TRADE THEORY PATTERN OF SPECIALIZATION & FDI A REMOVER OF BOP CONSTRAINTS

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MASTER OF COMMERCE – M.Com First Year (IBO) Solved Assignments for July 2019 and January 2020 Admission Cycles

IBO Tutor Marked Solved Assignment

Course Code : IBO – 01
Course Title : International Business Environment
Assignment Code : IBO-01/TMA/2019-20

Coverage : All Blocks

IBO – 01 International Business Environment Solved Assignment for 2019-20

Q4.) Comment on the following statements.

  i) The trade theory does not explain the pattern of specialization.

Ans: The following statement is incorrect as the pattern of specialization is at the core of international trade theory. A consequence of international trade is that countries are not required to produce all their consumption goods, instead they can specialize in the production of certain goods in exchange for others. Trade theory offers different explanations of how countries specialize in the number and sales volume of goods.

Example: India produces garments,gems and jewellery & other products and the USA produces computer parts and other machines.India may or may not produce computer parts and machines which USA will produce and similarly USA may or may not produce garments and gems & jewellery in which India has specialized.

 ii) FDI is not a remover of balance of payments constraints. 

Ans: The following statement is incorrect as FDI provides inflow of foreign exchange resource and removes the constraints on balance of payments. A large number of developing countries suffer from balance of payments deficits since  their need for foreign exchange is normally far in excess of their ability to earn. FDI is accounted as credit entry in financial account of balance of payment (BOP) thus having direct positive impact on BOP.

FDI has a distinct advantage over the external borrowings considered from the balance of payments point of view. In case of external borrowings, the governments or corporations have to adhere to a contractual pre-determined schedule to pay interest and repay the principal amount.