Business Environment and International Business Questions and Answers

Answer: C

A cartel is a type of horizontal combination.

A horizontal combination unites firms at the same stage of production in the same line of business, such as several cement makers. A cartel is an association of such independent firms that agree to fix prices, limit output, share markets or allocate quotas, so as to reduce competition among themselves while keeping their separate identities. OPEC is the best-known international example.

A vertical combination joins firms at successive stages of production, such as a steel mill and an iron ore mine. An allied (lateral) combination joins firms making related but different products, and a mixed combination joins unrelated businesses. A cartel brings together competitors in the same line, so it is horizontal.

Answer: A

Foreign equity includes ADR's (American Depository Receipts).

An American Depository Receipt is a negotiable certificate issued by a US depository bank and traded in the United States, representing a specified number of shares of a non-US company held by a custodian in the home country. An Indian company issuing ADRs is therefore raising equity capital from foreign investors, and ADRs, like Global Depository Receipts, are classed as foreign equity.

Bonds and commercial papers are debt instruments: the issuer borrows and must repay, so they create no ownership. Gold bonds are government debt securities linked to the price of gold. None of them is equity.

Answer: C

TRIPS has its greatest impact on pharmaceuticals.

Under the Patents Act, 1970, India granted only process patents for medicines, so Indian firms could legally make cheaper versions of drugs patented abroad by developing a different process. The WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights required product patents for pharmaceuticals, which India introduced through the Patents (Amendment) Act, 2005. This ended the copying of newly patented medicines and changed the business model of the Indian generic industry.

The automobile, banking and insurance, and aviation sectors are affected by trade and investment rules, but intellectual property rules do not alter them in anything like the same way.

Answer: A

The one not agreed upon by WTO members is observance of minimum labour standard.

Some developed countries wanted a 'social clause' linking trade rights to core labour standards. Developing countries, including India, opposed it as disguised protectionism, and at the Singapore Ministerial Conference of 1996 members declared that the International Labour Organization, not the WTO, is the competent body for labour standards. There is no WTO agreement on them.

The other subjects are covered by WTO agreements: intellectual property rights by TRIPS, the dispute settlement mechanism by the Dispute Settlement Understanding, and agricultural subsidies by the Agreement on Agriculture, which disciplines domestic support and export subsidies, even though negotiations to reduce them further continue.

Answer: C

The body established to help and finance the less developed countries is the IDA.

The International Development Association was set up in 1960 as the soft-loan affiliate of the World Bank. It lends to the poorest member countries on very easy terms: credits with no interest, only a small service charge, repayable over several decades with a long grace period, and also grants.

The IMF lends to members facing balance of payments difficulties and supervises the exchange rate system rather than financing development. The IBRD, the original World Bank, lends at near-market rates to middle-income and creditworthy poorer countries. The RBI is India's central bank and does not finance other countries.

Answer: C

Global depository receipts are issued by a depository bank.

When an Indian company raises money through GDRs, it issues shares to an overseas depository bank, which holds them through a domestic custodian bank in India. The depository bank then issues GDRs, each representing a fixed number of those shares, to investors abroad, and the receipts are listed on exchanges such as London or Luxembourg and traded in foreign currency.

America is not an issuer; receipts issued in the US market are ADRs. A 'depository country' is not an issuing body. Investors buy GDRs; they do not issue them.

Answer: C

It is called current account convertibility.

Current account convertibility means that domestic currency can be freely exchanged for foreign currency for current transactions: payments for imports and exports of goods and services, and remittances of factor income such as interest, dividends and wages. India made the rupee convertible on the current account in August 1994, accepting the obligations of Article VIII of the IMF's Articles of Agreement. Capital account transactions remain regulated.

Trade liberalisation and free trade concern tariffs and quotas on goods, not the freedom to make payments, and trade promotion means measures to boost exports. None of them is the name for removing restrictions on current payments.

Answer: C

SAFTA is related to SAARC.

The South Asian Free Trade Area agreement was signed at the twelfth SAARC summit in Islamabad in January 2004 and came into force in 2006. It commits the member countries of the South Asian Association for Regional Cooperation (Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka) to reduce customs duties on trade among themselves, replacing the earlier SAARC Preferential Trading Arrangement (SAPTA).

The UN has no free trade area of this name, the EU's single market is a different arrangement, and the ASEAN countries have their own AFTA, the ASEAN Free Trade Area.

Answer: B

The mechanism is hedging.

An open position is an exposure that will gain or lose as prices move. Hedging takes an offsetting position, usually in forwards, futures or options, so that a loss on the original exposure is matched by a gain on the hedge and the price risk is reduced.

A swap is one particular contract that can be used for hedging, not the general mechanism. A customised contract describes a forward's form, not its purpose. Squaring off means closing an open position by an opposite trade; it ends the exposure rather than protecting it while it is held.

Answer: A

Mercantilism was based on gold, that is, on bullion as the measure of national wealth.

The mercantilist writers of the sixteenth to eighteenth centuries held that a nation grows rich by accumulating gold and silver. Hence their policy of a favourable balance of trade: export more than you import, and the difference flows in as precious metal.

The dollar is anachronistic, since mercantilism predates it as a world currency. 'Use of money' is too general to identify the doctrine, and exchange of goods for goods is barter, the opposite of the bullion-centred view.