Exercise Solutions Available
Step-by-step answers for all textbook questions in this chapter
Facilitators of International Business — Exercise Solutions
I. Choose the Correct Answer (Text Book Back)
Q1. GATT was signed on
(a) 30-October-1947 ✓ (b) 1-January-1948 (c) 1-January-1995 (d) 15-April-1994
The General Agreement on Tariffs and Trade (GATT) was signed on 30th October 1947 at Geneva by 23 countries. It came into effect on 1st January 1948 and was later replaced by the WTO on 1st January 1995.
Q2. WTO was established on
(a) 30-October-1947 (b) 30-December-1994 (c) 1-1-1995 ✓ (d) 1-1-1948
The World Trade Organisation (WTO) was established on 1st January 1995, replacing the General Agreement on Tariffs and Trade (GATT). It currently has 164 member countries and is headquartered in Geneva, Switzerland.
Q3. The headquarter of WTO is located at
(a) New York (b) Washington DC (c) Geneva ✓ (d) London
The headquarters of the WTO is located in Geneva, Switzerland. It serves as the administrative centre for all WTO activities, including trade negotiations, dispute settlement, and policy reviews.
Q4. The day to day administration of WTO is entrusted with
(a) Ministerial Conference (b) General Council ✓ (c) Dispute Settlement Body (d) Trade Policy Review Body
The General Council is entrusted with the day-to-day administration of the WTO. It is composed of representatives of all member countries and meets regularly to carry out the functions of the WTO between Ministerial Conference sessions.
Q5. World Bank is located at
(a) Washington DC ✓ (b) New York (c) Geneva (d) London
The World Bank (IBRD) is headquartered in Washington DC, USA. It was set up in 1944 to reconstruct war-affected European countries and now assists developing nations with financial and technical assistance.
Additional MCQs
Q1. The main function of WTO is
(a) Regulating international finance (b) Providing loans to developing countries (c) Facilitating multi-lateral trade relations ✓ (d) Promoting regional cooperation
The main function of the WTO is to facilitate multi-lateral trade relations among nations. It ensures that global trade commences smoothly, freely, and predictably by providing a framework for trade negotiations and dispute resolution.
Q2. Which Indian city has been chosen by the World Bank for setting up its back-office operations?
(a) Mumbai (b) Chennai ✓ (c) Bengaluru (d) Hyderabad
Chennai has been chosen by the World Bank for setting up its back-office operations, making it an important centre for World Bank's administrative and support functions in India.
Q3. Regarding IMF, which statement is correct?
(a) It is a specialized agency of the United Nations (b) It provides long-term loans to member countries (c) It promotes free trade among nations (d) It can grant loans to the central bank of a country ✓
The IMF can grant loans to the central bank of a country to help it overcome balance of payments difficulties. The IMF provides temporary financial assistance to member countries facing short-term balance of payments problems.
Q4. The headquarters of IMF and World Bank are located at
(a) New York (b) Geneva (c) London (d) Washington ✓
Both the IMF and the World Bank are headquartered in Washington DC, USA. They were both established at the Bretton Woods Conference in 1944 and have their offices in the same city.
Q5. SDR facility is available at
(a) World Bank (b) IMF ✓ (c) WTO (d) SAARC
The Special Drawing Rights (SDR) facility is available at the IMF. SDR was created by the IMF in 1969 as a supplementary international reserve asset to support the Bretton Woods fixed exchange rate system.
Q6. SAARC was established on
(a) 1985 ✓ (b) 1986 (c) 1990 (d) 1995
SAARC (South Asian Association for Regional Cooperation) was established on 8th December 1985 at Dhaka, Bangladesh. It was founded to promote economic and regional cooperation among South Asian countries.
Q7. ICSID was set up in the year
(a) 1960 (b) 1964 (c) 1966 ✓ (d) 1970
ICSID (International Centre for Settlement of Investment Disputes) was set up in 1966. It is an international arbitration institution that facilitates settlement of investment disputes between states and nationals of other states.
Q8. The headquarters of IFC was situated in
(a) New York (b) Washington ✓ (c) Geneva (d) London
The IFC (International Finance Corporation) is headquartered in Washington DC, USA. It was established in 1956 as a member of the World Bank Group and focuses on private sector development in developing countries.
Q9. The number of countries as members in IFC are
(a) 150 (b) 172 (c) 175 (d) 184 ✓
The IFC has 184 member countries. It is the largest global development institution focused exclusively on the private sector in developing countries.
Q10. SAARC has been established for promoting the welfare of people of
(a) Africa (b) Europe (c) Asia ✓ (d) America
SAARC has been established for promoting the welfare of the people of Asia (specifically South Asia). It aims to accelerate economic growth, social progress, and cultural development in the South Asian region.
II. Very Short Answer Questions
Q1. What is WTO?
The World Trade Organisation (WTO) was established on 1st January 1995, replacing the General Agreement on Tariffs and Trade (GATT). It is an international organisation that deals with the global rules of trade between nations. With 164 member countries, the WTO ensures that global trade commences smoothly, freely, and predictably. It is headquartered in Geneva, Switzerland.
Q2. What do you mean by World Bank?
The World Bank, formally known as the International Bank for Reconstruction and Development (IBRD), was set up in 1944. Its initial purpose was to reconstruct and rehabilitate war-affected European countries after World War II. It now assists developing nations by providing financial and technical assistance for development projects. The World Bank is located in Washington DC, USA, and is part of the United Nations system.
Q3. What are Special Drawing Rights?
Special Drawing Rights (SDR) were created by the IMF in 1969 as a supplementary international reserve asset. They are described as "paper gold" because they serve as an additional reserve asset that member countries can use to settle their international payment obligations. The SDR basket currently consists of five currencies: the US dollar, Euro, Chinese Renminbi, Japanese Yen, and British Pound sterling. The value of SDR is posted daily on the IMF website.
Q4. What is SAARC?
SAARC stands for South Asian Association for Regional Cooperation. It is a regional inter-governmental organisation established on 8th December 1985 at Dhaka, Bangladesh. Its members are Afghanistan, Bangladesh, Bhutan, India, Nepal, Sri Lanka, Pakistan, and Maldives. SAARC aims to promote the welfare of the people of South Asia, accelerate economic growth, social progress, and cultural development in the region.
Q5. What is GATT?
GATT stands for General Agreement on Tariffs and Trade. It was signed at Geneva on 30th October 1947 by 23 countries and came into effect on 1st January 1948. GATT was a multilateral agreement that provided the framework for international trade regulation and aimed to reduce tariffs and other trade barriers. It was replaced by the World Trade Organisation (WTO) on 1st January 1995.
Q6. Write the meaning of Agreement of Agriculture (AOA).
The Agreement on Agriculture (AOA) under the WTO framework ensured free and fair trade in agriculture. It required developed countries to reduce customs duties on agricultural imports and subsidies on agricultural exports. Developing countries were exempted from making reciprocal offers, recognising their need for food security and rural development. The AOA aimed to create a fair and market-oriented agricultural trading system.
Q7. What is IFC?
The International Finance Corporation (IFC) is an international financial institution and member of the World Bank Group. Established in 1956 and headquartered in Washington DC, it has 184 member countries. The IFC offers advisory services and investment capital to build the private sector in developing countries. It focuses on promoting private sector investment, mobilising capital in international financial markets, and providing advisory services to businesses and governments.
III. Short Answer Questions
Q1. What is the primary motive for the establishment of WTO?
The primary motive for the establishment of the WTO is to ensure that global trade commences smoothly, freely, and predictably. The WTO focuses on:
- Governing international trade through negotiated agreements
- Settling trade disputes between member countries
- Stimulating economic growth and development
- Creating peace and stability through trade relations
- Providing a platform for trade negotiations and policy reviews
- Ensuring that developing countries benefit from global trade
Q2. Name the affiliates of World Bank.
The affiliates of the World Bank are:
1. IDA (International Development Association): Provides interest-free loans (called credits) and grants to the poorest developing countries. 2. IFC (International Finance Corporation): Promotes private sector investment in developing countries through financing and advisory services. 3. MIGA (Multilateral Investment Guarantee Agency): Provides political risk insurance and credit enhancement guarantees to attract foreign direct investment. 4. ICSID (International Centre for Settlement of Investment Disputes): Facilitates the settlement of investment disputes between states and nationals of other states through conciliation and arbitration.
Q3. What are the criticisms of the World Bank?
The main criticisms of the World Bank are:
1. Conditionality: The World Bank imposes strict conditions on borrower countries, including structural adjustment programmes that may adversely affect the poor and vulnerable sections of society. 2. Failure to resolve economic problems: Despite decades of lending, many developing countries continue to face persistent economic problems such as poverty, inequality, and debt. 3. Undemocratic governance structure: The governance structure of the World Bank is dominated by industrialised countries, particularly the United States, which holds significant voting power. This means developing countries have limited influence over the Bank's policies and decisions.
Q4. How is the value of SDR determined currently?
The value of SDR is determined based on a basket of five major international currencies:
1. US Dollar — the dominant reserve currency 2. Euro — the common currency of the European Union 3. Chinese Renminbi — included since 2016, reflecting China's growing economic importance 4. Japanese Yen — a major Asian currency 5. British Pound Sterling — a historically significant reserve currency
The SDR value is posted daily on the IMF website. The weights of these currencies are reviewed every five years by the IMF. Members can exchange SDR for freely usable currencies in the foreign exchange market or through voluntary arrangements with other member countries.
Q5. Mention the functions of SAARC.
The functions of SAARC include:
1. Monitoring and coordinating development programmes: SAARC monitors the implementation of various regional development programmes and coordinates activities among member states. 2. Determining inter-sectorial priorities: It identifies and determines priorities across different sectors such as agriculture, health, education, and trade. 3. Mobilizing cooperation within and outside the region: SAARC mobilises cooperation among member countries and also with other regional and international organisations. 4. Dealing with modalities of financing: It deals with the financing mechanisms for regional projects and programmes.
Q6. Explain TRIPS.
TRIPS (Trade-Related Aspects of Intellectual Property Rights) is an international agreement administered by the WTO that sets out minimum standards of protection for intellectual property rights. It covers seven areas of intellectual property:
1. Copyright — protection for literary, artistic, and musical works 2. Trademark — protection for brand names, logos, and symbols 3. Geographical Indication — protection for products originating from specific regions (e.g., Darjeeling Tea) 4. Industrial Design — protection for the visual design of products 5. Patent — protection for inventions and innovations 6. Layout Design of Integrated Circuits — protection for semiconductor chip designs 7. Undisclosed Information — protection for trade secrets and confidential business information
TRIPS ensures that intellectual property rights are protected across member countries, promoting innovation while balancing the interests of creators and users.
Q7. Write a short note on MIGA.
MIGA (Multilateral Investment Guarantee Agency) is an international financial institution and member of the World Bank Group. It offers political risk insurance and credit enhancement guarantees to investors and lenders. MIGA's primary purpose is to protect foreign direct investment against political and non-commercial risks in developing countries. By providing guarantees, MIGA encourages private sector investment in developing nations, thereby promoting economic growth and development. It is headquartered in Washington DC.
Q8. What are the objectives of IMF?
The key objectives of the IMF are:
1. Promoting international monetary cooperation: The IMF promotes international monetary cooperation through a permanent institution that provides a framework for consultation and collaboration on international monetary problems.
2. Ensuring balanced international trade: It facilitates the expansion and balanced growth of international trade, contributing to the promotion and maintenance of high levels of employment and real income.
3. Ensuring exchange rate stability: The IMF promotes exchange rate stability, maintains orderly exchange arrangements among members, and avoids competitive exchange rate depreciation.
IV. Long Answer Questions
Q1. Point out the objectives of WTO.
The objectives of the WTO are:
1. Improving Standard of Living: To raise the standard of living of people in member countries by ensuring that trade flows smoothly, freely, and predictably.
2. Ensuring Full Employment: To ensure full employment and a large and steadily growing volume of real income and effective demand in member countries.
3. Expanding Production and Trade: To expand the production of and trade in goods and services, allowing for the optimal use of the world's resources in accordance with the objective of sustainable development.
4. Sustainable Development: To protect and preserve the environment and enhance the means for doing so in a manner consistent with the respective needs of members at different levels of economic development.
5. Protecting Developing Countries: To ensure that developing countries, and especially the least developed countries, secure a share in the growth of international trade commensurate with their economic development needs.
6. Positive Solution to Trade Disputes: To resolve trade disputes through a constructive and positive approach, ensuring that disputes do not escalate into trade wars.
Q2. Write down the functions of WTO.
The functions of the WTO are:
1. Administering Trade Agreements: The WTO administers and implements the multilateral and plurilateral trade agreements that have been negotiated among member countries.
2. Forum for Trade Negotiations: The WTO provides a forum for trade negotiations among member countries, enabling them to discuss and agree on new trade rules and reductions in trade barriers.
3. Dispute Settlement: The WTO has a well-established dispute settlement mechanism that resolves trade disputes between member countries in a timely and impartial manner.
4. Trade Policy Review: The WTO reviews national trade policies of member countries through the Trade Policy Review Mechanism, ensuring transparency and adherence to agreed rules.
5. Cooperation with International Organisations: The WTO cooperates with other international organisations such as the IMF, World Bank, and UNCTAD to achieve greater coherence in global economic policy-making.
6. Technical Assistance and Training: The WTO provides technical assistance and training programmes for developing countries to help them implement trade agreements and participate effectively in trade negotiations.
Q3. Describe the benefits of WTO.
The benefits of the WTO are:
1. Promoting Free Trade: The WTO promotes free trade by reducing tariffs, quotas, and other trade barriers, enabling goods and services to flow more freely across borders.
2. Dispute Settlement: The WTO's dispute settlement mechanism provides a fair and efficient way to resolve trade disputes between member countries, preventing trade wars.
3. Stimulating Economic Growth: By promoting trade liberalisation, the WTO stimulates economic growth, job creation, and higher incomes in member countries.
4. Protecting Developing Countries: The WTO provides special provisions for developing and least developed countries, helping them integrate into the global trading system.
5. Ensuring Transparency: The WTO's trade policy review mechanism ensures transparency in member countries' trade policies, promoting accountability and fair practices.
6. Encouraging Competition: By reducing trade barriers, the WTO encourages competition, which leads to lower prices, better quality goods, and greater innovation.
7. Protecting Intellectual Property: Through the TRIPS agreement, the WTO protects intellectual property rights, encouraging innovation and creativity.
8. Reducing Cost of Living: By lowering trade barriers, the WTO helps reduce the cost of imported goods, lowering the cost of living for consumers.
9. Promoting Peace: By encouraging trade and economic interdependence among nations, the WTO promotes peace and reduces the likelihood of conflicts.
10. Providing a Rules-Based System: The WTO provides a rules-based trading system that gives businesses confidence and predictability in international trade.
Q4. Highlights the functions of IBRD.
The functions of IBRD (International Bank for Reconstruction and Development), commonly known as the World Bank, are:
1. Reconstruction of War-Affected Countries: The IBRD was initially set up to reconstruct the war-devastated European countries after World War II, providing financial assistance for rebuilding infrastructure and economies.
2. Promoting Economic Growth: The IBRD promotes long-term economic growth in developing countries by providing loans, guarantees, and technical assistance for development projects.
3. Infrastructure Development: It provides financial assistance for the development of infrastructure such as roads, railways, ports, power plants, and communication networks in developing countries.
4. Agricultural and Industrial Development: The IBRD supports agricultural and industrial development projects to increase productivity, create employment, and reduce poverty.
5. Healthcare Development: It provides loans and technical assistance for healthcare projects aimed at improving public health, reducing disease, and enhancing healthcare delivery systems in developing countries.
6. Improving Standard of Living: The IBRD aims to improve the standard of living of people in developing countries by supporting projects in education, housing, water supply, sanitation, and other essential services.
Q5. Write down the functions of IMF.
The functions of the IMF are:
1. Promoting International Monetary Cooperation: The IMF promotes international monetary cooperation through a permanent institution that provides a framework for consultation and collaboration on international monetary problems.
2. Ensuring Exchange Rate Stability: The IMF promotes exchange rate stability and maintains orderly exchange arrangements among members, avoiding competitive exchange rate depreciation.
3. Facilitating Balanced Growth of Trade: The IMF facilitates the expansion and balanced growth of international trade, contributing to the promotion and maintenance of high levels of employment and real income.
4. Providing Financial Assistance: The IMF provides financial assistance to member countries facing balance of payments difficulties, helping them overcome temporary financial crises and restore economic stability.
5. Technical Assistance: The IMF provides technical assistance and training to member countries in areas such as fiscal policy, monetary policy, exchange rate systems, and statistical systems.
6. Surveillance: The IMF monitors the economic and financial policies of member countries and provides policy advice to promote stability and prevent crises.
Q6. Explain how far India has benefited from IMF.
India has benefited from the IMF in the following ways:
1. Free Convertibility of Indian Rupee: The IMF played a role in the movement towards the free convertibility of the Indian rupee, enabling India to integrate more effectively with the global economy.
2. Loan for Development Activities: India has received loans from the IMF for various development activities, including infrastructure projects, agricultural development, and industrial growth.
3. Ability to Purchase Foreign Currency: Through the IMF, India has the ability to purchase foreign currencies to meet its balance of payments needs, ensuring smooth international transactions.
4. Expert Advice: The IMF provides expert economic advice to India on fiscal policy, monetary policy, exchange rate management, and structural reforms, helping India make informed policy decisions.
5. Timely Help: The IMF has provided timely financial assistance to India during periods of economic difficulty, helping the country overcome balance of payments crises.
6. Financial Assistance during Natural Calamity: India has received financial assistance from the IMF to cope with the economic impact of natural calamities such as droughts, floods, and earthquakes.
7. Membership in World Bank: India's membership in the IMF automatically qualified it for membership in the World Bank, enabling it to access additional financial resources for development.
8. Help during 1991 Economic Crisis: The IMF provided crucial financial assistance to India during the 1991 balance of payments crisis, supporting the economic reforms and liberalisation programme that transformed India's economy.
Q7. Write any five criticisms on WTO.
The criticisms of the WTO are:
1. Neglect of Developing Countries: The WTO is criticised for favouring developed countries over developing nations. The trade rules and agreements often reflect the interests of rich countries, leaving developing nations at a disadvantage.
2. Ineffective Dispute Settlement: The WTO's dispute settlement mechanism is often slow and ineffective. Developing countries find it difficult to enforce rulings in their favour, as they lack the resources and capacity to pursue lengthy disputes.
3. Threat to National Sovereignty: The WTO's rules can override national laws and regulations, undermining the sovereignty of member countries. Countries may be forced to change domestic policies to comply with WTO rulings.
4. Environmental Concerns: The WTO is criticised for prioritising trade over environmental protection. Free trade rules can undermine national environmental regulations, leading to ecological degradation.
5. Neglect of Labour Standards: The WTO does not adequately address labour standards and workers' rights. This allows countries with poor labour conditions to gain a competitive advantage in international trade, leading to exploitation.
Q8. Explain the objectives of SAARC.
The objectives of SAARC are:
1. Promoting Welfare: To promote the welfare of the people of South Asia and improve their quality of life through economic growth and social development.
2. Accelerating Economic Growth: To accelerate economic growth, social progress, and cultural development in the region through collective self-reliance and mutual cooperation.
3. Strengthening Collective Self-Reliance: To strengthen collective self-reliance among the countries of South Asia by pooling resources and working together on common problems.
4. Promoting Collaboration: To promote and strengthen collective self-reliance among the countries of South Asia in economic, social, cultural, technical, and scientific fields.
5. Cooperating with International Organisations: To cooperate with international and regional organisations with similar aims and purposes, thereby enhancing the region's engagement with the global community.
Q9. Explain LERMS.
LERMS stands for Liberalised Exchange Rate Management System. It was introduced in the Union Budget of 1992-93 as part of India's economic reforms. Under LERMS:
- The exchange rate of the Indian rupee was partially freed from government control.
- A dual exchange rate system was introduced: 40% of foreign exchange earnings were converted at the official rate fixed by the RBI, and the remaining 60% could be converted at the market-determined rate.
- Exporters were required to surrender 40% of their foreign exchange earnings to the RBI at the official rate and could sell the remaining 60% in the free market.
- This system was a step towards full convertibility of the rupee, moving from a fixed exchange rate regime to a more market-oriented approach.
- LERMS was eventually replaced by a unified market-determined exchange rate system in 1993, marking a significant milestone in India's economic liberalisation.
Common Mistakes
1. Confusing GATT with WTO: GATT (signed 1947, effective 1948) was a multilateral agreement, while WTO (established 1995) is an international organisation. GATT was replaced by WTO, but they are not the same. Remember: GATT is the agreement, WTO is the organisation.
2. Mixing up World Bank and IMF: The World Bank (IBRD) provides long-term development loans for projects like infrastructure and education, while the IMF provides short-term financial assistance for balance of payments problems. They were both created at Bretton Woods but serve different purposes.
3. Confusing IBRD with IDA, IFC, and MIGA: IBRD provides loans to middle-income countries, IDA provides interest-free loans to the poorest countries, IFC invests in the private sector, and MIGA provides political risk insurance. Each affiliate has a distinct role.
4. Incorrect SDR composition: The SDR basket currently consists of five currencies: US Dollar, Euro, Chinese Renminbi (added in 2016), Japanese Yen, and British Pound Sterling. Students often forget that the Renminbi was added recently or include currencies that are no longer in the basket.
5. Confusing SAARC members with ASEAN or EU: SAARC has 8 members: Afghanistan, Bangladesh, Bhutan, India, Nepal, Sri Lanka, Pakistan, and Maldives. Do not confuse with ASEAN (Southeast Asian countries) or EU (European countries).
6. Confusing the functions of WTO bodies: The Ministerial Conference is the highest decision-making body (meets every two years), while the General Council handles day-to-day administration. The Dispute Settlement Body and Trade Policy Review Body are specific councils under the General Council.
Exam Checklist
- [ ] Can explain GATT (signed 1947) and its replacement by WTO (1995) with key dates
- [ ] Can list at least 6 objectives of the WTO and explain its functions
- [ ] Can describe the World Bank (IBRD) and name its four affiliates (IDA, IFC, MIGA, ICSID)
- [ ] Can explain SDR, its composition (5 currencies), and its role as "paper gold"
- [ ] Can list the functions of the IMF and explain India's benefits from IMF membership
- [ ] Can describe SAARC (8 members, established 1985) and its objectives
- [ ] Can explain TRIPS and the seven intellectual property areas it covers
- [ ] Can distinguish between IBRD, IDA, IFC, MIGA, and ICSID with their specific roles