparative Advantage.

A country gains from trade by specializing in goods where it has the lowest opportunity cost (greatest relative efficiency), even if it has an absolute disadvantage in all goods.

What does the Heckscher-Ohlin (factor endowment) theory state?

A country will export goods that intensively use its abundant and cheap factors of production and import goods that use its scarce factors—trade arises from differences in factor endowments.

What is the Leontief Paradox?

Wassily Leontief's finding that the USA, a capital-abundant country, exported labour-intensive goods and imported capital-intensive goods—contradicting the prediction of the Heckscher-Ohlin theory.

Explain Vernon's Product Life Cycle theory of international trade.

Products pass through stages—new product, maturing product, and standardized product. Production initially occurs in the innovating (developed) country, then shifts to other developed countries and finally to developing countries as the product standardizes.

What is Michael Porter's Diamond model of national competitive advantage?

A nation's competitiveness rests on four determinants: factor conditions; demand conditions; related and supporting industries; and firm strategy, structure and rivalry—plus government and chance as influencing factors.

Why do governments intervene in international trade?

To protect infant/domestic industries and employment, safeguard national security, correct balance of payments deficits, raise revenue, retaliate against unfair practices (dumping), and protect consumers.

Differentiate between tariff and non-tariff barriers to trade.

Tariff barriers are taxes/duties levied on imports or exports (e.g., customs duty). Non-tariff barriers are non-tax restrictions such as quotas, licensing, embargoes, subsidies, and technical/health standards.

Distinguish a quota from a tariff.

A tariff is a tax on imported goods that raises their price; a quota is a physical limit on the quantity of a good that may be imported during a given period.

What is 'dumping' in international trade?

Selling goods in a foreign market at a price below the normal/home-market price (or below cost of production) to capture market share or dispose of surplus; countered with anti-dumping duties.

What is the objective of India's Foreign Trade Policy (FTP)?

To promote exports of goods and services, generate employment, increase value addition, and make India a major player in world trade—administered by the DGFT under the Ministry of Commerce and Industry.

Which authority formulates and administers India's Foreign Trade Policy?

The Directorate General of Foreign Trade (DGFT) under the Ministry of Commerce and Industry, under powers of the Foreign Trade (Development and Regulation) Act, 1992.

Name two key export promotion schemes under India's Foreign Trade Policy.

RoDTEP (Remission of Duties and Taxes on Exported Products) and Advance Authorisation Scheme; also EPCG (Export Promotion Capital Goods) and SEZ/EOU schemes.

Define Foreign Direct Investment (FDI).

Investment by a firm or individual in one country into business interests in another country, typically by acquiring a lasting management interest (usually 10% or more of voting power) or establishing operations abroad.

Differentiate FDI from Foreign Portfolio Investment (FPI).

FDI involves a lasting interest and management control in a foreign enterprise (long-term, less liquid). FPI is investment in financial assets (shares, bonds) without control, is short-term oriented, more liquid and volatile ('hot money').

Distinguish between horizontal and vertical FDI.

Horizontal FDI replicates the same business activity abroad (same product/stage). Vertical FDI invests in a different stage of the supply chain abroad—backward (toward inputs) or forward (toward distribution/markets).

What are the two routes for FDI into India?

The Automatic Route (no prior government approval needed up to permitted limits) and the Government/Approval Route (prior approval of the concerned ministry/department required).

What is greenfield investment versus brownfield (M&A) investment?

Greenfield investment establishes entirely new facilities/operations from the ground up in a foreign country. Brownfield investment acquires or merges with existing facilities (mergers and acquisitions).

Define the Balance of Payments (BOP).

A systematic record of all economic transactions between residents of a country and the rest of the world during a given period, typically a year.

What are the two main accounts of the Balance of Payments?

The Current Account (trade in goods and services, income, and current transfers) and the Capital (and Financial) Account (capital transfers and financial flows like FDI, FPI, loans).

What is included in the current account of the BOP?

Exports and imports of goods (visible trade/balance of trade), services (invisibles), primary income (compensation, investment income), and secondary income (unilateral transfers like remittances).

Differentiate the Balance of Trade (BOT) from the Balance of Payments (BOP).

BOT records only the difference between exports and imports of visible goods. BOP is broader, recording all international transactions including goods, services, income and capital flows—so BOT is one component of BOP.

Why does the Balance of Payments always balance in accounting terms?

It is recorded on the double-entry system, so total credits equal total debits; any imbalance in autonomous transactions is offset by accommodating transactions (official reserves), making the overall BOP balance.

What is regional economic integration?

An arrangement among countries in a geographic region to reduce or remove trade and investment barriers among themselves to promote the free flow of goods, services and factors of production.

List the stages of regional economic integration in increasing order.

Preferential Trade Area, Free Trade Area, Customs Union, Common Market, Economic (and Monetary) Union, and full Political/Economic Integration.

Differentiate a Free Trade Area from a Customs Union.

In a Free Trade Area members remove tariffs among themselves but keep their own external tariffs (e.g., NAFTA/USMCA). In a Customs Union members also adopt a common external tariff against non-members.

Name the major international economic institutions established at Bretton Woods (1944).

The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD, part of the World Bank Group).

What is the primary function of the International Monetary Fund (IMF)?

To ensure stability of the international monetary system by promoting exchange rate stability, facilitating balanced growth of trade, and providing short-term financial assistance to members facing balance of payments problems.

When was the World Trade Organization (WTO) established and what did it replace?

The WTO was established on 1 January 1995, replacing the General Agreement on Tariffs and Trade (GATT) of 1947, as the outcome of the Uruguay Round of negotiations.

State two core principles of the WTO trading system.

Most Favoured Nation (MFN)—treating all trading partners equally—and National Treatment—treating foreign and domestic goods/services equally once they enter the market; plus transparency and progressive trade liberalization.