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1 The world economy is globalizing at an accelerating pace. Discuss this

statement and list the benefits of globalization.

Answer- Globalisation is a process where businesses are dealt in markets around the world, apart

from the local and national markets. According to business terminologies, globalisation is

defined as the worldwide trend of businesses expanding beyond their domestic boundaries. It isadvantageous for the economy of countries because it promotes prosperity in the countries that

embrace globalisation. In this section, we will understand globalisation, its benefits and

challenges.

Global companies !ompanies, which invest in other countries for business and also operate

from other countries, are considered as global companies. "hey have multiple manufacturing

plants across the globe, catering to multiple markets."he transformation of a company from domestic to international is by entering #ust one market or

a few selected foreign markets as an exporter or importer. !ompeting on a truly global scale

comes later, after the company has established operations in several countries across continents

and is racing against rivals for global market leadership. "hus, there is a meaningful distinctionbetween a company that operates in few selected foreign countries and a company that operates

and markets its products across several countries and continents with manufacturing capabilitiesin several of these countries.

!ompanies can also be differentiated by the kind of competitive strategy they adopt while

dealing internationally. $ultinational strategy and global competitive strategy are the two typesof competitive strategy.

Global competitive strategy !ompanies adopt this strategy when prices and competitiveconditions across the different country markets are strongly linked and have common synergies.

In a globally competitive industry, a companys business gets affected by the changingenvironments in different countries. "he same set of competitors may compete against each otherin several countries. In a global scenario, a companys overall competitive advantage is gauged

by the cumulative efforts of its domestic operations and the international operations worldwide.

A good example to illustrate is %ony &ricsson, which has its head'uarters in %weden, (esearchand )evelopment setup in *%A and India, manufacturing and assembly plants in low+wage

countries like !hina, and sales and marketing worldwide. "his is made possible because of the

ease in transferring technology and expertise from country to country.

Industries that have a global competition are automobiles, consumer electronics like televisions,mobile phone-, watches, and commercial aircraft and so on.

Benefits of globalisation

"he merits and demerits of globalisation are highly debatable. hile globalisation createsemployment opportunities in the host countries, it also exploits labour at a very low cost

compared to the home country. /et us consider the benefits and ill+effects of globalisation. %ome

of the benefits of globalisation are as follows0

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1romotes foreign trade and liberalisation of economies.

Increases the living standards of people in several developing countries through capital

investments in developing countries by developed countries.

2enefits customers as companies outsource to low wage countries. 3utsourcing helps thecompanies to be competitive by keeping the cost low, with increased productivity.

1romotes better education and #obs.

/eads to free flow of information and wide acceptance of foreign products, ideas, ethics, best

practices, and culture.

1rovides better 'uality of products, customer services, and standardised delivery modelsacross countries.

Gives better access to finance for corporate and sovereign borrowers.

Increases business travel, which in turn leads to a flourishing travel and hospitality industry

across the world.

Increases sales as the availability of cutting edge technologies and production techni'uesdecrease the cost of production.

41rovides several platforms for international dispute resolutions in business, which facilitates

international trade.

%ome of the ill+effects of globalisation are as follows0

/eads to exploitation of labour in several cases.

!auses unemployment in the developed countries due to outsourcing.

/eads to the misuse of Intellectual 1roperty (ights I1(-, copyrights and so on due to theeasy availability of technology, digital communication, travel and so on.

Influences political decisions in foreign countries. "he $5!s increasingly use their

economical powers to influence political decisions.

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!auses ecological damage as the companies set up polluting production plants in countries

with limited or no regulations on pollution.

6arms the local businesses of a country due to dumping of cheaper foreign goods.

/eads to adverse health issues due to rapid expansion of fast food chains and increasedconsumption of #unk food.

!auses destruction of ethnicity and culture of several regions worldwide in favour of more

accepted western culture.

7 Compare the Adam mith and Da!id "icardo#s theories of international trade with

e$amples.

Answer-

Adam %miths theory

In one of the most notable book ealth of 5ations in 899:, Adam %mith attacked the

mercantilism and argued that countries differ in their ability to produce goods and servicesefficiently due to variety of reasons. At that time, &ngland, by virtue of their superior

manufacturing processes, were the worlds most efficient textile manufacturers of the world. "his

was due to combination of several factors such as favourable climate, good soils, skilledmanpower and accumulated experience and expertise in textile production. 3n the other hand,

the ;rench had one of the most efficient wine industries of the world. "hus, &ngland had an

absolute advantage in the manufacturing of textiles and ;rance had an absolute advantage in theproduction of wine. Adam %mith argued that a country has an absolute advantage if it has one of

the most efficient and cost effective product in comparison to any other country producing it.

%mith argued that countries should specialise in production and manufacturing of goods andservices in which they have an absolute advantage. %uch cost effective and efficient products can

be traded with goods from other countries in which that country has an absolute advantage.

According to %mith, &ngland should specialise in the production of textiles and ;rance shouldspecialise in the production of wine. 2oth countries should exchange such products of absolute

advantage with each other, i.e. &ngland should sell textiles to ;rance and ;rance should sell wine

to &ngland.

"he crux of %miths absolute advantage theory is that a country should not produce goods athome in which it does not have cost advantage< instead it should import from other countries.

Absolute advantage theory was based on positive sum game where countries benefit from tradeunlike mercantilism theory which was based on =ero game. !aselet tabled as under illustrates

the benefits of absolute advantage theory.

)avid (icardos theory

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)avid (icardo, in his notable book 1rinciples of 1olitical &conomy published in 8>89 came up

with an improvement on Adam %miths absolute advantage theory. (icardo argued what might

happen if one country has an absolute advantage in the production of all goods. Adam %mithstheory suggests that such a country might not have benefitted from international trade as trade is

positive sum game and countries prosper only if they exchange the goods in which they have

absolute advantage.(icardo argued that it was not the case and showed that countries should trade goods with each

other where they have comparative cost advantage. ;or a sustainable economic system, (icardo

argued that a country should specialise in the production of those goods that it can produce mostefficiently and import the goods which it produces less efficiently even if it has absolute cost

advantage in the production of those goods. 1ractical case on comparative cost advantage is

tabled as under0

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?"egional integration is helping the countries in growing their trade. Discuss this

statement. Describe in brief the !arious types of regional integrations.

Answer0 (egional integration can be defined as the unification of countries into a larger whole. Italso reflects a countrys willingness to share or unify into a larger whole. "he level of integration

of a country with other countries is determined by what it shares and how it shares. (egional

integration re'uires some compromise on the part of participating countries. It should aim toimprove the general 'uality of life for the citi=ens of those countries.

In recent years, we have seen more and more countries moving towards regional integration to

strengthen their ties and relationship with other countries. "his tendency towards integration wasactivated by the &uropean *nion &*- market integration. "his trend has influenced both

developed and developing countries to form customs unions and ;ree "rade Areas ;"A-. "he

orld "rade 3rganisation "3- terms these agreements of integration as (egional "rade

Agreements ("A-.

Types of Integration

Preferential trading agreement:-1referential trading agreement is a trade pact between

countries. It is the weakest type of economic integration and aims to reduce taxes on few

products to the countries who sign the pact. "he tariffs are not abolished completely but arelower than the tariffs charged to countries not party to the agreement. India is in 1"A with

countries like Afghanistan, !hile and %outh !ommon $arket $&(!3%*(-. "he introduction

of 1"A has generated an increase in the market si=e and resulted in the availability and variety ofnew products.

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Free trade area

;ree "rade Area ;"A- is a type of trade bloc and can be considered as the second stage of

economic integration. It comprises of all countries that are willing to or agree to reducepreferences, tariffs and 'uotas on services and goods traded between them. !ountries choose this

kind of economic integration if their economical structures are similar. If countries compete

among themselves, they are likely to choose customs union."he importers must obtain product information from all suppliers within the supply chain in

order to determine the eligibility for a ;ree "rade Agreement ;"A-. After receiving the supplier

documentation, the importer must evaluate the eligibility of the product depending on the rulespertaining the products. "he importers product is 'ualified individually by the ;"A. "he product

should have a minimum percentage of local content for it to be 'ualified.

Custom union

!ustom *nion is an agreement among two or more countries having already entered into a free

trade agreement to further align their external tariff to help remove trade barriers. !ustom union

agreement among negotiating countries may encompass to reduce or eliminate customs duty on

mutual trade. *nder customs union agreement, countries generally impose a common external+tariff !";- on imports from non+member countries. %uch common external tariff helps the

member countries to reap the benefits of trade expansion, trade creation and trade diversification.In the absence of common external tariff, there is a possibility that countries with lower custom

duties may become conduits for members which has higher custom duty. !ustom union is third

stage in level of economic integration and is followed only after free trade agreement amongparticipating countries.

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Common market

!ommon market is a group formed by countries within a geographical area to promote duty free

trade and free movement of labour and capital among its members. &uropean community is an

example of common market. !ommon markets levy common external tariff on imports fromnon+member countries.

A single market is a type of trade bloc, comprising a free trade area with common policies on

product regulation, and freedom of movement of goods, capital, labour and services, which areknown as the four factors of production. "his agreement aims at making the movement of four

factors of production between the member countries easier. "he technical, fiscal and physical

barriers among the member countries are eliminated considerably as these barriers hinder the

freedom of movement of the four factors of production. "he member countries must comeforward to eliminate these barriers, have a political will and formulate common economic

policies.

A common market is the first step towards a single market. It may be initially limited to a ;"A

with moderate free movement of capital and services, but it is not capable of removing the othertrade barriers.

Benefits and costs

A single market has many advantages. "he freedom of movement of goods, capital, labour and

services between the member countries results in the efficient allocation of these productionfactors and increases productivity.

A single market presents a challenging environment for businesses as well as for customers

making the existence of monopolies difficult. "his affects inefficient companies and hence,

results in a loss of market share and the companies may have to close down. 6owever, efficientcompanies can gain from the increased competitiveness, economies of scale and lower costs.

%ingle market also benefits the consumers in a way that the competitive environment provides

them with inexpensive products, more efficient providers of products and increased variety ofproducts.

A country changing over to a single market may experience some short term negative effects on

the national economy due to increased international competition. 5ational companies that earlierbenefited from market protection and subsidies may find it difficult to cope with their efficient

peers. If these companies fail to improve their methods, they may have to close down leading to

migration and unemployment.

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Economic union

&conomic union is a type of trade bloc and is instituted through a trade pact. It comprises of a

common market with a customs union. "he countries that are part of an economic union have

common policies on the freedom of movement of four factors of production, common product

regulations and a common external trade policy."he purpose of an economic union is to promote closer cultural and political ties while

increasing the economic efficiency between the member countries.

&conomic unions are established by means of a formal intergovernmental legal agreement

among independent countries with the intention of fostering greater economic integration. "he

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members of an economic union share some elements associated with their national economic

#urisdictions.

"hese include the free movements of0 Goods and services within the union along with a common taxing method for imports from

non+member countries.

!apital within the economic union. 1ersons within the economic union. %ome forms of cooperation usually exist while framingfiscal and monetary policies.

Political union

A political union is a type of country, which consists of smaller countries@nations. 6ere, theindividual nations share a common government and the union is acknowledged internationally as

a single political entity. A political union can also be termed as a legislative union or state union.

%rite short note on&

a' (AT )(eneral Agreement on trade in ser!ices'b' *+, )*nternational +abour organization'

Answer

(AT )(eneral Agreement on trade in ser!ices'

General greement on Trade in !ervices "GT!# GA"% is a framework agreement defining

the rules under which trade in services must occur. GA"% aims at extending the rules covering

trade in goods to trade in services. A detailed rule has been included to take into account the

differences between goods and services and the way in which trade in services is conducted."rade in services cover a wide range of activities in the area of telecommunication, information,

banking, insurance and education. "3 has recognised over 8BC service sub+sectors.

"he main ob#ective of GA"% is to establish a framework for liberalising trade in services. It

encourages countries to modify their domestic regulations. "his modification results in

elimination of restrictions applied to service products entering the country and is applicable tointernational service suppliers who are carrying out business in various modes. According to the

GA"%, $;5 status and transparency is applicable to all services. 3ther commitments such as

national treatment and market access are only applicable to services that are opened according tothe specified negotiated commitments. GA"% covers services known as consumption abroad

where services such as e+commerce are used by the consumers in a host country and citi=ens of acountry travel overseas to consume products such as tourism or education.

4Trade-$elated spects of Intellectual Property $ig%ts "T$IP!# "he Agreement on

"rade+(elated Aspects of Intellectual 1roperty (ights "(I1%- is one of the "3 agreementsthat is compiled by all "3 members. According to "(I1%, developed and developing members

of "3 must adopt the same minimum levels of intellectual property protection. "he "(I1%

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Agreement includes rules on domestic enforcement procedures. "(I1% Agreement focuses on

issues such as innovation and the dissemination of technology, development of biotechnology,

health care and the operation of multilateral environment agreements."he "(I1% agreement states that members can take actions to protect the public health and

nutrition. It encourages protection of new plant varieties. "he members are encouraged to

develop national systems that promote local breeding, rights of farmers and protect humanfundamental human rights which include the right to food and health. It promotes the use and

protection of knowledge that is relevant to the conservation and use of biological diversity. "his

includes knowledge in technology and genetic material. "he 8DDB "3 "(I1% Agreementscovers copyright and related rights, geographic indications, trademarks, and patents of integrated

circuits, protection of information and control of anticompetitive practices in contractual

licenses.

4General greement on Tariffs and Trade "GTT# GA"" is a multilateral agreement

among countries providing a framework for conducting international trade. GA"" is regarded as

an international institution governing international trade relations. It consists of disciplines ongovernments and matters related to import and export of goods. It was established to promote

international trade by reducing tariff and non+tariff restrictions on imports imposed by membernations. "ariff barrier refers to imposing import duty and non+tariff barriers means restricting

imports through import licensing and by banning the imports. GA"" provides a framework for

negotiations on the level of tariff. It promotes multilateral trade among member nations. Itprovides protection against unfair trade and obstructions to trade.

International &abour 'rganisation "I&'#

International /abour 3rganisation I/3- is a specialised agency of the *nited 5ations which

deals with labour issues. "he head'uarters is situated in Geneva, %wit=erland. "he secretariatcomprises of the people employed by the organisation throughout the world. "he secretariat is

known as the International /abour 3ffice. "he I/3 manages work through three main bodies.

"hey are0 International &abour Conference "he members of the I/3 meet at the International

/abour !onference every year in Eune, in Geneva. "wo government delegates along with an

employer delegate and a worker delegate represents their respective member state. "he technical

advisors also accompany the delegates. "he !abinet $inisters are usually responsible for labouraffairs, head the delegations and present

the viewpoint of their government. "he !onference creates and implements standards for

international labour. %ocial and labour issues are discussed in the !onference. It also assigns thebudget of the organisation and elects the Governing 2ody.

Governing Body "he executive council of the I/3 is known as the Governing 2ody. Itmeets thrice a year in Geneva and takes decisions on the I/3 policies. It forms programmes and

budgets which are submitted to the !onference for adoption. "he Governing 2ody has 7>

government members, 8 employer members and 8 worker members. "en government seats arepermanently held by states of chief industrial importance. "aking into consideration the

geographical distribution, representatives of other member countries are elected at the

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!onference once in every three years. "he representatives are elected by the employers and

workers.

4International &abour 'ffice "he permanent secretariat of the International /abour

3rganisation is the International /abour 3ffice. It is the central point for all activities that areadministered by the governing body. "he 3ffice is a center for administration, research and

documentation. It employs more than 8,9CC officials from 88C nationalities. "he 3ffice also

organises certain programmes to extend technical help to all member nations. *nder thisprogramme of technical cooperation, around :CC experts undertake missions in all regions of the

world.

International &abour Code

"he International /abour !ode is composed of !onventions and (ecommendations adopted by

the International /abour !onference. In 8DD9, the !ode contained 8>8 conventions and 8>>

recommendations that covered important sub#ects in labour and social fields. "he main function

of the I/3 is to set international labour standards by adopting conventions and recommendationscovering the ma#or labour+related issues which are referred to as the International /abour !ode.

"he !onference adopts conventions and recommendations which is prepared by the International/abour 3ffice and the governing body. "he representatives of the member nations bring the

conventions and recommendations to the notice of the authorities.

4Conventions "hese treaties are not bound to a country unless they are approved by that

country. I/3 conventions that have secured a two+third ma#ority should be presented by the

member country in the !onference. "he I/3 conventions are approved as written and withoutreservations. ;lexibility clauses are included in the conventions to accommodate different

climatic conditions or states of development of particular countries.

$ecommendations hen state practices vary largely, non+binding guidelines known as

recommendations are issued. (ecommendations are issued when the sub#ect is0

4Fery technical and cannot be handled by a convention.

Already covered by a convention but needs to be addressed in more detail.$ember states are re'uired to bring recommendations to the attention of their governments.

B %hat is the difference between domestic and international accounting and how

will you measure this difference

Answer&

(omestic vs) international accounting

)ifferent countries whether domestic or international, have different accounting standards. Acommon belief is that these differences reduce the 'uality and importance of accounting

information. Accounting standards determine the financial reporting 'uality and provides

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separately verified information about an organisations financial performance to investors

creditors.

"hough there are differences in accounting methods, domestic businesses are not affected. "heaccounting system of a domestic organisation must meet the specialised and regulatory standards

of its home country. 2ut, an $5! and its subsidiaries must meet differing accounting and

auditing standards of all the countries in which it operates. "his leads to a need for comparabilitybetween businesses in the group. In order to successfully manage and organise their operations,

local managers re'uire accounting information, which should be prepared according to the local

accounting concepts and denomination in the local currency. Het, for financial controllers, tomeasure the foreign subsidiarys performance and worth, the subsidiarys accounts must be

translated into the organisations home currency. "his translation is done using accounting

concepts and measures, which are detailed by the organisation. Investors worldwide look for the

highest possible returns on their capital, in order to interpret the track record, though they use acurrency and an accounting system of their own. "he organisation also has to pay taxes to the

countries where it does business, based on the accounting statements prepared in these countries.

2esides this, when a parent corporation tries to combine the accounting records of its

subsidiaries to produce consolidated financial statements, extra complexities occur because ofthe changes in the value of the host and home currencies.

"here are many differences between International Accounting %tandards IA%- and )omesticAccounting %tandards )A%-. 3n the basis of difference between the two, two indices, namely

divergence and absence, are created. Absence is the difference between )A% and IA%< the rules

on certain accounting issues are missed out in )A% and covered in IA%. )ivergence representsthe differences between )A% and IA%< the rules on the same accounting issue differ in )A% and

IA%.

*easurement of differences bet+een I! and (!

Hou can measure the differences between IA% and )A% in the following way0

&iterature on international accounting differences , (eferring to earlier reports oninternational accounting could give more information about the sub#ect. $ost of the earlier

reports understand international accounting differences as various options adopted by nations for

the similar accounting problems, which correspond to divergence concept.

4Frame+ork of analysis , /inks between variations in accounting standards and financial

reporting 'uality of various countries could be clearly seen from the reports published earlier. eshould consider the institutional determinants of accounting differences such as legal origin,

governance structure, economic development, and e'uity market.

ational differences in accounting

3ne of the ma#or problems encountered by an international business is lack of consistency in

accounting standards in various countries. 3rganisations show opposite financial results becauseof the differences in accounting standards.

)ifferences in accounting standards exist because of diverse political, legal, economic, and

cultural systems of the countries. Accounting standards and practices are also pre#udiced by the

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sources of capital used to fund business. ;igure D.8 shows the influencing factors on a countrys

accounting practices.

Hou might think that accounting systems in the world were uniformly influenced by a fewhistorical developments. "here could be some similarities but no two countries and their systems

are alike. Accounting systems are developed suiting the countrys specific needs. It is a fact that

different countries evolved in different ways. Accounting systems were influenced by privateownership, industrialisation, inflation, and so on. hen there are differences in economic

conditions, it is not surprising to find differences in accounting practices. 6owever, there are

other influencing elements apart from economic factors. "hese are legal systems, educationalsystems, socio cultural features, and political systems. "hese also influence the need for

accounting, speed and direction of its development. )ue to the increasing trend in globalisationof business, understanding various accounting systems is important.

&egal systems

/aw system is divided into civil law and common law in countries worldwide. In countries like

*%, Australia, * and 5ew Jealand accounting procedures originate from decisions ofindependent standards setting boards, such as *% ;inancial Accounting %tandards 2oard ;A%2-.

&ach board works with professional accounting groups. In countries, which follow common law,

accountants follow Generally Accepted Accounting 1rinciples GAA1-, which provides a trueand fair view of the organisations performance, based on the standards approved by these

professional boards. $any civil law countries also have a similar approach as that of GAA1.

;unctioning within the limitations of these standards, accountants have freedom to implementtheir professional #udgment in reporting a true and fair representation of the organisations

performance.

!ountries following civil law are likely to codify their national accounting measures andstandards. In these countries, accounting practices are determined by the law. "o assist the legal

role, all business accounting records must be officially registered with the government.

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"he way in which the accounting practices are imposed depends on the legal system. $ost of the

developed countries depend on both private and public enforcement of business performance,

though the public or private combination varies from country to country. "he difference of legalsystem is a ma#or restriction in the growth of accounting standards. In some countries, the

accounting policies are restricted to detailed legislation, which is passed by governments. "his

restriction forms a ma#or problem to international accounting bodies that are created to increaseharmonisation of national accounting frameworks. "his is because, such government+controlled

regimes are inclined to be less flexible, and perceive private sector influences as less acceptable.

:Discuss the !arious payment terms in international trade. %hich is the safest

method and why

Answer&-.nderstanding Payment *ec%anism in Foreign Trade-;or successfully conductinginternational trade in todays competitive international environment, it is essential for the

exporters to offer attractive sales terms and payments to importers so as to woo them for

business. 3ne of the ma#or concerns for en exporter is to choose the appropriate payment method

in order to minimise risks related to payments of trade transaction. 1ayment should be done afterunderstanding the economic scenario of importers country, importer credit worthiness and to

certain extent accommodating the needs of the importer. &xporter can choose any mode ofpayment depending on risk perception, si=e of deal, importer credit worthiness and economic

situation in importers country.

In case of domestic business, main factor driving salesmans decision criteria for realisation of

payments is based on the buyers ability, willingness and honesty to make payment coupled with

exporter trust on buyer. *sually sale in domestic market are on open account and in certain cases

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it can be on cash in advance. %uch methods also depend on buyers and sellers power to

negotiate and nature of competition such as0$onopoly condition will favour to the seller.

1erfect competition will favour to the buyers.

6owever, in case of international trade, exporter has to take more precautions as some methodsof payment are uni'ue and usually used in case of international trade only. ey consideration

while deciding upon a payment term in foreign trade is elaborated as under.

A. %ome of the ma#or risks involved in realisation of payments in international trade can beeither at importer, importer bank and importers country such as insolvency and default by

importer, insolvency of importer bank and exchange control restrictions, inconvertibility issues

with importers country.

2. %ome of the risks involved in international trade in /iberalisation, 1rivatisation andGlobalisation era can be under control of exporter but some cannot be. ;or example, credit risk

which arises from a change inthe credit worthiness of importer can be covered by &!G!. &xchange (ate ;luctuation risk can

be covered by hedging the currency invoiced in forward contract market but risk such as ;orce$a#eure which arises from change in policy of a country, which in turn affects the trade

capability, and by a natural disaster cannot be anticipated in complex international

environments/) 3ther risks mainly arises due to a difference in culture, law, or language are alsobeyond exporter control.

!. International "rade 3perations offers different types, 'uantum and location of risks, thereby

confusing the exporter with uncertainty over realisation of payments and timing of paymentsbetween the exporter and importer7.

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). ;or exporters, any international sale will be e'uivalent to gift until he has not realised the

payment from the importer. ;or importer any payment is donation until he has received the cargo

as sent by exporter.

&. &xporter will always be interested to receive the payments as soon as he@she sends the goods

to importer through shipment. Importer will be willing to delay the payments as he@she will be

interested to sell these goods in markets and then make the payments to exporter.

;. 6owever, the selection criteria for mode of payment is based on mutual negotiation of

exporter and importer and in /1GK$ era there are other parties such as bank, credit insurerinvolved which helps in exporter in financing and assuring about the payment.

G. "hough safe mode of payment such as /@! is getting popular, this is not usually used by small

exporters and importers due to heavy transaction costs. ;or example, /@! is used as mode of

payment only in 8L trade transactions due to heavy transactions costs?.

6. &xporter can alternatively divide the payment category into secure mode and unsecure mode.

"hesecure mode of payment for exporter is cash in advance and letter of credit. Unsecure mode

of payment are 3pen Account, )ocuments against Acceptance and )ocuments against 1ayments.

Payment terms in foreign trade

%ince international trade deals with exchange of goods, there are various ways in which the

payment terms finance- will be handled.2othe seller and trader should be careful about the method of payment as they are at different

locations and transactions happen without face+to+face interaction. "here are four methods of

payment for the international transactions. "his includes the !ash+in+advance method, /etter of!redit, )ocumentary collections and the 3pen Account. "hese are shown in figure 8.8.

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As shown in figure 8.8, there is uncertainty during the time when payment transactions happen

between importer and exporter. "he figure compares and contrasts the most suitable

methodology from the perspective of importer and exporter. Apparently the most securemethodologies that work for the exporter is not safe for the importer. ;or exporters, documentary

collection and open account are less secure and letter of credit and cash in advance are more

secure methods. In the same way, with respect to the importer, the letter of credit and cash inadvance are less secure and the documentary collection and open account are more secure. "hese

terms are explained as follows.

Cas%-in-advance

!ash+in+advance helps in removing the risks of credit by the exporter. 2y this method, exporter

receives the payment before the transfer of goods. "he options that are available with the cash+

in+advance method include wire transfers and credit cards. "his is the least attractive method formany of the buyers as it creates cash flow problems. "he buyers are concerned about the

'uality@'uantity and delivery of the goods that are not sent if the payment is made in advance.

&etters of credit

"he letter of credit is the most secure instrument available for international traders. "his is thecommitment made by the bank that the payment will be made to the exporter if the terms and

conditions are met. "he terms and conditions of the payment are explained in the re'uireddocuments.

(ocumentary collections

)ocumentary collection is a transaction in which, the exporters bank remitter bank- sends the

documents to the importers bank collecting bank-. "he document contains information about

the payment. "he funds are collected from the importer and paid to the exporter through the

banks involved in the collection, in exchange for the documents.

'pen account

"he open account transaction involves the shipping and delivery of goods in advance. "he

payment is due usually from ?C to DC days. "his is advantageous for the importer in cash flowand cost terms, but at the same time it is very risky for the exporters. 2uyers from abroad stress

on open accounts since the extension of credit from the seller to the buyer are more common in

many countries. &xporters who avoid extending credit may face loss in the sale because ofcompetitors in the market.

&etter of credit

International "rade is affected by distance, laws, political instability and lack of familiarity bythe transacting parties. /etter of credit assumes significance since it can be used to mitigate risk.

It is a document that is issued by the bank that guarantees payment to a beneficiary. It is written

by the financial institution in favour of the importer of goods to the seller. In the letter, the bankpromises that it will honour the drafts drawn on it if the seller confirms to the specific conditions

that are set forth in the letter of credit. "he process of letter of credit works as shown under0

8/11/2019 Mb 00053

19/19