Author name: Prasanna

Detailed, Step-by-Step NCERT Solutions for 12 Accountancy Chapter 1 Accounting for Not for Profit Organisation Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Accounting for Not for Profit Organisation NCERT Solutions for Class 12 Accountancy Chapter 1

Accounting for Not for Profit Organisation Questions and Answers Class 12 Accountancy Chapter 1

Do it Yourself
Test Your Understanding-I [Page No. 20]

Question 1.
State with reasons whether the following statements are TRUE or FALSE
(i) Receipt and Payment Account is a summary of all capital receipts and payments.

(ii) If there appears a sports fund, the expenses incurred on sports activities will be shown on the debit side of Income and Expenditure Account.

(iii) A credit balance of Income and Expenditure Account denotes excess if expenses over incomes.

(iv) Scholarships granted to students out of funds provided by Government will be debited to Income and Expenditure Account.

(v) Receipt and Payment Account records the receipts and payments of revenue nature only.

(vi) Donations for specific purposes are always capitalized.

(vii) Opening balance sheet is prepared when the opening balance of capital fund is not given.

(viii) Surplus of Income and Expenditure Account is deducted from the capital/general fund.

(ix) Receipt and Payment Account is equivalent to profit and loss account. Receipt and Payment Account year shown in liabilities side of Balance Sheet.

(x) Does not differ with capital and revenue receipts.
Answer:
(i) False—Because Receipt and Payment Account is a summary of all cash transactions whether they are capital receipts and payments or revenue receipts and payments.

(ii) False—Because Sports Fund is a special fund of capital nature, so the expenses incurred on sports activities will be deducted from Sports Fund in the Balance Sheet.

(iii) True—Because excess of income over expenditure denotes surplus.

(iv) False—Because Funds provided by the Government is of capital nature, therefore scholarships granted out of funds directly deducted from this fund in the Balance Sheet.

(v) False—Because Receipt and Payment Account is a summary of all cash transactions whether they are capital receipts and payments or revenue receipts and payments.

(vi) True—Because donations for specific purposes are non-recurring in nature so they are always capitalized.

(vii) True—Because opening capital fund is must to ascertain the actual financial position of the organisation.

(viii) False—Because surplus of Income and Expenditure Account increases the capital/general fund of the organisation, so it must be added to capital/general fund.

(ix) False—Because Receipt and Payment Account is merely – summary of cash transactions, it does not disclose any information regarding the income/deficit of the organisation.

(x) True—Because Receipt and Payment Account is a summary of all cash transactions whether they are capital receipts and payments or revenue receipts and payments.

Test Your Understanding-II [Page No. 29]

1. How would you treat the following items in the case of a ‘not-for-profit’ organisation?
1. Tournament Fund Rs. 40,000. Tournament Expenses Rs. 14,000. Receipts from Tournament Rs. 16,000.
2. Table Tennis match expenses Rs. 4,000.
3. Prize Fund Rs. 22,000. Interest on Prize Fund Investments Rs. 3,000. Prizes given Rs. 5,000. Prize Fund Investments Rs. 18,000.
4. Receipts from Charity Show Rs. 7,000. Expenses on Charity Show Rs. 3,000.
Answer:
(i) Here Tournament Fund is a specific fund. The accounting treatment is as under—

(ii) Table Tennis match expenses is independent of any specific fund. The accounting treatment is as under—

(iii) There is a specific fund i.e. Prize Fund. The accounting treatment is as under—

(iv) There is no specific fund regarding Charity. The accounting treatment is as under—

Do it Yourself [Page No. 25]

Question 1.
Subscriptions received by the health club during the year 2006 were as under-

Answer:

Question  2.
During the year 2006, subscriptions received by a sports club were Rs. 80,000. These included Rs. 3,000 for the year 2005 and Rs. 6,000 for the year 2007. On December 31, 2005 the amount of subscriptions due but not received was Rs. 12,000. Calculate the amount of subscriptions to be shown in Income and Expenditure Account as income from subscription.
Answer:

Question 3.
Subscriptions received during the year ended December 31, 2006 by Royal Club were as under—

The Club has 500 members each paying @ Rs. 200 as annual subscriptions. Subscriptions outstanding as on December 31, 2005 are Rs. 6,000. Calculate the amount of subscriptions to be shown as income in the Income and Expenditure Account for the year ended December 31, 2006 and show the relevant data in the Balance Sheet as on that date.
Answer :

Do it Yourself [Page No. 30]

Question 1.
Find out the cost of medicines consumed during 2005-06 from the following information—

Answer:

Question 2.
What amount of sports material will be posted to Income and Expenditure Account for the year ended March 31, 2007 as expenditure?

Answer:

Short Answer Type Questions (Textual)

Question 1.
State the meaning of ‘Not-For-Profit’ Organisations.
Answer :
Meaning of ‘Not-For-Profit’ Organisations—
All trading and business organisations are profit organisations since their main objective is to earn profit. ‘Not-For-Profit’ Organisation are those organisation whose main aim objective is to provide services to their members or the society at large and not the earning of profits.

These organisation refer to the organisations that set-up for the welfare of the society, as a charitable institution, which run without- profit motive. Their main aim is to provide services to its members or the society at large. The funds raised by such organisations are represented as capital fund or General Fund.

The main source of their income usually are subscription from their members, donations, grants, income from investment etc. These organisation keeps the accounting records to meet the statutory requirements and controlling utilisation of their funds. They usually prepare them at the end of financial year to ascertain their income and expenditure and the financial position of the organisation and submit them to the statutory authority i.e. Registrar of Societies.

Question 2.
State the meaning of Receipt and Payment Account.
Answer:
Receipt and Payment Accounts—
A receipt and payment account is a summary of cash transaction. It is prepared at the end of the accounting period from the cash receipts journals and cash payment journals.

“Receipt and Payment Account is nothing more than a summary of the Cash Book (Cash and Bank transactions) over a certain period, analysed and classified under suitable heading. It is the form of account most commonly adopted by the treasures of societies, clubs, associations etc. when preparing the results of the year’s working.” —William Pickles

In other words, Receipt and Payment Account, simply is a summary of cash and bank transactions under various heads. On the debit side, it begins with an opening balance of cash and bank and records all the items of receipts irrespective of whether they are of capital or revenue nature or whether they pertain to the current or past or future accounting period(s). The payments are recorded on the credit side without-making any distinction between items of revenue and capital nature and whether they belong to the current or past or future accounting period(s).

It may be noted that this account does not show any non-cash item like depreciation. At the end of period, this account is balanced to ascertain the balance of cash in hand or cash at bank. The annual totals of various items of receipts and payments are found from their respective accounts in the ledger or from the Cash Book and are then entered in the Receipt and Payment Account.

Question 3.
State the meaning of Income and Expenditure Account.
Answer:
It is a nominal account of ‘Not-For-Profit’ Organisation equivalent to the profit and loss account of the trading concerns. The terms profit is substituted by the words excess of income over expenditure (surplus) and the loss is expressed as excess of expenditure over income (deficit).

It reveals the surplus or deficit arising out of the organisation’s activities during an accounting period. This account is prepared on an accrual basis and includes only items of revenue nature. All the revenue items relating to the current period are shown in this account, the expenses and losses on the expenditure side (debit side) and incomes and gains on the income side (credit side) of the account. It shows the net operating result in the form of surplus or deficit, which is transferred to the capital fund shown in the balance sheet.

Question 4.
What are the features of Receipt and Payment Account?
Answer:
Feature of Receipt and Payment Account—

1. Real Account—It is a real account, so the rule of real account i.e, ‘Debit what comes in and credit what goes out’ is followed. Thus receipts are recorded in Debit side and the payments are recorded in Credit side.

2. Summary of the Cash Book—It is a summary of the cash book. Its form is similar to cash book (without discount and bank column) with debit and credit sides.

3. Shows Amount irrespective of period—It shows the total amount of all receipts and payments irrespective of the period to which they pertain.

4. No distinction between the nature (Capital or Revenue nature)—It includes all receipts and payments whether they are of capital nature or of revenue nature.

5. No distinction between mode of transaction (Cash or Bank)— No distinction is made in receipts/payments made in cash or through bank. With the exception of the opening and closing balances, the total amount of each receipts and payment is shown in this account.

6. Do not show non-cash items—Non-cash items like depreciation, outstanding expenses, accrued income etc. are not shown in this account.

7. Opening and Closing Balances—The opening and closing balance in it respectively mean Cash in hand or Cash at bank in the beginning and at the end. The balance of Receipts and Payment Account must be debit being Cash in hand or Cash at bajnk, unless there is a bank overdraft.

8. Does not reflect net income or net loss—This account does not tell us whether the current incomes exceeds the current expenditure or vice versa or in other words it does not give any information of net income or net loss.

Question 5.
What steps are taken to prepare Income and Expenditure Account from Receipt and Payment Account?
Answer:
The following steps are taken to prepare Income and Expenditure Account from Receipt and Payment Account—
1. From the Receipt and Payment Account exclude the opening and closing balance of cash and bank as they are not an income.

2. Exclude the items of capital nature as these are to be shown in balance sheet.

3. Take out the revenue receipts only for the current year to be shown on the income side of Income and Expenditure Account. These are adjusted by excluded the amounts relating to the preceding and the succeeding periods and including the amounts relating to the current year not yet received.

4. Take out the revenue payments only the current year to be shown on the expenditure side of Income and Expenditure Account. These are adjusted by excluded the amounts relating to the preceding and the succeeding periods and including the amounts relating to the current year not yet paid.

5. Make the adjustments of non-cash items like

• Depreciation on fixed assets.
• Provision for doubtful debts, if required.
• Profit or loss on sale of fixed assets etc.

For determining the surplus/deficit for the current year.

Question 6.
What is Subscription? How is it calculated?
Answer:
Subscription—It is the amount paid by the members of the organisation periodically so that their membership is not cancelled. This is the main source of income of ‘Not-For-Profit’ Organisations. Treatment—
(i) The total amount of subscription received during the accounting period is shown in the receipt side (Dr. side) of Receipt and Payment Account.

(ii) Subscription related to the current period shown in the income side (Cr. side) of Income and Expenditure Account. Amount of subscription to be shown in Income and

Expenditure Account is calculated as follows :

(iii) Subscription Outstanding at the end of year is shown on the assets side of Balance Sheet and Subscription received in advance in current year for the next year is shown on the liabilities side of the Balance Sheet. .

Question 7.
What is Capital Fund? How is it calculated?
Answer:
It is the Capital of the non-profit organisation. It is the excess of assets over liabilities of the organisation. It may be made up in part by capitalising entrance fees,-or by capitalising life membership fees etc. Excess of income over expenditure or surplus is added to the capital fund and excess of expenditure over income or deficit is deducted from the Capital Fund. It is also called ‘Accumulated Fund’ or ‘General Fund’.

Long Answer Type Questions (Textual)

Question 1.
Explain the statement—”Receipt and Payment Account is a summarised version of Cash Book.”
Answer:
According to William Pickles “Receipt and Payment Account is nothing more than a summary of the Cash book (Cash and Bank transactions) over a certain period, analysed and classified under suitable heading. It is the form of account most commonly adopted by the treasurers of societies, clubs, associations etc.

when preparing (he results of the year’s working.” The main difference between the Cash Book and Receipts and Payments Account is that in a cash book all cash transactions are recorded date-wise in detail but in Receipts and Payments Account, from chronological record of cash transaction in the cash book, summary of cash transactions is prepared at the end of the period under consideration.

It does not give the date of the transactions. Thus, both Cash Book and ‘Receipt and Payment Account’ provide the same information but in a different manner.

For example salary, rent, electricity charges paid from time to time as recorded on the credit side of die Cash Book but the total salary paid, total rent paid, total electricity charges paid during the year appear on the payment side of Receipts and Payments Account.

Thus, Receipt and Payment Account gives summarised picture of various receipts and payments, irrespective of whether they pertain to the current period, previous ‘period or succeeding period or whether they are of capital or revenue nature. Let us take a example to show how cash book is summ ised to show transactions in Receipts and Payments Account.

Part-A
Item-wise Aggregation of various Receipts

‘

Part-B
Item-wise Aggregation of various Payments

From the above aggregation of various receipts and payments. We can now prepare the summary of Cash book and then represent this summary of Cash book in the Receipts and Payments Account.

Summary of Cash Book

primary objective is not to earn profit but to serve its members or society in general. However, these organisations compare incomes and expenses to check whether the organisation have sufficient resources to carry out its objectives. To achieve this, ‘Income and Expenditure Account’ is prepared by ‘Not-For-Profit’ Organisation.

Therefore, we can say that ‘Income and Expenditure’ Account of Not-For-Profit Organisation is like ‘Profit and Loss Account’ of business concerns or profit-making organisations. ‘Not-For-Profit’ Organisation follow the same rule or principles for preparing Income and Expenditure Account which are followed by business organisations for preparing

‘Profit and Loss Account’.
Above statement can became more clear from the following points—
(i) ‘Income and Expenditure Account’ of ‘Not-For-Profit’ Organisation and ‘Profit and Loss Account’ of business organisation or trading organisation, both accounts are nominal accounts. Hence follow the same principle “Debit all expenses and losses and Credit all income and gains”.
(ii) Both accounts records all expenses and losses on the Debit side and all income and gains on the Credit side.
(iii) Both accounts records only revenue items and ignores capital items.
(iv) Both accounts are prepared on accrual basis i.e. both accounts records all the revenue items relating to the current period.
(v) Both accounts have not any opening and closing balances.
(vi) Both accounts prepared at the end of period after considering, all adjustment relating to current period.
(vii) Both accounts exclude all the items of income and expenses which do not pertain to the current period.
(viii) Both accounts shows the net result of working of the organisations during the current period in the form of profit or loss (for Business Organisation) and surplus/deficit (for ‘Not-For-Profit’ Organisation).
Hence, it is clear from the above discussion that “Income and Expenditure Account of a ‘Not-For-Profit’ Organisation is akin to Profit and Loss Account of a business concern.”

Question 3.
Distinguish between Receipts and Payment Account and Income and Expenditure Account.
Answer:
Distinction between Income and Expenditure Account and Receipt and Payment Account—

Question 4.
Explain the basic features of Income and Expenditure Account and of Receipt and Payment Account.
Answer:
Basic Features of Income and Expenditure Account—
1. Nominal Account—It is a nominal account, therefore the rule of nominal account i.e. “Debit all expenses and losses and Credit all incomes and gains” is followed.

2. Ignore Items of Capital Nature—In this account only items of revenue nature are to be considered and all the items of capital nature should be ignored.

3. Prepare from Receipt and Payment Account—It is generally prepared from a given receipts and payments account and other information after making necessary adjustments.

4. No Opening and Closing Balances—In this account no opening and closing balances of cash and bank are recorded.

5. Same as Profit and Loss Account—This account is prepared in the same manner in which a Profit and Loss Account is prepared, considering, all adjustment relating to current year.

6. Exclude Past and Future Items—It exclude all the items of income and expenditure which do not pertain to the current period.

7. End-balance of this Account—The end balance of the Income and Expenditure Account, which may be either, ‘excess of income over expenditures’ or ‘excess of expenditure over income’ would be added to or deducted from, as the case may be, the capital fund, on the liabilities side of the balance sheet.

Basic Features of Receipt and Payment Account—

1. Real Account—It is a real account, so the rule of real account i.e. ‘Debit what comes in and Credit what goes out’ is followed. Thus receipts are recorded in debit side and the payments are recorded in credit side.

2. Summary of the Cash Book—It is a summary of the Cash Book. Its form is similar to Cash Book (without discount and bank cloumn) with debit and credit sides.

3. Shows amount irrespective of period—It shows the total amount of all receipts and payments irrespective of the period to which they pertain.

4. No distinction between the nature (Capital or Revenue nature)—It includes all receipts and payments whether they are of capital nature or of revenue nature.

5. No Distinction between mode of transaction (Cash or Bank)— No distinction is made in receipts/payments made in cash or through bank. With the exception of the opening and closing balances, the total amount of each receipts and payment is shown in this account.

6. Do not show non-cash items—Non-cash items like depreciation, outstanding expenses, accrued income etc. are not shown in this account.

7. Opening and closing balances—The opening and closing balance in it respectively mean cash in hand or cash at bank in the beginning and at the end. The balance of receipts and payment account must be debit being cash inhand or cash at bank, unless there is a bank overdraft.

8. Does not reflect net income or net loss—This account does not tell us whether the current incomes exceeds the current expenditure or vice versa or in other words it does not give any information of net income or net loss.

Question 5.
Show the treatment of the following items by a Not-For- Profit Organisation:
(i) Annual Subscription
(ii) Specific donation
(iii) Sale of fixed assets
(iv) Sale of old periodicals
(v) Sale of sports materials
(vi) Life membership fee
Answer:
(i) Annual Subscription—It is the amount paid by the members of the organisation periodically so that their membership is not cancelled. This is the main source of income of Not-For-Profit Organisations.

Treatment
(a) The total amount of subscription received during the accounting period is shown in the receipt side (Dr. side) of Receipt and Payment Account.

(b) Subscription related to the current period shown in the income side (Cr. side) of Income and Expenditure Account. Amount of subscription to be shown in Income and Expenditure Account is calculated as follows :

(c) Subscription Outstanding at the end of year is shown on the assets side of Balance Sheet and Subscription received in advance an current year for the next year is shown on the liabilities side of the Balance Sheet.

(ii) Specific Donation : Donations is a type of gift in cash or in property received from person, firm or company. If the amount received as donation is for a specific purpose such as donations for extension of ffee existing building, donation for library, for construction of new computer laboratory etc., it is capitalised and is shown in the liabilities side of the Balance Sheet.

(iii) Sale of Fixed Assets: Receipt from the sale proceeds of fixed assets appear in the receipt side of Receipt and Payment Account. Only the profit or loss on the sale of a fixed asset is credited or debited, as the case may be, to the Income and Expenditure Account. In the Balance Sheet, the book value of the asset sold should be deducted from the relevant assets.

For example, if an item furniture with a book value of Rs. 5,000 is sold for Rs. 3,700, then amount of Rs. 3,700 will be shown in receipt side of Receipt and Payment Account and the loss of Rs. 1,300 (5,000 – 3,700) on sale of furniture will appear on the expenditure side of Income and Expenditure Account as a loss on sale of old asset and while showing furniture in the Balance Sheet Rs. 5,000 will be deducted from its total book value.

(iv) Sale of Old Periodicals : Receipts from the sale of old periodicals shown in the receipt side of Receipt and Payment Account. It is an item of recurring nature and shown in the income side of Income and Expenditure Account.

(v) Sale of Sports Materials: Sale of sports materials like old bat, old nets etc. is the regular feature with any sports club. It is treated as revenue income on the assumption that their book value is zero. It is therefore shown in the income side of Income and Expenditure Account. It also shown on the receipt side of Receipt and Payment Account.

(vi) Life Membership Fee: In order to become the member of an organisation for the whole of the life, some members pay the fee in lump sum i.e. once in their life time. It is a receipt of non-recurring nature since the members will not be required to pay the fees regularly. It is shown on the receipt side of Receipt and Payment Account and added to the capital fund in the Balance Sheet. It should not credited to the Income and Expenditure Account.

Question 6.
Show the treatment of items of Income and Expenditure Account when there is a specific fund for those items?
Answer:
‘Not-For-Profit’ Organisation creates some specific funds for a specific purpose such as ‘Prize Funds’, ‘Match Funds’ and ‘Sports Fund’ etc. It may be created by setting aside a part of the excess of income over expenditure or when amount is received for a specific purpose.

The amount may be invested outside the organisation in securities for a particular period. This fund is shown on the liabilities side of the Balance Sheet and investment out of special fund is shown on the assets side of the Balance Sheet.

Any receipt relating to that fund is added to the specific fund and expenses incurred relating to the fund are deducted from it. Thes§ funds do not affect the Income and Expenditure Account.

Question 7.
What is Receipt and Payment Account? How is it different from Income and Expenditure Account?
Answer:
Receipts and Payment Account—
A Receipts and Payment Account is a summary of cash transactions. It is prepared at the end of the accounting period from the cash receipts journals and cash payment journals.

“Receipt and Payment Account is nothing more than a summary of the cash book (Cash and Bank transactions) over a certain period, analysed and classified under suitable heading. It is the form of account most commonly adopted by the treasures of societies, clubs, associations etc. when preparing the results of the year’s working.” —William Pickles .

In other words, Receipt and payment Account, simply is a summary of cash and bank transactions under various heads. On the debit side, it begins with an opening balance of cash and bank and records all the items of receipts irrespective of whether they are of capital or revenue nature or whether they pertain to the current or past or future accounting period(s).

The payments are recorded on the credit side without making any distinction between items of revenue and capital nature arid whether they belong to the current or past or future accounting period (s). It may be noted that this account does not show any non-cash item like depreciation. At the end of period, this account is balanced to as certain the balance of cash in hand or cash at bank.

The annual totals of various items of receipts and payments are found from their respective accounts in the ledger or from the cash book and are then entered in the Receipts and Payment Account.

Income and Expenditure Account: It is a nominal account of ‘Not-For-Profit’ Organisation equivalent to the Profit and Loss A/c of the trading concerns. The term profit is substituted by the words excess of income over expenditure (surplus) and the loss is expressed as excess of expenditure over income (deficit). It reveals the surplus or deficit arising out of the organisation’s activities during an accounting period.

This account is prepared on an accrual basis and includes only items of revenue nature. All the revenue items relating to the current period are shown in this account. The expenses and losses on the expenditure side (debit side) and income and gains on the income side (credit side) of the account. It shows the net operating result in the form of surplus or deficit, which is transferred to the Capital Fund shown in the balance sheet.

Distinction between Income and Expenditure Account and Receipt and Payment Account

Numerical Questions
Question 1.
From the following particulars taken from the Cash Book of a health club, prepare a Receipts and Payments Account.

Answer:

Question 2.
The Receipt and Payment Account of Harimohan Charitable Institution is given :
Receipt and Payment Account for the year ending March 31,2007

Prepare the Income and Expenditure Account for the year ended on March 31,2007 after considering the following:
(i) It was decided to treat fifty percent of the amount received on account of Legacies and Donations as income.
(ii) Liabilities to be provided for are :
Rent Rs. 800; Salaries Rs. 1,200; Advertisement Rs. 200.
(iii) Rs. 2,000 due for interest on investment was not actually received.
Answer:
Harimohan Charitable Institution
Income and Expenditure Account for the year ending March 31, 2007 Dr.

Question 3.
From the following particulars, prepare Income and Expenditure Account:


Answer:
Income and Expenditure Account for the year ending ………

Question 4.
Following is the information given in respect of certain items of a Sports Club. Show these items in the Income and Expenditure Account and the Balance Sheet of the Club :

Answer:
Sports Club
Balance Sheet as at March 31,2006

These Items does not affect the Income and Expenditure Account.

Question 5.
How will you deal with the following items while preparing for the Bombay Women Cricket Club, its Income and Expenditure Account for the year ending 31.3.2007 and its Balance Sheet as on 31.3.2007 :

Give reasons for your answers.
Answer:
(a) Donation received Rs. 12,25,000 for the construction of a permanent Pavilion is a specific donation. Therefore, it will be capitalised and shown on the liability side of Balance Sheet at the end. Amount spent on the construction of Pavilion till the end of year Rs. 10,80,0 will be deducted from the Donation received. Estimated cost of construction will not be shown in Income and Expenditure Account and in Balance Sheet of the club. It should be noted that after the completion of the purpose of a specific fund, the balance lying in that fund is transferred to the Capital Fund.

Bombay Women Cricket Club
Balance Sheet as at
March 31st, 2007

(b) Tournament Fund is a special fund. Therefore, it is shown on the liability side of the Balance Sheet. Any receipt relating to the fund (subscription for tournament) is added to the fund and expenses (Expenditure incurred on conducting tournaments) are deducted from the fund.

Bombay Women Cricket Club
Balance Sheet
as at March 31st, 2007

(c) Unless otherwise stated in the question, whole of the Life Membership Fee is capitalised. Therefore Rs. 28,000 received as Life Membership Fee will be shown on the liability side of the Balance Sheet at the end.

Bombay Women Cricket Club
Balance Sheet
as at March 31st, 2007

Question 6.
From the following receipts and payments and information given below, prepare Income and Expenditure Account and opening Balance Sheet of Adult Literacy Organisation as on December 31, 2006:
Receipt and Payment Account for the year ending as on December 31, 2006

Information:
(i) Subscription outstanding as on 31.12.2005, Rs. 2,000 and on December 31, 2006, Rs.1,500.
(ii) On December 31,2006 Salary outstanding Rs. 600, and one month Rent paid in advance.
(iii) On Jan. 01, 2005 organisation owned Furniture Rs. 12,000, Books Rs. 5,000.
Answer:
Adult Literacy Organisation
Income and Expenditure Account
for the year ending December 31, 2006

Adult Literacy Organisation
Opening Balance Sheet
as at January 1st, 2006

Adult Literacy Organisation
Closing Balance Sheet as at
December 31st, 2006

Question 7.
The following is the account of cash transactions of the Nari Kalayan Samittee for the year ended December 31, 2006 :

You are required to prepare an Income and Expenditure Account after the following adjustments :
(a) Subscription still to be received are Rs. 750, but subscription include Rs. 500 for the year 2007.
(b) In the beginning of the year the Sangh owned building Rs. 20,000 and furniture Rs. 3,000 and Books Rs. 2,000.
(c) Provide depreciation on furniture @ 5% (including purchase), books @ 10% and building @ 5%.
Answer:
Nari Kalayan Samittee
Income and Expenditure Account for the year ending

Question 8.
Following is the Receipt and Payment Account of Indian Sports Club, prepared Income and Expenditure Account, Balance Sheet as on December 31, 2006 :

Other Information:
Subscription outstanding was on December 31, 2005 Rs. 1,200 and Rs. 3,200 on December 31, 2006. Locker rent outstanding on December 31,2006 Rs. 250. Salary outstanding on December 31,2006 Rs. 1,000.

On January 1, 2006, club has Building Rs. 36,000, furniture Rs. 12,000. Sports equipments Rs. 17,500. Depreciation charged on these items @ 10% (including Purchase).

Question 9.
From the following Receipt and Payment Account of Jan Kalyan Club, prepare Income and Expenditure Account and Balance Sheet for the year ending December 31, 2006:


Answer:
Jan Kalyan Club
Income and Expenditure Account
for the year ending

Question 10.
Receipt and Payment Account of Shankar Sports Club is given below, for the year ended December 31, 2006 :
Answer:
Receipt and Payment Account
for the year ending Dec. 31, 2006

Prepare Income and Expenditure Account and Balance Sheet with help of following Information-:

Subscription outstanding on 31st December, 2005 is Rs. 1,200 and Rs. 2,300 on 31.12.2006, opening stock of postage stamps is Rs. 300 and closing stock is Rs. 200, Rent Rs. 1,500 related to 2005 and Rs. 1,500 is still unpaid.

On January 1, 2006 the club owned furniture Rs. 15,000, Furniture valued at Rs. 22,500 on 31.12.2006. The club took a loan of Rs. 20,000 (@ 10% p.a.) in 2005.
Answer:

Question 11.
Prepare Income and Expenditure Account and Balance Sheet for the year ended December 31, 2006 from the following Receipt and Payment Account and Balance Sheet of Culture Club :


Answer:

Question 12.
From the following Receipt and Payment Account prepare final accounts of a Unity Club for the year ended March 31, 2007 :


Additional Information:
1. The Club had 500 members each paying an annual subscription of Rs. 150.
2. On- 31.3.2007 salaries outstanding amounted to Rs. 1,200 and salaries paid included Rs. 6,000 for the year 2005-06.
3. Provide 5% depreciation on Land and Building.
Answer:

Question 13.
Following is the information in respect of certain items of a Sports Club. You are required to show them in the Income and Expenditure Account and the Balance Sheet.

Answer:

These items does not affect the Income and Expenditure Account.

Question 14.
Receipt and Payment Account of Maitrey Sports Club showed that Rs. 68,500 were received fey way of subscriptions for the year ended on March 31,2006.
The additional information was as under:
1. Subscription Outstanding as on March 31, 2005 were Rs. 6,500.
2. Subscription received in advance as on March 31,2005 were Rs. 4,100.
3. Subscription Outstanding as on March 31, 2006 were Rs. 5,400.
4. Subscription received in advance as on March 31, 2006 were Rs. 2,500.
Show how that above information would appear in the final accounts for the year ended on March 31, 2006 of Maitreya Sports Club.
Answer:
Calculation of Subscription

Subscription credited to Income and Expenditure Account for the year ended on March 31, 2006 is Rs. 69,000. Subscription Outstanding as on 31.3.2006 is Rs. 5,400 and should be shown on the assets side of the Balance Sheet as on March 31, 2006 and subscriptions of Rs. 2,500 received in advance as on March 31, 2006 on the liabilities side of the balance sheet as on March 31, 2006.

Question 15.
Following is the Receipt and Payment Account of Rohatgi Trust:
Receipt and Payment Account
for the year ending December 31, 2006

Prepare Income and Expenditure Account for the year ended December 31, 2006 and a Balance Sheet as on that date after the following adjustments:

Subscription for 2006, still owing were Rs. 7,000. Interest due on defence bonds was Rs. 7,000, Rent still owing was Rs. 1,000. The book value of investment sold was Rs. 80,000, Rs. 30,000 of the investment were still in hand. Subscription received in 2006 included Rs. 400 from a life member. The total furniture on January 1, 2006 was worth Rs. 12,000. The salary paid for the year 2007 is Rs. 2,000.
Answer:
Rohatgi Trust
Income and Expenditure Account
for the year ending Dec. 31st, 2006

Question 16.
Following Receipt and Payment Account was prepared from the cash book of Delhi Charitable Trust for the year ending December 31, 2007:

Prepare Income and Expenditure Account for the year ended December 31, 2006, and a Balance Sheet as on that date after the following adjustments:
(a) It was decided to treat one-third of the amount received on account of donation as income.
(b) Insurance premium was paid in advance for three months.
(c) Interest on investment Rs. 1,100 accrued was not received.
(d) Rent Rs. 600: salary Rs. 900 and advertisement expenses Rs. 1,000 outstanding as on December 31,2007.
Answer:

Question 17.
From the following Receipt and Payment Account of a club, prepare Income and Expenditure Account for the year ended December 31, 2006 and the Balance Sheet as on that date :

Additional Information:
(a) The club has 100 members each paying an annual subscription of Rs. 900. Subscriptions outstanding on December 31,2005 were Rs. 3,600.
(b) On December 31, 2006, salary outstanding amounted to Rs. 1,000. Salary paid included Rs. 1,000 for the year 2005.
(c) On January 1,2006 the club owned land and building Rs. 25,000, furniture Rs. 2,600 and books Rs. 6,200.
Answer:
Income and Expenditure Account
for the year ending Dec. 31st, 2006.

Question 18.
Following is the Receipt and Payment Account of Women’s Welfare Club for the year ended December 31, 2007:

Prepare Income and Expenditure Account for the year ended December 31,2007 and Balance Sheet as on that date.
Answer:

Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 12 International Business 2 Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

International Business 2 NCERT Solutions for Class 11 Business Studies Chapter 12

International Business 2 Questions and Answers Class 11 Business Studies Chapter 12

Multiple Chioce Questions

Question 1.
Which of the following documents are not required for Obtaining an export license?
(a) IEC number
(b) Letter of credit
(c) Registration cum
(d) Bank account number membership certificate
Answer:
(b) Letter of credit

Question 2.
Which of the following documents is not required in connection with an import transaction?
(a) Bill of lading
(b) Shipping bill
(c) Certificate of origin
(d) Shipment advice
Answer:
(c) Certificate of origin

Question 3.
Which of the following do not form part of duty drawback scheme?
(a) Refund of excise duties
(b) Refund of customs duties
(c) Refund of export duties
(d) Refund of income dock charges at the port of shipment
Answer:
(a) Refund of excise duties

Question 4.
Which one of the following is not a document related to fulfill the customs formalities
(a) Shipping bill
(b) Export licence
(c) Letter of insurance
(d) Proforma invoice
Answer:
(b) Export licence

Question 5.
Which one of the following is not a part of export documents?
(a) Commercial invoice
(b) Certificate of origin
(c) Bill of entry
(d) Mate’s receipt
Answer:
(c) Bill of entry

Question 6.
A receipt issued by the commanding officer of the ship when the cargo is loaded on the ship is known as
(a) Shipping receipt
(b) Mate receipt
(c) Cargo receipt
(d) Charter receipt
Answer:
(b) Mate receipt

Question 7.
Which of the following documents is prepared by the exporter and includes details of the cargo in terms of the shippers name, the number of packages, the shipping bill, port of destination, name of the vehicle carrying the cargo?
(a) Shipping bill
(b) Packaging list
(c) Mate’s receipt
(d) Bill of exchange
Answer:
(a) Shipping bill

Question 8.
The document containing the guarantee of a bank to honour drafts drawn on it by an exporter is :
(a) Letter of hypothetication
(b) Letter of credit
(c) Bill of lading
(d) Bill of exchange
Answer:
(b) Letter of credit

Question 9.
Which of the following does not belong to the World Bank Group?
(a) IBRD
(b) IDA
(c) MIGA
(d) IMF
Answer:
(d) IMF

Question 10.
TRIP is one of the WTO agreements that deal with :
(a) Trade in agriculture
(b) Trade in services
(c) Trade-related investment
(d) None of these measures
Answer:
(d) None of these measures

Short Answer Questions

Question 1.
Discuss the formalities involved in getting an export license.
Answer:
Important formalities in getting an export license are as follows:

1. Opening a bank account in any bank authorized by the Reserve Bank of India (RBI) and getting an account number.
2.  Obtaining Import Export Code (EEC) number from the Directorate Genial Foreign Trade (DGFT) or Regional Import Export Licensing Authority.
3. Registering with the appropriate export promotion council.
4. Registering with Export Credit and Guarantee Corporation (ECGC) in order to safeguard against risks of non-payments.

Question 2.
Why is it necessary to get registered with an export promotion council?
Answer:
It is obligatory for every exporter to get registered with the appropriate export promotion council. Various export promotion councils such as Engineering Export Promotion Council (EEPC) and Apparel Export Promotion Council (AEPC) have been set up by the Government of India to promote and develop exports of different categories of products.

It is necessary for the exporter to become a member of the appropriate export promotion council and obtain a Registration cum Membership Certificate (RCMC) for availing benefits available to export firms from the Government.

Registration with the Export promotion council is necessary in order to protect overseas payments from political and commercial risks. Such registration also helps the export firm in getting financial assistance from commercial banks and other financial institutions.

Question 3.
What is IEC Number?
Answer:
Import Export Code (IEC) number is given to an export firm by Director General for Foreign Trade (DGFT) which the firm needs to be filled in various export/import documents. For obtaining the IEC number, a firm has to apply to the DGFT with documents such as exporter/importer profile, bank receipt of the requisite fee, a certificate from the banker on the prescribed form, two copies of photographs attested by the banker, details of the non-resident interest and declaration about the applicant’s non-association with caution listed firms.

Question 4.
What is pre-shipment finance?
Answer:
On receipt of the letter of credit and confirmation order, the exporter approaches his banker for obtaining pre-shipment finance to undertake export production. Pre-shipment finance is the finance that the exporter needs for procuring raw materials and other components, processing, and packaging of goods, and transportation of goods to the port of shipment.

Question 5.
Why is it necessary for an export firm to go in for pre¬shipment inspection?
Answer:
An export firm has to go in for pre-shipment inspection as required by the Government of India to ensure that only good quality products are exported from the country. The government has passed the Export Quality Control and Inspection Act, 1963 for the purpose of compulsory inspection of certain products by a competent agency as designated by the government.

If the product to be exported comes under such a category, the exporter needs to contact the Export Inspection Agency (EIA) or the other designated agency for obtaining an inspection certificate. The pre-shipment inspection report is required to be submitted along with other export documents at the time of exports.

Such an inspection is not compulsory in case the goods are being exported by star trading houses, trading houses, export houses, industrial unit’s setup in Export Processing Zones/ Special Economic Zones (EPZs/SEZs), and 100% Export Oriented Units (EOUs).

Question 6.
Discuss the procedure related to excise clearance of goods.
Answer:
Excise duty is payable on the materials used in manufacturing goods as per Central Excise Tariff Act. The exporter, therefore, has to apply to the concerned Excise Commissioner in the region Auth an invoice.

If the Excise Commissioner is satisfied, he may issue the exercise clearance. On many products of export which are competitive in the world market, the government may exempt the payment of excise duty or make a refund of excise at later stage. This scheme of exemption of excise duty is known as Duty Drawback.

The scheme is administrated by the Directorate of Drawback under the Ministry of Finance which is responsible for fixing the rates of drawback for different products. The work relating to sanction and payment of drawback is, however, looked after by the Commissioner of Customs or Central Excise Incharge of the Concerned port, airport or land custom station from where the export of goods is considered to have taken place.

Question 7.
Explain briefly the process of customs clearance of export goods.
Answer:
The goods must be cleared from the customs before they can be loaded on the ship. For obtaining customs clearance, the exporter prepares the shipping bill which contains particulars of the goods being exported, the name of the vessel, the port at which goods are to be discharged, country of final destination, exporter’s name and address, etc.

Five copies of the shipping bill along with the following documents are then submitted to the Customs Appraiser at the Customs House for clearance:

• Export Contract or Export Order
• Letter of Credit
• Commercial Invoice
• Certificate of Origin
• Certificate of Inspection, where necessary
• Marine Insurance Policy

After submission of these documents, the superintendent of the concerned port trust is approached for a carting order and after obtaining it, the Cargo is physically moved into the port area arid stored in a shed.

Question 8.
What is a bill of lading? How does it differ from the bill of entry?
Answer:
Bill of lading is a document wherein a shipping company gives
its official receipt of the goods put on board of its vessel and at the same time gives an undertaking to carry them to the port of destination. It is also a document of title to the goods and as such is freely transferable by the endorsement and delivery.

A bill of lading contains the following detail:

• Name of the Exporter or Shipper
• Name of the Consignee or Importer
• Identification Marks on Packages
• Description of Goods
• Number of Packages
• Fright Charges
• Name and Nationality of the ship
• Port of Shipment and Port of Destination.

Bill of entry – Bill of entry is a form supplied by the custom office to the importer. It is to be field in by the importer at the time of receiving the goods. It has to be submitted to custom office in triplicate. Various information such as names and address of the importer, name of the ship.

Number of packages, marks on the packages, description of goods, quantity and value of goods, name and address of the exporter, port of destination and custom duty payable should be given in the bill of entry.

Question 9.
What is the shipping bill?
Answer:
Shipping bill is the main document on the basis of which the customs office gives permission for export. Shipping bill contains particulars of the goods being exported, the name of the vessel, the port at which goods are to be discharged, country of final destination, exporters name and address, etc. Exporter prepares the shipping bill for obtaining customs clearance. Thus, we can say the shipping bill is the bill which is prepared by the exporter and required for the customs clearance.

Question 10.
Explain the meaning of mate’s receipt.
Answer:
A mate receipt is a receipt issued by the commanding officer of the ship when the cargo is loaded on the board, and contains the information about the name of the vessel, berth, date of shipment, description of packages, marks and numbers, condition of the cargo at the time of receipt on board the ship etc. The port superintendent, on receipt of port dues, hands over the mate’s receipt to the Clearing and Forwarding (C&F) agent.

Mate’s receipt are of two types – clean and foul receipt. If the mate at port is satisfied with packing, he will issue a receipt without remark known as Clean Receipt. But of mate is not satisfied with the condition of packing, he makes a remark to that effect on the receipt which is known as Foul Receipt may be converted into clean report by making some payment to the shipping company or by submitting indemnity bond.

Question 11.
What is a letter of credit? Why does an exporter need these documents?
Answer:
A letter of credit is a guarantee issued by the importer’s bank that it will honor up to a certain amount of export bills to the bank of the exporter. Letter of credit is the most appropriate and secured method of payment adopted to settle international transactions.

The exporter needs this letter to Insure against the non – payment of dues by the importer in the foreign country as there is always a risk in the collection of payment from the importers. Thus, in order to protect the exporter from financial loss “Letter of credit” is needed.

Question 12.
Discuss the process involved in securing payment for exports.
Answer:
After the shipment of goods the exporter informs the importer about the shipment of goods. Various documents needed to claim the title of goods and clearance of goods from custom include certified copy of the invoice, bill of lading, packaging list, insurance policy, certificate of origin and letter of credit.

The exporter sends these documents through banker with the instruction that these may be delivered to the importer after acceptance of the bill of exchange – a document which is sent along with the above-named documents.

Bill of exchange is an order to the importer to pay a certain amount of money only to or to order of the person or to the bearer of the instrument. On receiving the bill of exchange the importer releases the payment incase of sight draft or accepts the usance draft for making payment on maturity of bill of exchange. The exporter’s bank receives the payment through the importer’s bank and is credited to the exporter’s account.

The exporter can get immediate payment from his/her bank on the submission of documents by signing a Letter of dimity.Having received the payment for exports, the exporter needs to get a bank certificate of payment. Bank certificate of payment is a certificate which implies that the necessary documents relating to particular export consignment has been negotiated and the payment has been received in accordance with the exchange control regulations.

Question 13.
Differentiate between the followings:

1. Sight and Usance Drafts
2. Bill of Lading and Airways Bill
3. Pre-shipment and Post-shipment Finance

Answer:
1. Sight and Usance Drafts:
In the case of sight draft, the drawer instructs the bank to hand over the relevant documents to the importer against payment. But in the case of the usance draft, the drawer – instructs the bank to hand over the relevant documents to the importer against acceptance of the bill of exchange.

2. Bill of Lading and Airway Bill:
Bill of lading is a document prepared and signed by the master of the ship acknowledging the receipt of goods on board, it contains terms and conditions on which the goods are to be taken to the port of destination On the other hand, Airway Bill is a document wherein an airline/ shipping company gives its official receipt of the goods on board it’s aircraft and at the same time gives the undertaking to carry them to the port of destination.

3. Pre-shipment and Post – shipment Finance:
Pre-shipment finance is provided to an exporter for financing the purchase, processing, manufacturing or packaging of goods for export purpose while the post-shipment finance is provided to the exporter from the date of extending the credit after the shipment of goods to the export country.

Question 14.
Explain the meaning of the following documents used in connection with import transactions:
(i) Trade enquiry
(ii) Import license
(iii) Shipment of advice
(iv) Import general manifest
(v) Bill of entry.
Answer:
(i) Trade enquiry – The first thing that the importing firm has to do is together information about the countries and firms which export the given product. The importer can gather such information from the trade directories or trade associations and organisations or trade associations and organisations.

Having identified the countries and firms that export the product, the importing firm approaches the export firms with help of a trade enquiry for collecting information about their export prices and terms of exports.

A trade enquiry is a written request by an importing firm to the exporter for supply of information regarding the price and various terms and conditions on which the latter is ready to exports goods. After receiving a trade enquiry, the exporter prepares a quotation and sends it to the importer.

The quotation is known as proform an invoice. A proforma invoice is a document that contains details as to the quality’, grade, design size, weight and price of the export product, and the terms and conditions on which their export will take place.

(ii) Import licence – There are certain goods that can be imported freely, while others need licensing. The importer needs to consult that Export-Import policy in force to know whether the goods that he or she wants to import are subject to import licensing. In case goods can be imported only against the license, the importer needs to procure an import licence.

In India, it is obligatory for every importer to get registered with the Directorate General Foreign Trade or Regional Import Export Licensing Authority, and obtain an Import Export Code(IEC) number. This number is required to be mentioned on most of the import documents.

Shipment Advice – After loading the goods on the vessel, the overseas supplier dispatches the shipment advice to the importer. Shipment advice contains information about the shipment of goods. The information provided in the shipment advice includes details such as invoice number, bill of lading/airways bill number and date, name of the vessel with date, the port of export, description of goods and quantity, and the date of sailing of the vessel.

Import General Manifest – Goods are shipped by the overseas supplier as per the contract. The person in charge of the carrier (ship or airway) informs the officer in charge at the dock or the airport about the arrival of goods in the importing country. He provides the document called import general manifest.

(iii) Bill of entry- Bill of entry is a form supplied by the customs office to the importer. It is to be filled in by the importer at the time of receiving the goods. It has to be in triplicate and is to be submitted to the customs office. The bill of the entry contains information such as names and addresses of importers, name of the ship, number of packages marks on the packages, description of goods, quality and quantity of goods, value of goods, name and address of exporter, port of destination and custom duty payable.

Question 15.
List out major affiliated bodies of the World Bank.
Answer:
International Bank for Reconstruction and Development (IBRD) commonly known as the World Bank, an International Organization that assists in the development of the underdeveloped nations of the world especially in social sectors like health and education. Over time, additional organizations have been set up under the umbrella of the World Bank. As of today, the World Bank is a group of five international organizations responsible for providing finance to different countries. The group and its affiliates headquartered in Washington DC catering to the various financial needs of nations.

The affiliates of World Bank can be listed as under:

• International Bank for Reconstruction and Development (IBRD)
• International Financial Corporation (IFC)
• International Development Association (IDA)
• Multilateral Investment Guarantee Agency (MIGA)
• International CentreforSettlementoflnvestmentDisputes(ICSID)

Question 16.
Write short notes on the following :
(i) MIGA
(ii) World Bank
(iii) ITPO
(iv) IMF
Answer:
(i) MIGA (Multilateral Investment Guarantee Agency) – The multilateral InvestmentGuarantee Agency was established in April 1988 to supplement the functions of the World Bank and IFC.

Objective of MIGA :

• To encourage flow of direct foreign investment into the less developed member countries.
• To provide insurance cover to investors against political risks.
• To provide guarantee against non-commercial risks(likedangers involved in currency transfer was and civil disturbances and breach of contract)
• To insure new investments expansion of existing investments, privatisation and financial restructuring.
• To provide promotional and advisory services.
• To establish credibility.

(ii) World Bank – The International Bank for Reconstruction and Development (IBRD) commonly known as World Bank, was result of the Bretton Woods conference. The main objectives behind setting up this international organisation were to aid the task of reconstruction of the war-affected economies of Europe and assist in the development of the underdeveloped nation of the world. For the first few years, the world bank remained preoccupied with the task of restoring war-torn nations in Europe.

Having achieved success in accomplishing this task by late 1950s, the world bank turned its attention to the development of underdeveloped nations. It realised that by investing more and more in these countries especially in social sectors like health and education; it could bring about the needed social and economic transformation of the developing countries.

To give shape to this investment aspect in the under developed nations, the International Development Association (IDA) was formed in the year 1960. The main objective underlying setting up IDA has been to provide loans on concessional terms and conditions to those countries whose per capita incomes are below a critical level.

Concessional terms and conditions mean that:

• Repayment period is much longer than the repayment period of IBRD.
• The borrowing nation need not pay any interest on the borrowed amount. IDA thus provides interest free long term loans to the poor nations. IBRD also provides loans but these carry interest charged on commercial basis.

(iii) ITPO – Indian Trade Promotion Organisation was setup on 1st January 1992 under the companies Act 1956 by the Ministry of Commerce, Government of India. Its headquarter is at New Delhi. ITPO was formed by merging the twoerst while agencies viz., Trade development Authority and Trade Fair Authority of India.

ITPO is a service organisation and maintains regular and close interaction with trade, Industry and government. It serves the industry by organising trade fairs and exhibitions – both with in the country and outside, it helps export firms participate in international trade fairs and exhibitions, developing exports of new items, providing support and updated commercial business information. ITPO has five regional offices at Mumbai Bangalore, Kolkata, Kanpur and Chennai and four international offices at Germany, Japan, UAE and USA.

(iv) IMF – International Monetary Fund (IMF) is the second international organisation next to the World Bank IMF which came into existence in 1945 has its headquarters located in Washington DC, in 2005, it had I9l countries as its members. The major idea underlying the setting up of the IMF is to evolve an orderly international monetary system, i.e., facilitating a system of international payments and adjustments in exchange rates among national currencies.

The objective of IMF:

• To promote international monetary cooperation through a permanent institution.
• To facilitate the expansion of balanced growth of international trade and to contribute thereby to the promotion and maintenance of high levels of employment and real income.
• To promote exchange stability with a view of maintaining orderly exchange arrangements among member countries.

Long Answer Questions

Question 1.
Rekha Garments has received an order to export 2000 men’s trousers to Swift Imports Ltd. located in Australia. Discuss the procedure that Rekha Garments would need to go through for executing the export order.
Answer:
Export Procedure – The main steps involved in exporting goods from India are as follows :

(1) Receiving Trade Enquiry and Sending Quotation – The prospective buyer of a product sends an enquiry to different exporters. Generally, the following information is sought in the trade enquiry:

• Specification of goods available
• Quantity of goods available
• Price per unit
• Terms of shipment
• Terms of payment
• Schedule of delivery

In response to the trade enquiry, the exporter sends a quotation giving information sought in the trade enquiry. Sometimes the exporter may send a proforma invoice containing the necessary details and the approximate amount to be paid in case of import. Various informations regarding quality, grade, size and mode of delivery and payment are provided.

(2) Receiving an Indent and Sending Confirmation – The intending importer, after scrutiny of quotation/proforma invoice, sends an indent. The exporter may receive an indent directly from the importer or through an indent house. An indent house is an agent which imports goods on behalf of importers. It serves as a middleman or intermediary between the importers and exporters. Indent houses charge commissions for their services from importers.

An indent refers to an order received from abroad for sale (export) of goods. It contains the following details:

• Quantity’ of goods to be sent
• Quality, size and design of goods
• pride
• Nature of packing and marking
• Modi of shipment and insurance
• Period of delivery
• Method of payment

An indent is generally prepared, in duplicate one copy is sent to the exporter. The second copy is filed by the importer in his records.

(3) Securing Letter of Credit – After receipt of indent the exporter satisfies himself as to the credit-worthiness of the importer. A bank reference may be sufficient in some cases. Generally, the importer is requested to arrange a letter of credit in favour of the exporter.

A letter of credit (L/C) is an undertaking by its issuer (the importer’s bank) that the bills of exchange drawn by the foreign dealer on the importer will be honoured on presentation upto the specified amount. It is a guarantee by the bank to the foreign dealer that his bills upto the amount mentioned therein will be honoured. Letter of credit is the most appropriate and secure method of payment adopted to settle international transactions.

(4) Obtaining IEC Number and RBI Code Number – Export of goods in India is subject to custom laws which demand that the export firm must have an export licence before it proceeds with exports. Importer Exporter code (IEC) number is to be filled in various import export formalities.

In order to obtain this number, an exporter has to apply to the Regional Import-Export Licensing Authority in the prescribed form. The application should be submitted along with the following documents:

• Profile of the exporter
• Bank receipt for the required fee
• Certificate from the banker in the prescribed form
• Two copies of photographs attested by the banker
• Detail of non-resident interest, if any
• Declaration about the applicant’s non-association with a caution listed firm.

If the Regional Import Export Licensing Authority is satisfied with the documents and formalities, IEC number is issued.

Reserve Bank of India (RBI) requires exporters to obtain RBI code No. before exporting goods from India. This number has to be mentioned in various documents to obtain permission from the customs authorities for shipment of goods.

It is obligatory for every exporter to get registered with the appropriate export promotion councils such as Engineering Export Promotion Council and Apparel Export Promotion Council to promote and develop exports of different categories of products.

(5) Obtaining Registration cum Membership Certificate (RCMC) from Export Promotion Council/Commodity Board In order to avail of export incentives, concessions and facilities (e.g., cash compensatory support, REP licenses, etc.) an exporter is required to obtain a Registration-cum-membership certificate (RCMC).

This certificate is issued by Export Promotion Councils Commodity Boards/ Federation of Indian Export Organisations, etc. Application has to be made to the concerned authority in the prescribed form along with membership fee, IEC number, bank certificate and other specified documents. If the concerned authority is satisfied, a Registration-cum- membership certificate is issued.

(6) Manufacturing/Procuring Goods and Packing Them -Now the exporter starts manufacturing or procuring the goods as required by the importer. If the materials required for the manufacture of goods are subject to excise duty, excise clearance is required.

Export goods are either exempted from the excise duty’ or this duty, if paid, is refunded back to the exporter.
The exporter collects the goods from his factory or purchases the same from the market. The goods must correspond to the instructions given in the indent in regard to quantity, quality, make of the goods, etc. Then the goods are properly packed in accordance with the instructions given by the importer.

In the absence of such instructions, goods must be packed keeping in mind the safety of goods and cost of freight. These packages should be properly marked according to the instructions if any, so that they may be easily distinguished from the goods belonging to others.

(7) Procuring Export Inspection Certificate – After the goods are packed in accordance with the prescribed specifications the exporter applies to the Export Inspection Agency. The agency sends an inspector for inspecting the export consignment.

Once the inspector is satisfied that the goods confirm to the prescribed specifications, an Export Inspection Certificate is issued. This certificate is required by the customs authorities for the shipment of goods. Such inspection is not compulsory in case the goods are being exported by star trading houses, export houses, units of export processing zone and EOU units.

(8) Appointing Forwarding Agents – Once Export Inspection Certificate is obtained, the goods can be exported. But before the goods are shipped the exporters are required to get clearance from customs authorities. Generally, it is not possible or convenient for the exporter to go to the port and perform these formalities. Therefore, he engages a forwarding agent. Forwarding agents are specialists who perform the customs fonnalities on behalf of exporters in consideration for some commission.

(9) Dispatching Goods to Port and Sending Receipt to Agent – After appointing the forwarding agent, the exporter will despatch the goods by rail or truck to the port town. He will then endorse the railway receipt (R/R) or Lorry Receipt (L/R) in the agent’s favour along with the necessary instructions to the forwarding agent and send the same.

(10) Formalities by Forwarding Agent –
(i) Taking delivery of goods at port town: When the goods arrive at the port town, the forwarding agent takes delivery from the railway or truck on submission of R/R. He then arranges for storage of the consignment in a warehouse. The exporter endorses the Railway Receipt (RR) in favour of agent to enable him to take delivery of goods at port of shipment.

(ii) Obtaining shipping Order: The forwarding agent approaches a shipping company or its agent to hire space in the ship. He enters into an agreement with the shipping company. The shipping company issues ‘ a document called the ‘shipping order’ to him. The shipping order is a document containing an instruction to the captain of the ship to accept ‘ the specified goods on board the ship from the exporter whose name is mentioned in it.

Shipping order may be either a Ready Shipping Order or Forward Shipping Order. In the case of the former, the name of the ship and the date of departure of the ship are mentioned while in the latter only the date of departure is given. After the agreement is made, the exporter has to send goods by that very ship only.

Even if he is unable to send the goods due to some reason, he has to pay the full freight. Such a freight is called ‘dead freight’.In case the consignment is very large, the forwarding agent may hire a whole ship or major part of it. The agreement to hire the whole ship or major part of the ship is called charter Party’’.

(iii) Obtaining customs clearance : In order to obtain customs clearance, the exporter or his agent prepares three copies of shipping bill in printed forms. A shipping bill contains information about name and address of the exporter, port of loading port of destination, name of the ship, description and value of goods, identification marks on packages.

There, are different types of shipping bills for dutiable goods, duty free goods and duty drawback goods. Along with three copies of the shipping bill, the agent has to submit the forwarding documents to the customs office:

• Indent
• Letter of credit
• Commercial invoice
• Certification of inspection and origin
• Marine insurance policy
• A declaration that the particulars given in the shipping bill are in conformity with the indent

Then the forwarding agent makes payment of export duty as calculated by the customs office (in case of dutiable goods). He gets Customs Export Pass which permits him to bring the goods to the docks.

(iv) Paying dock dues: After paying the export duty, the forwarding agent makes arrangements for carrying goods to the docks. For this purpose, he fills two copies of‘DockChallan’ and submits them to the dock authorities (Landing aid Shipping Dues Office) along with one copy of each of the shipping bill and the shipping order.

After dock charges are paid, dock authorities retain one copy of the dock challan and return the second copy duly signed to the forwarding agent. This signed copy is called ‘dock receipt’ or ‘Port Trust Dues Receipt’.

(v) Obtaining permission for shipment: Then the forwarding agent brings goods to the docks. The Customs Preventive Officer at the docks inspects the goods on the basis of the declaration given in the Shipping Bill. If the officer is satisfied he gives permission to load the goods on the ship by issuing a ‘Customs Export Pass’ or by an endorsement ‘Let Ship’ on the duplicate copy of the shipping bill.

(vi) Securing mate‘s receipt: When the goods have been loaded on the ship the captain of the ship or his assistant (called ‘mate’) issues a receipt called on ‘ Mate’s Receipt’. A mate’s receipt is a receipt issued by the commanding officer of the ships when the cargo is loaded on board and contains the information about the name of the vessel, berth, date of shipment, description of package marks and numbers, condition of the cargo at the time of receipt on board die ship etc.

(vii) Obtaining bill of lading: After dispatching the goods, the forwarding agent goes to the office of the shipping company. He submits the mate’s receipt and gets in exchange a Bill of Lading. He has to fill in three forms of bill of lading giving details regarding the goods, name of the ship, port of destination, etc. If the agent pays the freight in advance, he will get the bill of lading and Freight.

Note duly signed by an authorized official of the shipping company. In case the freight is to be paid by the importer at the port of destination, the bill of lading will be marked ‘Freight Forward’. The importer cannot obtain delivery of goods without a bill of lading.

(viii) Getting insurance policy: The forwarding agent gets the goods insured against Marine risks. Marine insurance should be done strictly according to the importer’s instructions. Generally, insurance is done for the actual cost of the goods plus a margin of profit.

(ix) Sending advice to the exporter: The forwarding agent sends the bill of lading, shipping bills, insurance policy, and other documents to exporters and informs them of the shipment of goods.

(11) Getting Certificate of Origin – Some importing countries in order to get Tariff Concession ask the exported to send a certificate of origin. Import regulations of a foreign country may require that all import consignments must carry a certificate of origin.

Trade agreements between two countries may offer preferential treatment in respect of import duties on goods produced in such countries. Goods manufactured in a particular country may be banned for import in the foreign market. In such cases, the exporter is required to send a certificate of origin to the importer. The certificate of origin certifies the name of the country in which the exported goods are manufactured.

The Government of India has authorized the Chambers of Commerce. Trade Associations and Export Promotion Councils to issue such certificates. The exporter will send the certificate of origin to the importer so that the latter may enjoy the benefit of concessional custom duties.

(12) Getting Consular Invoice – When the import duties are charged ad valorem (on the basis of the value of goods) the customs authorities will have to open the packages to calculate duties. To avoid this problem, the exporter procures a consular invoice and sends it to the importer.

The value of the goods and other particulars are stated in this invoice. It is signed by the consul of the importer’s country stationed in the exporter’s country. The consular invoice enables the importer to obtain prompt clearance of goods when they arrive at the port of destination. It saves time and trouble for the importer.

Consular invoice is prepared in triplicate one each for the importer, customs authorities in the importing country and the consul. The customs authorities abroad accept this invoice as true statement of the contents and asses custom duty on this basis without opening the packages.

(13) Preparing Commercial Invoice and Submitting Documents to Bank – Now the exporter prepares a commercial invoice for the goods shipped. It is prepared in triplicate according to the terms and conditions agreed upon between the importer and the exporter.

After preparing the invoice, the exporter submits all relevant documents-commercial invoice, bill of lading, insurance policy, certificate of origin, consular invoice, etc. to his bank for transmission to the importer’s bank.

(14) Securing Payment – The exporter needs various documents to claim the title of goods on their arrival at his country. The exporter obtains payment either by means of a documentary letter of credit or through documentary bill of exchange. The document include certified copy of invoice, bill of lading, packing list, insurance policy etc.

(15) Claiming Export Incentives – In the last step, the exporter claims export incentives offered by the Government for export promotion. These incentives are as under :

• Cash compensatory support: Exporters of specified products are paid cash compensation.
• Duty drawback : The import duty paid by the exporter on imported raw materials and excise duty paid on manufactured goods which are exported are refunded.
• Import replenishment: An import licence for import of raw materials is issued to the exporter so that he may produce export goods.

Question 2.
Your firm is planning to import textile machinery from Canada. Describe the procedure involved in importing.
Answer:
Following is the procedure involved in importing textile machinery from Canada:
1. Trade Enquiry:
The importing firm approaches the textile machinery export firms in Canada with the help of trade enquiry they collecting information about their export prices and terms of exports. After receiving a trade enquiry, the exporter will prepare a quotation called proforma invoice and send it to our firm.

2. Procurement of Import Licence:
We will consult the Export-Import (EXIM) policy in force to know whether the textile machinery imports are subject to import licensing. In case it can be imported only against the license, we will procure an import license.

3. Obtaining Foreign Exchange:
As payment for imports will be made in Canadian dollars, our firm will have to make an application to a bank authorized by RBI to issue foreign exchange.

4. Placing Order or Indent:
After obtaining the import license, our firm will place an import order or indent with the exporter for supply of the specified products containing information about the price, quantity, grade and quality of machinery and the instructions relating to packing, shipping, ports of shipment and destination, delivery schedule, insurance and mode of payment.

5. Obtaining Letter of Credit:
If the payment terms agreed between us and the overseas supplier then our firm should obtain the letter of credit from its bank and forward it to the overseas supplier.

6. Arranging for Finance:
Our firm would make arrangements in advance to pay to the exporter on arrival of goods at the port.

7. Receipt of Shipment Advice:
Advice afterloading the ordered textile machinery on the vessel, the overseas supplier will dispatch the shipment advice to our firm which contains information about the shipment of goods.

8. Retirement of Import Documents:
After shipping the machinery, the overseas supplier will prepare a set of necessary documents including bill of exchange, commercial invoice, bill of lading/airway bill, packing list, certificate of origin, marine insurance policy, etc. and will hand it over to his or her banker for their onward transmission and negotiation to our firm.

The acceptance of bill of exchange for the purpose of getting delivery of the documents is known as retirement of import documents after which the bank handover the import documents to the importer.

9. Arrivals of Goods:
Goods will be shipped by the overseas supplier as per the contract. The officer in charge at the dock will provide the document called import general manifest on the basis of which unloading of cargo will take place.

10. Customs Clearance and Release of Goods:
Textile machinery imported into India will have to pass through customs clearance. Firstly, our firm will have to obtain a delivery order, pay dock dues and obtain port trust dues receipt and then fill in a form bill of entry has to be presented to the dock superintendent. The examiner will give his report on the bill of entry and we will present the bill of entry to the port authority who will issue the release order after receiving the necessary charges.

Question 3.
Discuss the principal documents used in exporting.
Answer:
Principal Export Documents – These documents are required for the transfer of goods from exporter to the importer and for the realization of payment. The principal export documents are given below :

(1) Commercial invoice – This invoice is a seller’s bill for merchandise and contains information about goods such as quantity, total value, number of packages, name of ship etc. The commercial invoice contains the following details:

• Name and address of the exporter
• Name and address of the importer
• Name of the ship
• Date of sailing
• Export order number and date
• Number of packages and marks on them
• Detailed description of the goods – quantity, price, total value etc.
• Terms of payment

(2) Packing List – This list contains the date of packing, order number, corresponding invoice number, details of shipping, bill of lading number, date of sailing and details of goods in each package and marks.

(3) Certificate of Inspection – This document certifies that the consignment has been inspected as required under the law. It is issued by the Export Inspection Agency or the authorised person. It ensures that the goods exported are of proper quality. Some countries have made this certificate mandatory for the goods being imported to their countries.

(4) Insurance Policy – When goods are sent from one country’ to another country, they are exposed to various risks of loss or damage.’ In order to protect against these risks, the exporter is required to insure
the goods and obtain an insurance policy. This policy protects the risks of loss or damage in transit and is sent to the importer.

(5) Certificate of Origin – This certificate certifies the origin of the goods. It is required by the importer to obtain benefit of concessional customs duty in his country when goods produced in the exporter’s country enjoy such concession.

Certificate of origin is issued by the Exporter Promotion Council or Chamber of Commerce or the Government Department in the exporter’s country. This certificate is also required when there is a ban on imports of certain goods from selected countries. The goods are allowed to be brought into the importing country if these are not originating from the banned countries.

(6) Bill of Lading- Bill of lading is a documents wherein a shipping company gives its official receipts of the goods put on board. The main functions/features of bill of lading are as follows:

(a) A receipt of goods: Bill of lading is a receipt of goods delivered to the shipping company. It contains description and condition of the goods received by the shipping company.

(i) A document of title of goods : Bill of lading serves as a document of title to the goods. A bonafide holder of bill of lading can got ownership of the goods. The ownership can be transferred by endorsement of the bill of lading.

(ii) A contract of affreightment: Bill of lading is a written contract between the shipper (consignor) and the shipping company. It contains the terms and conditions of the contract of carriage. Under this contract the shipping company undertakes to carry the goods in consideration of a price called freight.

(iii) A collateral security: Bill of lading can be used as a collateral security for raising loan. Bill of lading is a document in writing signed on behalf of the owner of the ship in which goods are loaded acknowledging the receipt of the goods, and undertaking to’deliver them at the end of the voyage, subject to the specified conditions.

A bill of lading contains the following particulars:

• Name of the ship and its captain
• Date of shipment
• Place of loading
• Port of destination
• Name and address of the exporter
• Name and address of the importer
• Description of the goods
• Number of packages
• Marks thereon, if any
• Amount of freight

A bill of lading is prepared in triplicate. One copy is sent to the importer, another copy is given to the captain of the ship; and the third copy is retained by the exporter.

Is bill lading a negotiable instrument ? A bill of lading contains some of the features of a negotiable instrument. It can be transferred by endorsement and delivery. It is freely transferable and the transferee can sue in his own name and give a valid discharge to the person liable.

However, it is not a negotiable instrument in the sense a bill of exchange, a promissory note or a cheque is. In case of a negotiable instrument, the transferee gets a better title than that of the transferor himself provided the transferee has acquired it in good faith and for value.

In a bill of lading, the transfered does not get better title than that of the transferor. If the transferor’s title is bad or defective, the transferee also gets a bad or defective title even though he might have accepted it in good faith and for valuable consideration.Thus, a bill of lading may be called a semi-negotiable or quasi- negotiable instrument.

(7) Charter Party – A charter party is a formal agreement in writing between the shipowner and the exporter under which the whole ship or a substantial part of it is hired to carry goods for a specified voyage or for a particular time period. It is a contract of affreightment containing all the terms and conditions of the contract. A charter party usually contains the following particulars:

• Name of the ship
• Place of loading
• Port of destination
• Name and address of the exporter (consignor)
• Name and address of the importer (consignee)
• Particulars of goods
• Amount of freight
• Expected perils and lay days.

(i) Airways Bill – Like a bill of lading, an airways bill is a document wherein an airline company gives an undertaking to carry them to the port of destination the goods boarded. It is a document of title to the goods and as such is freely transferable by the endorsement and delivery.

(9) Bill of Exchange – This is a document relating to the payment for the goods supplied. According to the Negotiable Instruments Act, “a bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a person or to the bearer of the instrument”. In case of external trade, the exporter draws a bill of exchange on the importer asking him to make payment to the specified bank. With this bill, documents of title to goods are attached.

Therefore, such a bill is known a ‘documentary bill of exchange’ The exporter’s bank will send this bill and documents to its branch or agent in the importer’s country. The branch or agent will present the bill to the importer. If the bill is marked D/A (Documents against Acceptance), documents will be handed over to the importer or his bank after they have accepted the bill.

On maturity the concerned bank receives the payment and credit the amount to the exporter’s account. In case the bill is marked D/P (Documents against Payment), the documents will be delivered only after the importer has paid full amount of the bill.

Question 4.
List and explain various incentives and schemes that the government has evolved for promoting the country’s export.
Answer:
(i) Duty drawback scheme:
Since goods meant for exports are not consumed domestically, these are not subjected to payment of various excise and customs duties. Any such duties paid on export goods are, therefore, refunded to exporters on the production of proof of exports of these goods to the concerned authorities.

Such refunds are called duty drawbacks. Some major duty drawbacks include refund of excise duties paid on goods meant for exports, refund of customs duties paid on raw materials and machines imported for export production. The latter is also called customs drawback.

(ii) Export manufacturing under bond scheme:
This facility entitles firms to produce goods without payment of excise and other duties. The firms desirous of availing such facility have to give an undertaking (i.e., bond) that they are manufacturing goods for export purposes and will export such products on their production.

(iii) Exemption from payment of sales taxes:
Goods meant for export purposes are not subject to sales tax. Even for a long time, income derived from export operations had been exempt from payment of income tax. Now this benefit of exemption from income tax is available only to 100 percent Export Oriented Units (100 percent EOUs) and units set up in Export Processing Zones (EPZs)/Special Economic Zones (SEZs) for select years.

We shall shortly discuss the 100 percent Export Oriented Units (100 percent EOUs) and units set up in Export Processing Zones (EPZs)/Special Economic Zones (SEZs) in the succeeding paragraphs.

(iv) Advance licence scheme:
It is a scheme under which an exporter is allowed the duty-free supply of domestic as well as imported inputs required for the manufacture of export goods. As such the exporter is not required to pay customs duty on goods imported for use in the manufacture of export goods. The advance licenses are available to both the types of exporters those who export on a regular basis and also to those who export on an Adhoc basis.

The regular exporters can avail themselves of such licenses against their production programmes. The firms exporting intermittently can also obtain these licenses against specific export orders.

(v) Export Promotion Capital Goods Scheme (EPCG):
The main objective of this scheme is to encourage the import of capital goods for export production. This scheme allows export firms to import capital goods at negligible or lower rates of customs duties subject to actual user conditions and fulfillment of specified export obligations. If the said conditions are fulfilled by the manufacturers, then they can import the capital goods either at zero or concessional rate of import duty.

Supporting manufacturers and service providers are also eligible to import capital goods under this scheme. This scheme is especially beneficial to the industrial units interested in modernization and upgradation of their existing plant and machinery. Now service export firms can also avail of this facility for importing items such as computer software systems required for developing software for purposes of exports.

(vi) Scheme of recognising export firms as export house, trading house and superstar trading house:
With an objective to promote established exporters and assist them in marketing their products in international markets, the government grants the status of Export House, Trading House, Star Trading House to select export firms. This status is granted to a firm on its achieving a prescribed average export of performance in past select years.

Besides attaining a minimum of past average export performance, such export firms have to also fulfill other conditions as laid down in the import-export policy. Various categories of export houses have been recognized with a view to building marketing infrastructure and expertise required for export promotion.

These houses are given national recognition for export promotion. They are required to operate as highly professional and dynamic institutions and act as an important instrument of export growth.

(vii) Export of Services:
In order to boost the export of services, various categories of service houses have been recognized. These houses are recognized on the basis of the export performance of the service providers. They are referred to as Service Export House, International Service Export House, International Star Service Export House based on their export performance.

(viii) Export finance:
Exporters require finance for the manufacture of goods. Finance is also needed after the shipment of the goods because it may take some time to receive payment from the importers. Therefore, two types of export finances are made available to the exporters by authorized banks. They are termed pre-shipment finance or packaging credit and post-shipment finance.

Under pre-shipment finance, finance is provided to an exporter for financing the purchase, processing, manufacturing or packaging of goods for export purpose. Under the post-shipment finance scheme, finance is provided to the exporter from the date of extending the credit after the shipment of goods to the export country. The finance is available at concessional rates of interest to the exporters.

(ix) Export Processing Zones (EPZs):
Export Processing Zones are industrial estates, which form enclaves from the Domestic Tariff Areas (DTA). These are usually situated near seaports or airports. They are intended to provide an internationally competitive duty-free environment for export production at low cost. This enables the products of EPZs to be competitive, both qualitywise and pripe-wise, in the international markets.

These zones have been set up at various places in India which include: Kandla (Gujarat), Santa Cruz (Mumbai), Falta(West Bengal), Noida (Uttar Pradesh), Cochin (Kerala), Chennai (Tamil Nadu), and Vishakapatnam (Andhra Pradesh). Santa Cruz zone is exclusively meant for electronic goods and gem and jewellery items. All other EPZs deal with multifarious items.

Recently the EPZs have been converted to Special Economic Zones (SEZs) which are more advanced form of export processing zones. These SEZs are free from all rules and regulations governing imports and exports units except relating to labour and banking Government has also permitted development of EPZs by private, state or joint sector. The inter-ministerial committee on private EPZs has already cleared proposals for setting up of private EPZs in Mumbai, Surat and Kanchipuram.

(x) 100 percent Export Oriented Units (100 percent EOUs):
The 100 percent Export Oriented Units scheme, introduced in early 1981, is complementary to the EPZ scheme. It adopts the same production regime, but offers a wider option in location with reference to factors like source of raw materials, ports, hinterland facilities, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. EOUs have been established with a view to generating additional production capacity for exports by providing an appropriate policy framework, flexibility of operations and incentives.

Question 5.
Identify various organizations that have been set up in the country by the government for promoting country’s foreign trade.
Answer:

Various organizations that have been set up in the country by the government for promoting the country’s foreign trade are as follows:
1. Department of Commerce:
Department of Commerce in the Ministry of Commerce, Government of India is the apex body responsible for the country’s external trade and all matters connected with it. This may be in the form of increasing commercial relations with other countries, state trading, export promotional measures and the development, and regulation of certain export-oriented industries and commodities. The Department of Commerce formulates policies in the sphere of foreign trade. It also frames the import and export policy of the country in general.

2. Export Promotion Councils (EPCs):
Export Promotion Councils are non profit organisations registered under the Companies Act or the Societies Registration Act, as the case may be. The basic objective of the export promotion councils is to promote and develop the country’s exports of particular products falling under their jurisdiction. At present there are 21 EPC’s dealing with different commodities.

3. Commodity Boards:
Commodity Boards are the boards which have been specially established by the Government of Ifidia for the development of production of traditional commodities and their exports. These boards are supplementary to the EPCs. The functions of commodity boards are similar to those of EPCs. At present there are seven commodity boards in India: Coffee Board, Rubber Board, Tobacco Board, Spice Board, Central Silk Board, Tea Board, and Coir Board.

4. Export Inspection Council (EIC):
Export Inspection Council of India was setup by the Government of India under Section 3 of the Export Quality Control and Inspection Act 1963. The council aims at sound development of export trade through quality control and pre-shipment inspection.

The council is an apex body for controlling the activities related to quality control and pre-shipment inspection of commodities meant for export. Barring a few exceptions, all the commodities destined for exports must be passed by EIC.

5. Indian Trade Promotion Organisation(ITPO):
Indian Trade Promotion Organisation was setup on 1 st January 1992 under the Companies Act 1956by the Ministry ofCommerce, Government oflndia. Its headquarter is at New Delhi. ITPO was formed by merging the two erstwhile agencies viz., Trade Development Authority and Trade Fair Authority of lndia.

ITPO is a service organisation and maintains regular and close interaction with trade, industry and Government. It serves the industry by organising trade fairs and exhibitions both within the country and outside, It helps export firms participate in international trade fairs and exhibitions, developing exports of new items, providing support and updated commercial business information. ITPO has five regional offices at Mumbai, Bangalore, Kolkata, Kanpur and Chennai and four international offices at Germany, Japan, UAE and USA.

6. Indian Institute of Foreign Trade (IIFT):
Indian Institute of foreign Trade is an institution that was setup at 1963 by the Government of India as an autonomous body registered under the Societies Registration Act with the prime objective of professionalizing the country’s foreign trade management; It has recently been recognised as Deemed University. It provides training in international trade, conduct researches in areas of international business, and analysing and disseminating data relating to international trade and investments.

7. Indian Institute of Packaging (IIP):
The Indian Institute of Packaging was set up as a national institute jointly by the Ministry of Commerce, Government of India, and the Indian Packaging industry and allied interests in 1966. Its headquarters and principal laboratory is situated at Mumbai and three regional laboratories are located at Kolkata, Delhi and Chennai.

It is a training-cum-research institute pertaining to packaging and testing. It has excellent infrastructural facilities that cater to the various needs of the package manufacturing and package user industries. It caters to the packaging needs with regard to both the domestic and export markets.

It also undertakes technical consultancy, testing services on packaging developments, training and educational programmes, promotional award contests, information services and other allied activities.

8. State Trading Organisations:
A large number of domestic firms in India found it very difficult to compete in the world market. At the same time, the existing trade channels were unsuitable for the promotion of exports and bringing about diversification of trade with countries other than European countries. It was under these circumstances that the State Trading Organisation (STC) was setup in May 1956.

The main objective of the STC is to stimulate trade, primarily export trade among different trading partners of the world. Later the government set up many more organisations such as Metals and Minerals Trading Corporation (MMTC), Handloom and Handicrafts Export Corporation (HHEC).

Question 6.
What is World Bank? Discuss its various objectives and role of its affiliated agencies.
Answer:
World Bank – The International Bank for Reconstruction and Development (IBRD), commonly known as World Bank, was result of the Bretton Woods Conference. The main objectives behind setting up this international organization were to aid the task of reconstruction of the war-affected economies of Europe and assist in the development of the underdeveloped nations of the world. For the first few years, the World Bank remained preoccupied with the task of restoring war-torn nations in Europe.

Having achieved success in accomplishing this task by the 1950s, the World Bank turned its attention to the development of underdeveloped nations. It is felt by the World Bank that investment in underdeveloped countries in order to bring social and economic changes serve the very purpose of setting up of bank.

To give shape to this investment aspect in the underdeveloped nations, the Internal ional Development Association (IDA) was formed in the year 1960. The main objective underlying setting up IDA has been to provide loans on concessional terms and conditions to those countries whose per capita incomes are below a critical level.

Concessional terms and conditions mean that

• the repayment period is much longer than the repayment – period of IBRD, and
• the borrowing nation need not pay interest on the borrowed amount. IDA, thus, provides interest-free long-term loans to poor nations. IBRD also provides loans but these carry interest charges on a commercial basis.

Over time, additional organisations have been set up under the umbrella of the World Bank. As of today, the World Bank is a group of five international organisations responsible for providing finance to different countries. The group and its affiliates- headquartered in Washington DC catering to various financial needs are listed in Box A on World Bank and its affiliates.

Functions of the World Bank – As mentioned earlier, the World Bank is entrusted with the task of economic growth and widening of the scope of international trade. During its initial years of inception, it placed more emphasis on developing infrastructure facilities like energy, transportation and others.

No doubt all this has benefited the under-developed nations too, but the results were not found to be very satisfactory due to poor administrative structure, lack of institutional framework and non-availability of skilled labour in these countries. Moreover, since the underdeveloped countries depend heavily on agriculture and small industries, the attempt to develop infrastructure had hardly any effect on these two sectors.

Realizing these problems, the World Bank later decided to divert resources to bring about industrial and agricultural development in these countries. Besides, industrial and agricultural development the bank extended its assistance for the development of resources for education, health care, sanitation and small-scale enterprises.

Today, the services provided by the World Bank have increased manifold. The World Bank is no longer confined to simply providing financial assistance for infrastructure development, agriculture, industry, health and sanitation. It is rather significantly involved in areas like the removal of rural poverty through raising productivity, increasing income of the rural poor, providing technical support, and initiating research and cooperative ventures.

International Development Association – International Development Association (IDA) was set up in 1960 as an affiliate of the World Bank. IDA launch a soft loan scheme known as soft loan w indow of World Bank to provide financial support to less developed countries on liberal rates.

Major objectives of IDA include :

• To provide development finance on easy terms to the less developed member countries.
• To provide assistance for poverty alleviation in the poorest countries.
• To provide finance at concessional interest rates in order to promote economic development, raise productivity and living standards in less developed nations, and
• To extend macroeconomic management services such as those relating to health, education, nutrition, human resources development, and population control.

International Finance Corporation (IFC) – IFC was established in July 1956 in order to provide finance to the private sector of developing countries. IFC is also an affiliate of the World Bank, but it has its own separate legal entity,’ funds, and functions. All the members of the World Bank are eligible to become members of IFC.

The Multinational Investment Guarantee Agency (MIGA) – The Multinational Investment Guarantee Agency was established in April 1988 to supplement the functions of the World Bank and IFC.

Major objectives of MIGA are:

• To encourage the flow of direct foreign investment into the less developed member countries
• To provide insurance cover to investors against political risks
• To provide a guarantee against non-commercial risks (like dangers involved in currency transfer, war, and civil disturbances, and breach of contract);
• To ensure new investments, expansion of existing investments, privatisation, and financial restructuring;
• To provide promotional and advisory services; and
• To establish credibility.

Question 7.
What is IMF? Discuss its various objectives and functions.
Answer:
International Monetary Fund (IMF) is the second international organisation next to the World Bank. IMF which came into existence in 1945 has its headquarters located in Washington DC. In 2005, it had 191 countries as its members. The major idea underlying the setting up of the IMF is to evolve an orderly international monetary system, i.e., facilitating a system of international payments and adjustments in exchange rates among national currencies.

Major objectives of IMF include:

1. To promote international monetary cooperation through a permanent institution.
2. To facilitate the expansion of balanced growth of international trade and to contribute thereby to the promotion and maintenance of high levels of employment and real income.
3. To promote exchange stability with a view to maintaining orderly exchange arrangements among member countries.
4. To assist in the establishment of a multilateral system of payments in respect of current transactions between members.

Functions of IMF:
Various functions are performed by the IMF to achieve the aforesaid objectives. Some of the important functions of IMF include:

1. Acting as a short-term credit institution.
2. Providing machinery for the orderly adjustment of exchange rates.
3. Acting as a reservoir of the currencies of all the member countries, from which a borrower nation can borrow the currency of other nations.
4. Acting as a lending institution of foreign currency and current transaction.
5. Determining the value of a country’s currency and altering it, if needed, so as to bring about an orderly adjustment of exchange rates of member countries.
6. Providing machinery for international consultations.

Question 8.
Write a detailed note on the features, structure, objectives, and functioning of WTO.
Answer:
The member countries in World Bank and International Monetary Fund (IMF) make an arrangement for liberalising the custom tariff and restrictions among member countries known as General Agreement for Tariffs and Trade (GATT).

World Trade Organisation (WTO) and Major Agreements – GATT came into existence with effect from 1st January 1948 and remained in force till December 1994.

Various rounds of negotiations have taken place under the auspices of GATT to reduce tariff and non¬tariff barriers. The last one, known as the Uruguay Round, was the most comprehensive one in terms of coverage of issues, and also the lengthiest one from the point of view of the duration of negotiations which lasted over a period of seven years from 1986 to 1994.

One of the key achievements of the Uruguay Round of GATT negotiations was the decision to set up a permanent institution for looking after the promotion of free and fair trade amongst nations. Consequent to this decision, the GATT was transformed into World Trade Organisation (WTO) with effect from 1st January 1995.

The headquarters of WTO are situated at Geneva, Switzerland. The establishment of WTO thus represents the implementation of the original proposal of setting up of the WTO as evolved almost five decades back.

Though WTO is a successor to GATT, it is a much more powerful body than GATT. It governs trade not only in goods but also in services and intellectual property rights. Unlike GATT, the WTO is a permanent organisation created by an international treaty ratified by the governments and legislatures of member states. It is, moreover, a member-driven rule-bast organisation in the sense that all the decisions are taken by the member governments on the basis of a general consensus.

The global status of WTO like World Bank and IMF is more concerned with solving problems and provide multilateral trade negotiations among the member countries. India is a founding member of the WTO. As of 11th December 2005, there were 149 members in WTO.

Objectives of WTO – The basic objectives of WTO are similar of those of GATT, raising standards of living and incomes, ensuring full employment, expanding production and trade, and optimal use of the world’s resources.

The major difference between the objectives of GATT and WTO is that the objectives of WTO are more specific and also extend the scope of WTO to cover trade in services. WTO objectives, moreover, talk of the idea of sustainable development in relation to the optimal use of the world’s resources so as to ensure protection and preservation of the environment.

The major objectives of WTO are as under;

• To ensure the reduction of tariffs and other trade barriers imposed by different countries;
• To engage in such activities which improve the standards of living, create employment, increase income and effective demand and facilitate higher production and trade;
• To facilitate the optimal use of the world’s resources for sustainable development; and
• To promote an integrated, more viable, and durable trading system.

Functions of WTO-The major functions of WTO include:

• Promoting an environment that is encouraging to its member countries to come forward to WTO in mitigating their grievances.
• WTO lays stress on the commonly accepted code of conduct between the member countries to lessen the trade barriers of tariff and disseminating international trade relations among the member’s countries.
• Acting as a dispute settlement body;
• Ensuring that all the rules regulations prescribed in the Act are duly followed by the member countries for the settlement of their disputes;
• Holding consultations with IMF and IBRD and its affiliated agencies so as to bring better understanding and cooperation in global economic policymaking; and
• Supervising on a regular basis the operations of the revised Agreements and Ministerial declarations relating to goods, services, and Trade-Related Intellectual Property Rights (TRIPS).

Benefits of WTO – Since its inception in 1995, WTO has come a long way in constituting the legal and institutional foundation of the present-day multilateral trading system. It has been instrumental not only in facilitating trade but also in improving living standards and cooperation among member countries.

Some of the major benefits of WTO are as follows:

• WTO helps promote international peace and facilitates international business.
• All disputes between member nations are settled with mutual consultations.
• Rules make international trade and relations very smooth and predictable.
• Free trade improves the living standard of the people by increasing the income level.
• Freetradeprovidesamplescopeofgettingvarietiesofqualitative products.
• Economic growth has been fastened because of free trade.
• The system encourages good government.
• WTO helps to foster the growth of developing countries by providing them with special and preferential treatment in trade-related matters.

Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 11 International Business 1 Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

International Business 1 NCERT Solutions for Class 11 Business Studies Chapter 11

International Business 1 Questions and Answers Class 11 Business Studies Chapter 11

Multiple Choice Questions:

Question 1.
In which of the following modes of entry, does the domestic manufacturer give the right to use intellectual property such as patent and F trademark to a manufacturer in a foreign country for a fee:
(a) Licensing
(b) Contract Manufacturing
(c) Joint venture
(d) None of these
Answer:
(a) Licensing

Question 2.
Outsourcing a part of or entire production and concentrating on marketing operations in international business is known as
(a) Licensing
(b) Franchising
(c) Contract manufacturing
(d) Joint venture
Answer:
(c) Contract manufacturing

Question 3.
When two of more firms come together to create a new business entity that is legally separate and distinct from its parents it is known as :
(a) Contract manufacturing
(b) Franchising
(c) Joint ventures
(d) Licensing
Answer:
(b) Franchising

Question 4.
Which of the following is not an advantage of exporting?
(a) an Easier way to enter into international markets
(b) Comparatively lower risks
(c) Limited presence in foreign markets
(d) Fewer investment requirements
Answer:
(c) Limited presence in foreign markets

Question 5.
Which one of the following modes of entry requires higher level of risks?
(a) Licensing
(b) Franchising
(c) Contract manufacturing
(d) Joint venture
Answer:
(b) Franchising

Question 6.
Which one of the following modes of entry permits greatest degree of control over overseas operations?
(a) Licensing/franchising
(b) Wholly owned subsidiary
(c) Contract manufacturing
(d) Joint venture
Answer:
(b) Wholly owned subsidiary

Question 7.
Which one of the following modes of entry brings the firm closer to international markets?
(a) Licensing
(b) Franchising
(c) Contract manufacturing
(d) Joint venture
Answer:
(d) Joint venture

Question 8.
Which one of the following is not amongst India’s major export items?
(a) Textiles and garments
(b) Gems and Jewellery
(c) Oil and petroleum products
(d) Basmati rice
Answer:
(c) Oil and petroleum products

Question 9.
Which one of the following is not amongst India’s major import items?
(a) Ayurvedic medicines
(b) Oil and Petroleum Products
(c) Pearls and precious stones
(d) Machinery
Answer:
(a) Ayurvedic medicines

Question 10.
Which one of the following is not amongst India’s major trading partners?
(a) USA
(b) UK
(c) Germany
(d) New Zealand
Answer:
(d) New Zealand

Short Answer Questions

Question 1.
Differentiate between International Trade and International Business. –
Answer:

International Trade:

1. International trade means movements of goods only.
2. It involves only the movements of goods and international currency is used for dealing.
3. International trade is a narrow term.

International Business:

1. Business transaction that takes place between two or more countries is known as international business. It involves not only the international movements of goods and services but also capital, personnel, technology and intellectual property like trademarks, patents.
2. International business is much broader than international trade.

Question 2.
Discuss any three advantages of International business:
Answer:
Not with standing greater complexities and risks, international business is important to both nations and business firms. It offers them several benefits. The growing realisation of these benefits over time has in fact been a contributory factor to the expansion of trade and investment amongst nations, resulting in the phenomenon of globalisation.

Benefits :
(i) Earning of Foreign Exchange – International business helps a country to earn foreign exchange which it can later use for meeting its imports of capital goods, technology, petroleum products and fertilizers, pharmaceutical products and a host of other consumer products which otherwise might not be available domestically.

(ii) Increased Standard of Living – In the absence of international trade of goods and services, it would not have been possible for the world community to consume goods and services produced in other countries that the people in these countries are able to consume and enjoy a higher standard of living.

(iii) Prospects of Higher Profits – International business can be more profitable, than the domestic business. When the domestic prices are lower, business firms can earn more profits by selling their products in countries where prices are high.

Question 3.
What is the major reason underlying trade between nations?
Answer:
The major reason behind the international business is that the countries have unequal distribution of natural resources among them or have differences in their productivity levels because of which they cannot produce all that they need equally well or at equal costs.

Trade between nations allows a country to produce what a country can produce more efficiently, and trade the surplus production so generated with other countries to procure what they can produce more efficiently.

Question 4.
Discuss as to why nations trade?
Answer:
The countries have unequal distribution of natural resources among them or have differences or at equal costs. Availability of various factors of production such as labour, capital and raw materials that are required for producing different goods and services differ among nations.

Moreover, labour productivity and production costs differ among nations due to various socio-economic, geographical and political reasons. Due to these differences, each country finds it advantageous to produce those select goods and services that it can produce more efficiently at home, and procuring the rest through trade with other countries which the other. countries can produce at lower costs. This is precisely the reason as to why countries trade with others.

Question 5.
Enumerate Limitations of Contract Manufacturing.
Answer:
Limitations – The major limitation of contract manufacturing to international firm and local producer in foreign countries areas follows :

Local firms generally are not serious in regard to production design and quality standards ,thus causing serious product quality problems to the international firm.

Local manufactures in the foreign country have little control over the manufacturing process because goods are produced strictly as per the terms and specifications of the contract between the nations.

The local firm producing under contract manufacturing is not free to sell the contracted goods as per his own desire. It has to sell the goods to the international company at predetermined prices. This results in lower profits for the local firm if the open market prices for such goods happen to be higher than the prices agreed upon under the contract.

Question 6.
Why is it said that licensing is an easier way to expand globally?
Answer:
Licensing is contractual agreement in which one firm grants access to its patents, trade secrets or technology to another firm in a foreign country for a fee caused royalty. The firm that grants such permission to the other firm is known as licensor and the other firm in the foreign country that acquires such rights to use technology or patents is called the licensee. It is not only technology that is licensed.

In the fashion industry, a no. of designers license the use of their names. In some cases, there is exchange of tech, between the two firms. Sometimes there is mutual exchange of knowledge, technology and/or patents between the firms known as cross-licensing.

Advantages :
(i) Since the business in the foreign country is managed by the licensee who is a local person, there are lower risks of business takeovers or government interventions.

(ii) Licensee being a local person has greater market knowledge and contracts which can prove quite helpful to the licensor in successfully conducting its marketing operations.

(iii) As per the terms of the licensing agreement, only the parties to the licensing agreement are legally entitled to make use of the licensor’s copyrights, patents and brand names in foreign countries. As a result, other firms in the foreign market cannot make use of such trademarks and patents.

Question 7.
Differentiate between contract manufacturing and setting up wholly-owned production subsidiary abroad.
Answer:
Contract manufacturing refers to a type of international business where a firm enters into a contract with one or a few local manufacturers in foreign countries to get certain components or goods produced as per its specifications while in a wholly-owned subsidiary the parent company acquires full control over the foreign company by making 100% investment in its equity capital.

Question 8.
Distinguish between licencing and franchising.
Answer:
Licencing and Franchising Differences – Licencing is an arrangement between the firms for granting access to patents, trademarks or technology for agreed payment, “franchising is basically a specialised form of licensing in which the franchiser not only sells intangible property (normally a trademark) to the franchisee, but also insists that the franch isee agrees to abide by strict rules as to how to does business.” Charles W.L.HiU

Franchising is a “form of licensing in which a parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a prescribed manner. This right can take the form of selling the franchisers products, ‘using its name, production and marketing technique, or general business approach.” Donald W.Hackett

Licensing and Franchising-Licensing is a contractual agreement in which one firm grants access to its patents, trade secrets or technology to another firm in a foreign country for a fee called royalty. The firm that grants such permission to the other firm is known as licensor and the other firm in the foreign country that acquires such rights to use technology or patents is called the licensee.

It may be mentioned that not only technology is licensed, but also exchange of technology. In the fashion industry, a number of designers license the use of their names. In some cases, there is exchange of technology between the two firms. Sometimes there is mutual exchange of knowledge, technology and/or patents between the firms which is known as cross-licensing.

Franchising is a term very similar to licensing. One major distinction between the two is that while the former is used in regard with production and marketing of goods, the term franchising applies to service business specifically. The other point of difference between the two is that franchising is relatively more strictly adhered than licensing.

Franch users usually set strict rules and regulations as to how the franchisees should operate while running their business. Barring these two differences, franchising is pretty much the same as licensing. Like in the case of licensing, a franchising agreement too involves grant of rights by one party to another for use of technology, trademark and patents in return of the agreed payment for a certain period of time.

The parent company is called the franchiser and the other party to the agreement is called franchisee. Various service providers like restaurant, hotel, travelling agency, bank, wholesalers and retailers has developed a unique technique for marketing of services in their own brand name and trademark.

It is the uniqueness of the technique that gives the franchiser an edge over its competitors in the field, and makes the would-be-service providers interested in joining the franchising system. McDonald, PizzaHutand Wal- Mart are examples of some of the lead ing franchisers operating worldwide.

Advantages – As compared to joint ventures and wholly-owned subsidiaries, licensing/franchising is relatively a much easier mode of entering into foreign markets with proven product/technology without much business risks and investments.

Some of the specific advantages of licensing are as follows:
(i) Under the licensing/franchising system, it is the licenser/franchisees who sets up the business unit and invests  is/her own money in the business. As such, the licensor/franchiser has to virtually make no investments abroad. Licensing/franchising is, therefore, considered a less expensive mode of entering into international business.

(ii) Due to lesser foreign investment of the licensing/franchising unit is involved, the licensor or franchiser does not bear any loss arises. Licensor/franchiser is paid by the licensee/franchisee by way of fees fixed in advance as a percentage of production or sales turn over. This royalty or fee keeps to the licensor/franchiser so long as the production and sales keep on taking place in the licensee’s/ franchisee’s business unit.

(iii) Since the business in the foreign country’ is managed by the licensee/ franchisee who is a local person, there are lower risks of business takeovers or government interventions.

(iv) Licensee/franchisee being a local person has greater market knowledge and contacts which can prove quite helpful to the licensor/’ franchiser in successfully conducting its marketing operations.

(v) As per the terms of the licensing/franchising agreement, only the parties to the licensing/franchising agreement are legally entitled to make use of the licensor’s/franchiser’s copyrights, patents and brand names in foreign countries. As a result, other firms in the foreign market cannot make use of such trademarks and patents.
Limitations – Licensing/franchising as a mode of international business suffers from the following weaknesses :

(vi) Licensee or franchisee may after becoming shilled in the “manufacture and marketing of products pose services competition to licensor or franchise.

(vii) If not maintained properly, trade secrets can get divulged to others in the foreign markets. Such lapses on the part of the licensee/ franchisee can cause severe-losses to the licensor/franchiser.

(viii) Overtime, conflicts often develop between the licensor/franchiser and licensee/franchisee over issues such as maintenance of accounts, payment of royalty and non-adherence to norms relating to production of quality products. These differences often result in costly litigations, causing harm to both parties.

Question 9.
List major items of India’s exports.
Answer:
The major items of India’s exports may include Textiles and garments, gems and jewellery, engiheering products and chemicals, leather products, agricultural and allied products etc. Table shows the India’s contribution in the field of export in international markets.

Commodity Composition of India’S Exports

Manufactures, textile yams fabrics, garments and tobacco, its share is much higher and ranges between 3 percent to 13 percent. India even holds the distinct position of being the largest exporter in the world in select commodities such as basmati rice, tea, and ayurvedic products.

So far as imports are concerned, products likes crude oil and petroleum products, capital goods (i.e., machinery), electronic goods, pearl, precious and semi-precious stones, gold, silver and chemicals constitute major items of India’s imports.

Question 10.
What are the major terns that are imported by India?
Answer:
The major imports of India are crude oil and petroleum products, capital goods, electronic goods, pearl and precious stones, gold, silver, edible oils, chemicals etc.

Commodity Composition of India’S Imports

Question 11.
List the major countries with whom India trades.
Answer:
India’s major trading partners include USA, UK, Belgium, Germany, Japan, Switzerland, Hong Kong, UAE, China, Singapore and Malaysia. USA is the leading partner sharing 11.6% in total trade. The table shows the contribution of major countries in India’s foreign trade.

Long Answer Questions

Question 1.
What is International Business? How is it different from Domestic Business?
Answer:
The radical changes in the development of communication, technology, infrastructure have brought nations closer to each other. (WTO) World Trade Organizations and economic reforms initiated by various governments have also been a major contributory factor to the increased interactions and business relations amongst the nations.

International Business vs. Domestic Business – Due to variations in the political, social, and cultural economic systems of countries, the operation of international business becomes more complex than domestic trade. Business firms find it difficult to extend their domestic business strategy to foreign markets.

To be successful in the overseas markets, they need to adapt their product, pricing, promotion and distribution strategies and overall business plans to suit the specific requirements of the target foreign markets.

Key aspects in respec to which domestic and international businesses differ from each other are discussed below.
(i) Nationality of buyers and sellers – Nationality of the key participants (i.e., buyers and sellers) to the business deals differs between domestic and international businesses.

In the case of domestic business, both the buyers and sellers are from the same country. This makes it easier for both the parties to understand each other and enter into business deals. But this is not the case with international business where buyers and sellers come from different countries.

Because of differences in their languages, attitudes, social customs and business goals and practices, it becomes relatively more difficult for them to interact with one another and finalise business transactions.

(ii) Nationality of other stakeholders-Domestic and International Businesses also differ in respect of the nationalities of the other stakeholders such as employees, suppliers, shareholders/partners and general public who interact with business firms.

While in the case of domestic business all such factors belong to one country, and therefore relatively speaking depict more consistency in their value systems and behaviours; decision making in international business becomes much more complex as the concerned business firms have to take into account a wider set of values and aspirations of the stakeholders belonging to different nations.

(iii) Mobility of Factors of Production – Various factors of production like labour and capital are less mobile between the countries than within the same country. While these factors of movement can move freely within the country, there exist various restrictions to their movement across nations.

Apart from legal restrictions, even the variations in socio-cultural environments, geographic influences and economic conditions come in a big way in their movement across countries. This is especially true for the Iabour which finds it difficult to adjust to the climatic, economic and socio-cultural conditions that differ from country to country.

(iv) Customer heterogeneity across markets – The customers of various countries differ in their socio-cultural values and backgrounds. The demand for products also differ due to changes in tastes, customs, attitudes, languages and beliefs. It is precise because of the socio- cultural differences that while people in Chinapreferbicycles, the Japanese in contrast like to ride bikes.

Similarly, while people in India use right-hand driven cars, Americans drive cars fitted with steering, brakes, etc., on the left side. Moreover, while people in the United States change their TV, bike and other consumer durables very frequently—within two to three years of their purchase, Indians mostly do not go in for such replacements until the products currently with them have totally worn out.

Such variations greatly complicate the task of designing products and evolving strategies appropriate for customers in different countries. Though to some extent customers within a country too differ in their tastes and preferences. These differences become more striking when we compare customers across nations.

(v) Differences in Business Systems and Practices – The differences in business systems and practices are considerably much more among countries than within a country. Countries differ from one another in terms of their socio-economic development, availability, cost and efficiency of economic infrastructure and market support services, mid business customs and practices due to their socio-economic milieu and historical coincidences.

All such differences make it necessary for firms interested in entering into international markets to adapt their production, finance, human resource and marketing plans as per the conditions prevailing in the international markets.

(vi) Political System and Risks – Political factors such as the type of government, political party system, political ideology, political risks, etc., have a profound impact on business operations. Since a business person is familiar with the political environment of his/her country, he/she can well understand it and predict its impact on business operations. But this is not the case with international business.

Various countries differ on political environments in regard to business implications. Since political environment keeps on changing, one needs to monitor political changes on an ongoing basis in the concerned countries and devise strategies to deal with diverse political risks.

A major problem with a foreign country’s political environment is a tendency among nations to favour products and services originating in their own countries to those coming from other countries. While this is not a problem for business firms operating domestically, it quite often becomes a severe problem for the firms interested in exporting their goods and services to other nations or setting up their plants in the overseas markets.

(vii) Business regulations and policies – Each country frame its own set of business laws arid regulations as per their socio-cultural environment. Through these laws. Regulations and economic politician are more or less uniformly applicable within a country, they differ widely among nations. Tariff and taxation policies, import quota system, subsidies and other controls adopted by anation are not the same as in other countries and often discriminate against foreign products, series and capital.

(viii) Currency used in business transactions-Another important difference between domestic and international business is that the latter involves the use of different currencies. Since the exchange rate, i.e., the price of one currency expressed in relation to that of another country’s currency, keeps on fluctuating, it adds to the problems of international business firms in fixing prices of their products and hedging against foreign exchange risks.

Major Difference Between Domestic and International Business

Question 2.
“International Business is more than International Trade.” Comment.
Answer:
International trade comprises exports and imports of goods and forms an important component of international business. But the scope of international business is substantially wider than that of international trade. International business includes the international exchange of services such as international travel and tourism, transportation, communication, banking, warehousing, distribution, and advertising.

It also covers foreign investments and overseas production of goods and services. Multinational companies have started making investments in foreign countries and undertaking the production of goods and services in foreign countries to explore foreign markets and produce at lower costs.

All these activities form part of international business. To conclude, we can say that international business is a much broader term and is comprised of both the trade and production of goods and services across frontiers. International trade is done through exporting of goods while international business modes include licensing, franchising, contract manufacturing, joint-ventures, and establishment of wholly-owned subsidiaries apart from exporting.

Question 3.
What benefits do firms derive by entering into international business?
Answer:
Benefits of International Business – The importance of international business can be judged from die various benefits achieved by the business firms. Growing realisation of these benefits over time has in fact been a contributory factor to the expansion of trade and investment amongst nations, resulting in the phenomenon of globalisation. Some of the benefits of international business to the nations and business firms are discussed below.

Benefits to Nations :

(i) Earning of Foreign Exchange – Foreign exchange earning can helps in the imports of capital goods, technology, petroleum products and fertilisers, pharmaceutical products and a host of other consumer products which other wise might not be available domestically.

(ii) More Efficient Use of Resources – Each country should produce the goods and services by efficiently put all the resources without the thinking of producing for its own demand. If such an enhanced pool of goods and services is distributed equitably amongst nations, it benefits all the trading nations.

(iii) Improving Growth Prospects and Employment Potentials – Producing solely for the purposes of domestic consumption severely restricts a country’s prospects for growth and employment. Many countries, especially the developing ones, could not execute their plans to produce on a larger scale, and thus create employment for people because their domestic market was not large enough to absorb all that extra production.

Later on a few countries such as Singapore, South Korea and China which saw markets for their products in the foreign countries embarked upon the strategy ‘export and flourish’, and soon became the star performers on the world map. This helped them not only in improving their growth prospects, but also created opportunities for employment of people living in these countries.

(iv) Increased Standard of Living -In the absence of international trade of goods and services, it would not have been possible for the world community to consume goods and services produced in other countries that the people in these countries are able to consume and enjoy a higher standard of living.

Benefits to Firms:

(i) Prospects for Higher Profits – International business firm can earn more profits through selling their products in those countries where prices are high instead of selling in domestic market if prices are lower.

(ii) Increased Capacity Utilisation – Many firms setup production capacities for their products which are in excess of demand in the domestic market. By planning overseas expansion and procuring orders from foreign customers, they can think of making use of their surplus production capacities and also improving the profitability of their operations. Production on a larger scale often leads to economies of scale, Which in turn lowers production cost and improves per-unit profit margin.

(iii) Prospects for Growth – Business firms find it quite frustrating when demand for their products starts getting saturated in the domestic market. Such firms can considerably improve prospects of their growth by plunging into overseas markets.

This is precisely what has prompted many of the multinationals from the developed countries to enter into markets of developing countries. While demand in their home countries has got almost saturated, they realised their products were in demand in the developing countries and demand was picking up quite fast.

(iv) Way out to intense competition in domestic market – International business can contact the local or domestic competition of the firms. Many companies prefer to search international market on the face of domestic competition. International business thus acts as a catalyst of growth for firms facing tough market conditions on the domestic turf.

(v) Improved Business vision-The growth of intemational business of many companies is essentially a part of their business policies or strategic management. The vision to become international comes from the urge to grow, the need to become more competitive, the need to diversify and to gain strategic advantages of internationalisation.

Question 4.
In what ways is exporting a better way of entering into international markets than setting up wholly-owned subsidiaries abroad.
Answer:
Exporting is a better way of entering into international markets than setting up wholly-owned subsidiaries abroad in the following ways:

1. Exporting is the easiest way of gaining entry into international markets. It is less complex than setting up and managing joint ventures or wholly-owned subsidiaries abroad.
2. Exporting involves lesser time and effort as business firms are not required to invest that much time and money as it is needed when they set up manufacturing plants and facilities as wholly-owned subsidiaries in host countries.
3. Since exporting does not require much investment in foreign countries, exposure to foreign investment risks is nil or much lower than that in establishing a wholly-owned subsidiary.

Question 5.
Discuss briefly the factors that govern the choice of mode of entry into international business.
Answer:
The term mode means the manner in which the entry of international business comes in light. The important ways of entering into the international business are exporting and importing, contract manufacturing, licensing and franchising, Joint ventures and who owned subsidiaries companies.

Formalities regarding exporting and importing activities include shipment and financing of goods and services through middlemen such as export houses or buying offices of overseas customers located in the home country. Contract manufacturing is also known as outsourcing are production of components such as automobiles components or shoe uppers, cars accessories etc., assembling of components into final products.

Licencing and franchising are similar in nature but distinction between the two is of specialization. Franchising is more specialised form of licensing to abide by strict rules of the business.

Joint ventures is a technique of entering into foreign markets. A joint venture means establishing a firm that is jointly owned by two or more independent firms.

Wholly owned subsidiaries in a foreign market can be established by setting up a new firm altogether to start operations in a foreign country and also known as green field venture.

Acquiring an established firm in the foreign country and using that firm to manufacture mid promote its products in the host nation.

In order to select the most suitable mode of entering into international business may be judged by analysing the relative merits and limitations of each mode of entry of international business. The major factors used for the selection of best way of entering international business are production facilities, investment in the foreign countries, risk involved, brand names in foreign country, benefits to host country etc.

Question 6.
Discuss the major trends in India’s foreign trade. Also list the major products that India trades with other countries.
Answer:
India’s Foreign Trade-The Trends – India account for a small share in world trade. The imports and exports of India constitute major economic indicators for the progress of the country. Due to faster growth achieved at the international front, share of foreign trade in the country’s Gross Domestic Product (GDP) has considerably increased from 14.6% in 1990-91 to 24.1% in 2003-04.

Both imports and exports shows the growing trend phenomenally over the years. Total exports of goods shows tremendous increase from Rs.606 crores in 1950-51 to Rs.2,93,367crores in 2003-04 representing 480 times increase in the last five decades.

The imports of the country also shows phenomenal growing trend which is 608crores in 1950-51 to Rs. 3,59,108 crores in the year 2003-04, registering a growth of590 times during the same period.

The major items of exports of India are textiles and garments, gems and jewellery, engineering products and chemicals, agricultural and allied products, tea, pearls, medicines and semi-precious stones, medicinal and pharmaceutical products, rice, spices, iron ore, leather and leather manufacturing, textiles yam fabrics, garments and tobacco.

India even holds the district position of being, the largest exporter in the world in selected commodities such as basmati rice, tea and ayurvedic products. So far as imports are concerned, products like crude oil and petroleum products, capital goods (machinery ), electronic goods, precious and semi-precious stones, gold, silver and chemicals constitute major items of India’s imports.

India’s trend in services have also undergone significant changes over the years in terms of both the volume and composition of trade; The most conspicuous change relates to emergence of software exports which of late have to account for about 49% of India’s total service exports.

India’s performance, however, does not appear very satisfactory in terms of international comparison. India’s share in world trade is a mere 0.8%. Its composition of foreign investments too is poor. India continues to lag considerably behind other developing countries which have emerged as major destinations for foreign investments.

Question 7.
What is invisible trade (service trade). Discuss salient aspects of India’s trade in services.
Answer:
India’s trade in services have grown tremendously over the years from 1991. Both import and export services shows increasing trend remarkably from the year 1990-91 to 2004-05.

India’s Trade in Services – India’s trade in services have also grown manifold over the years. Table below contains data on exports and imports of India’s three services which have been historically important to India. It is obvious from the table that both the exports and imports of services relating to foreign travel, transportation and insurance have increased spectacularly during the last four decades.

What is more remarkable is the change in the composition of services exports. Software and other miscellaneous services (including professional technical and business services) have emerged as the main categories of India’s exports of services.

While the relative share of travel and transportation has declined from 64.3 percent in 1995-96 to 29.6 percent in 2003-2004, the share of software exports has gone up from 10.2 percent to around 49 percent in the corresponding period.

Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 10 Internal Trade Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Internal Trade NCERT Solutions for Class 11 Business Studies Chapter 10

Internal Trade Questions and Answers Class 11 Business Studies Chapter 10

Question 1.
What is meant by internal trade?
Answer:
Buying and selling of goods and services within the boundaries of a nation are referred to as internal trade. No customs duty or import duty is levied on such trade as goods are part of domestic production and consumption. Internal trade can be classified into two broad categories:

• Wholesale trade
• Retail trade

Question 2.
Specify the characteristics of fixed shop retailers.
Answer:
Fixed Shops – Fixed shop retailers have a fixed place of business and do not move from one place to another. Their shops are situated in market places or residential localities. They are of two types (a) small-scale shops, and (b) large-scale shops.
Small-scale Fixed Retail Shops – Small-scale retail shops are the most common form of retail trade. Such shops are found in every nook and corner of cities. They are of the following types :

(1) Street Stalls – These are located at street crossing or in the busy streets. A stall is an improvised structure a table or a temporary platform to display the goods for sale. They deal in a wide variety of low-priced articles such as bread, butter, stationery, hosiery, toys, etc.

(2) Second-hand Goods Shops – These shops deal in second-hand goods or used articles such as books, utensils, furniture, garments, etc. They buy goods from private and public auctions. Such shops cater mainly to the needs of poor people who cannot afford to buy new articles. Well-to-do people too visit such shops in search of rare books or antiques. Persons with modest mean make purchases from such stores.

(3) General Stores – General stores are small shops located mainly in residential areas. They deal in the wide variety of products of everyday use. Such stores cater to the daily requirements of local residents for articles like tooth brush, soaps, detergents, electric bulb. etc. A general store may be a single line store or a multi-line store.

(4) Single Line Stores – Such stores deal in one line of goods. They are located generally in shopping centres. Medical stores, cloth stores, grocery shops, book shops, jewellery shops, sweetshops, etc. are examples of these stores.

(5) Speciality Stores – These stores deal in a particular category of products in one product line. For example, a store may be selling sarees only instead of all types of garments. They provide a wide variety of the product and cater to the needs of particular customers. Another example of a speciality store is a shop dealing in children’s books only. Speciality stores are generally located in central places so as to attract a large number of customers.

Question 3.
What purpose is served by wholesalers providing ware¬housing facilities?
Answer:
Two-way purposes are served by wholesalers providing warehousing facilities in the following manner:

1. Wholesalers take delivery of goods when goods are manufactured in a factory and keep them in their godowns/warehouses which reduce the burden of manufacturers of providing storage facilities for the finished products.
2. Warehousing by wholesalers relieves the retailers of the work of collecting goods from several producers and keeping a big inventory of the same for maintaining adequate stock of varied commodities for the customers.

Question 4.
How does market information provided by the wholesalers benefit the manufacturers?
Answer:
Wholesalers provide various services to the manufacturers as well as the retailers and consumers. The major services offered by wholesalers in relation to marketing function may be cleared from the below-mentioned facts: The wholesalers take care of the distribution of goods to a number of retailers who, in turn, sell to a large number of customers spread over a large geographical area. This relieves the manufacturers of many of the marketing activities and enable them to concentrate on the production activity.

Wholesalers are in direct contact with the retailers, they are in a position to advice the manufacturers about various aspects including customer’s tastes and preferences, market conditions, competitive activities and the features of the product preferred by the customers. They serve as an important source of market information on these and related aspects.

Wholesalers take delivery of goods when these are produced in a factory and keep them in their godowns or warehouses. This reduces the burden of manufacturers of providing storage facilities till the market requirements for the finished products.

Wholesalers make suggestions-about the type and quality of goods required by the consumers. Such information enables the manufacturers to regulate production in accordance with the changing requirements of the market. A manufacturer can make necessary improvements in his/her product.

Question 5.
How do the wholesalers help the manufacturer in availing the economies of scale?
Answer:
A wholesaler buys goods in bulk and thereby enables the manufacturers to carry on large-scale production. Large-scale production results in a lower cost of production per unit. By operating on a large scale the wholesaler relieves the manufacturers of innumerable duties which they find difficult and expensive to performs.

Wholesalers collect small orders from a number of retailers and pass on the pool of such orders to manufacturers and make purchases in lots. This provides help to producers to undertake production on large scale and take advantage of the economies of scale. The manufacturer is assured of the sale of his product by the wholesaler.

Question 6.
Distinguish between single Line shops and specialty stores. Can you identify such stores in your locality?
Answer:
Single Line stores:

1. The store which is dealing in general category product lines is called single-line store e.g., Garments, medicines, etc.
2. There is no such advantage of specialization.
3. They are situated in market places.

Specialty Stores:

1. The stores which are dealing in a particular type of product under one product line e.g., jeans shop have all brands of Jeans only.
2. They take advantage of specialization in a particular segment of the market.
3. They are located in a central place of market.

Question 7.
How would you differentiate between street traders and street shops?
Answer:
Small Scale Fixed Shop Vendors:
(1) Street Stalls – These are located at street crossings or in the busy streets. TV starts an improvised structure — a table or a temporary platform to display the goods for sale. The stallholders generally deal in cheaper products like newspapers, magazines, toys, pens, cheap hosiery, etc.

(2) General Stores – General stores are set up in residential areas and they stock all kinds of products needed by the local residents for their daily use. A general store is owned and managed by a sole proprietor who keeps personal contact with his customers.

The general store may be a single-line store or a multi-line store. A single line store specialises in selling only products of a single line. For instance, medical stores deal in medicines only and stationery stores deal in stationery items only.

Question 8.
Explain the services offered by wholesalers to manufacturers.
Answer:
Services to Manufacturers-Wholesalersrenderthe following services to manufacturers :
(1) Bulk Buying-A wholesaler collects orders from a large number of retailers. He buys goods in large quantities and avails of discounts on bulk buying.

Therefore, the producer is saved from the trouble of collecting small orders from a large number of widely scattered retailers. He also saves the costs of packing and despatching goods in small lots. He need not spend much on advertising and publicity.

(2) Concentration on Production – A wholesaler relieves the producer from the botheration of finding buyers for his goods. The manufacturer can, therefore, pay undivided attention to the main task of manufacturing. The wholesaler facilities round the year production by the manufacturer.

(3) Economies of Scale – The wholesalers facilities large-scale production of goods and reap the economies of large-scale operations. A wholesaler buys goods in bulk and thereby enables the manufacturer to carry on large-scale production. Large-scale production results in lower cost of production per unit. By operating on a large scale the wholesaler relieves the manufacturers of innumerable duties which they find difficult and expensive to perform.

(4) Regular Production – Wholesalers often place advance orders before the seasonal demand and keep stock of seasonal products. In this way they enable manufacturers to continue production steadily even during periods of slack demand. The wholesaler keeps the goods in his own warehouse till are required in the market.

(5) Storage – By buying goods in bulk, a wholesaler relieves the producer of the need for carrying large stocks. Producers do not have to make arrangements for warehousing because goods are lifted by wholesalers immediately after they are produced. Producers are assured of a quick turnover of their capital because they do not have to block their capital in carrying large stocks.

(6) Market Information – Wholesalers keep the manufacturers aware of market demand, competitive products, changes in tastes and fashions in the market. They make suggestions about the type and quality of goods required by the consumers. Such information enables the manufacturers to regulate production in accordance with the changing requirements of the market. A manufacturer can then make necessary improvements in his products. ”

(7) Price Stability – Wholesalers stock goods during the slack season and sell them during the period of peak demand. As a result, they prevent violent fluctuations in prices. ,

(8) Financial Assistance-Wholesalers make prompt and sometimes even advance payments to manufacturers. Therefore, producers have to invest lesser capital in their business. The manufacturer need not block his capital in the stocks which are immediately purchased by the wholesalers.

Question 9.
What are the services offered by retailers to wholesalers and consumers?
Answer:
The invaluable services that the retailers render to the wholesalers and producers are given as hereunder:
1. Help in the distribution of goods:
A retailer’s most important service to the wholesalers and manufacturers is to provide help in the distribution of their products by making these available to the final consumers, who may be scattered over a large geographic area. They thus provide place utility.

2. Personal selling:
In the process of the sale of most consumer goods, some amount of personal selling effort is necessary. By undertaking personal selling efforts, the retailers relieve the producers of this activity and greatly help them in the process of actualizing the sale of the products.

3. Enabling large-scale operations:
On account of retailer’s services, the manufacturers and wholesalers are freed from the trouble of making individual sales to consumers in small quantities. This enables them to operate on, a relatively large scale, and thereby fully concentrate on their other activities.

4. Collecting market information:
As retailers remain in direct and constant touch with the buyers, they serve as an important source of collecting market information about the tastes, preferences, and attitudes of customers. Such information is considered very useful in making important marketing decisions in an organisation.

5. Help in promotion:
From time-to-time, manufacturers and distributors have to carry on various promotional activities in order to increase the sale of their products. For example, they have to advertise their products and offer short-term incentives in the form of coupons, free gifts, sales contests, and so on. Retailers participate in these activities in various ways and, thereby, help in promoting the sale of the products.

Services to Consumers:
Some of the important services of retailers from the point of view of Consumers are as follows:
1. Regular availability of products:
The most important service of a retailer to consumers is to maintain the regular availability of various products produced by different manufacturers. This enables the buyers to buy products as and when needed.

2. New products information:
By arranging for effective display of products and through their personal selling efforts, retailers provide important information about the arrival, special features, etc., of new products to the customers, This serves as an important factor in the buying decision-making process of the purchase of such goods.

3. Convenience in buying:
Retailers generally buy goods in large quantities and sell these in small quantities, according to the requirements of their customers. Also, they are normally situated very near to the residential areas and remain open for long hours. This offers great convenience to the customers in buying products of their requirements.

4. Wide selection:
Retailers generally keep stock of a variety of products of different manufacturers. This enables the consumers to make their choice out of a wide selection of goods.

5. After-sales services:
Retailers provide important after-sales services in the form of home delivery, the supply of spare parts, and attending to customers. This becomes an important factor in the buyers ’ decision for repeat purchase of the products.

6. Provide credit facilities:
The retailers sometimes provide credit facilities to their regular buyers. This enables the latter to increase their level of consumption and, thereby, their standard of living.

Long Answer Questions

Question 1.
Itinerants traders have been an integral part of internal trade in India. Analyse the reasons for their survival in spite of competition from large-scale retailers.
Answer:
Itinerant retailers are traders who do not have a fixed place of business to operate from. They keep on moving with their wares from street to street or place to place, in search of customers. Following are the reasons for their survival in spite of competition from large scale retailers:

1. They are small traders operating with limited resources.
2. They normally deal in consumer products of daily use such as toiletry products, fruits and vegetables, and so on.
3. The emphasis of such traders is on providing greater customer service by making the products available at the very doorstep of the customers.
4. As they do not have any fixed business establishment to operate from, these retailers have to keep their limited inventory of merchandise either at home or at some other place.

Question 2.
Discuss the features of the departmental store. How are they different from multiple shops or chain stores.
Answer:
Departmental Store (Meaning) – A departmental store is a large retail establishment having, in the same building, a number of departments each of which confines its activities to one particular line of goods. It deals in a wide variety of merchandise under one roof.

The merchandise is grouped into well-defined departments which are centrally controlled. Thus, a departmental store is a combination of several small stores under one roof and unified control. Everything from a pin to an airplane is the spirit behind a typical department store. In India, some stores include ‘A K. liberally in Mumbai and ‘Spencer’ in Chennai are examples of departmental stores.

Essential Features – The distinctive features of a departmental store are as follows :

(1) Large size – A departmental store is a large retail establishment with huge capital investment. It deals in a wide range of products.

(2) Central location – A departmental store is located in the centre of the city so that people from different parts of the city may easily reach it.

(3) Wide variety – A departmental store deals in a wide range of goods practically from “pinto plane”. It is a complete shopping centre. The merchandise offered for sale is classified into Several classes and each departmental specialise in one line.

(4) Services and amenities – A departmental store provides several facilities such as a post office, restaurant, public telephone, reading room, free home delivery, credit, parking, etc.

(5) Attractive appearance – A departmental store is housed in a big and impressive building which is elegantly furnished and tastefully decorated and easily accessible to customers.

(6) Unified control – All purchases are made centrally while selling is decentralised.

(7) Extensive advertising – A departmental store undertakes advertising and publicity on a large scale to attract customers from far and wide.

(8) Elimination of middlemen – A departmental store buys goods directly from manufacturers. Therefore, it eliminates middlemen.

(9) Centralized buying – Generally purchases are made centrally. This saves time and effort of customers.

(10) Decentralized selling – Sales are decentralized to departments.

Difference between Departmental Store and Chain Stores

Question 3.
Why are consumers cooperative stores considered to be less expensive? What are its relative advantages over other large-scale retailers?
Answer:
A consumer co-operative store is an organization owned, managed, and controlled by consumers themselves. The co-operative stores generally buy in large quantities, directly from manufacturers or wholesalers, and sell them to the consumers at reasonable prices. Members get products of good quality at cheaper rates since the middlemen are eliminated or reduced.

The major advantages of a consumer cooperative store are as follows:

1. Ease information: It is easy to form a consumer cooperative society. Any ten people can come together to form a voluntary association and get themselves registered with the Registrar of Cooperative Societies by completing certain formalities.
2. Limited liability: The liability of the members in a cooperative store is limited to the extent of the capital contributed by them. Over and above that amount, they are not liable personally to pay for the debts of society, in case the liabilities are greater than its assets.
3. Democratic management: Cooperative societies are democratically managed through management committees which are elected by the members. Each member has one vote, irrespective of the number of shares held by him/her.
4. Lower prices: A cooperative store purchases goods directly from the manufacturers or wholesalers and sells them to members and others. The elimination of middlemen results in lower prices for the consumer goods to the members.
5. Cash sales: The consumer cooperative stores normally sell goods on a cash basis. As a result, the requirement for working capital is reduced.
6. Convenient location: The consumer cooperative stores are generally opened at convenient public places where the members and others can easily buy the products as per their requirements.

Question 4.
Imagine life without your local market. What difficulties would a consumer face if there is no retail shop?
Answer:
Life without a local market would be very difficult because of the following points:

1. Non-Availability of Products: Without a local market, the regular availability of goods to the consumers would be hampered. There would not be a mechanism through which products could reach consumers from the manufacturers as and when required.
2. Information about New Products: Information about new products reaches the consumers through the local markets. The new products even after being advertised would not be available to consumers easily if there were no local markets.
3. Inconvenience: Local markets provide consumers the convenience’ of place and time in buying products.
   In the absence of local markets, the Consumers will have to go long distances for buying products directly from the manufacturer’s warehouse.
4. Lack of Variety of Products: Local markets provide consumers with a wide variety of products for choice-based selection. This would not be available in one place in the absence of local markets.
5. Lack of After Sales Services: The retailers in the local market provide after-sales service to the consumers for goods purchased from the retail shops. This service would become difficult in case there are no local markets.

Question 5.
Explain the usefulness of mail-order houses. What type of products are generally handled by them? Specify.
Answer:
Mail Order House :
Meaning – Mail order houses are retail outlets which carry on business through the mail. Mail-order business is also known as “selling through post’ for the retailer and ‘shopping by post’ for the consumer. Under this, the retailers contact the prospective customers through some sort of advertising. Advertising is carried through the press, T.V., or by sending leaflets and catalogues giving the necessary details about the product.

Mail order houses maintain mailing lists of potential customers. Then send the literature about their products through mail. They also mail reply paid cards to prospective customers. When they receive orders, they will procure the goods and despatch them to the customers usually by V.P.P. (Value Payable Post). Sometimes, the goods are sent by railway parcel and the railway receipt is forwarded to the customer by V.P.P.

Many mail-order houses also send the goods ordered through couriers. This type of business is not suitable for all types of products. For example, goods that are perishable in nature or are bulky and cannot be easily handled, are not recommended for mail house trading.

Only the goods that can be graded and standardised, easily transported at low cost, having ready demand in the market and available throughout the year, having least possible competition in the market are suitable for this type of trading.

Mail order business is suitable under the following conditions:

• Goods are identified by brand name and are of standardised quality;
• Goods enjoy popular demand by the customers scattered over wide areas.
• Goods do not require demonstration or special skills in handling and use; and
• Goods are durable and do not get spoiled in the course of transit.

Books, drugs and medicines, sports articles, cosmetics and beauty aids, electronic gadgets of small value, and cameras are some of the goods which are sold through the mail.

The following factors have contributed to the growth of mail-order business:

• growth of postal facilities and development of railways and other means of transportation;
• increased circulation of newspaper and journals; and
• the growing desire of people to have wider varieties and better qualities of goods.

In India, the mail order business is not so popular because of poverty and illiteracy among people, lack of effective advertising, lack of standardised products, and deceitful practices by unscrupulous traders. However, some of the business houses in India have started advertising their product through T.V. to generate interest of the people in their products. They also book orders over the phone. This is also known as teleshopping.

Features – The features of a mail-order house are as under:

(i) No personal contact – Goods are sold without any personal contact between the seller and the buyer. Orders for goods are received and executed by post by approaching the customers through advertisements in newspapers or magazines.

(ii) Mode of payment – Goods are usually sent to customers by V.P.P. (Valued payable post). The postman will deliver the goods after receiving the payment from the buyer. Thus, post office acts as an agent of the mail-order house as it collects payment on behalf of the mail-order house. The goods may be sent through a bank which is instructed to deliver the articles to the customers.

(iii) Role of Brand name — In mail-order business, the customer can’t inspect the goods. He will send the order by describing the brand name and code number of the product he requires.

(iv) Role of advertisement – Advertisement is the backbone of mail-order business. Information about the availability of various products is provided to the prospective customers through advertisement in different media such as Press, Journal and Magazines. All the relevant information about the products such as price features, delivery terms, terms of payment, etc. are described in the advertisement.

(v) Capital requirement – Mail order business can be started with a small amount of capital as there is no need to keep huge stocks. Goods could be manufactured on receipt of orders. Moreover, it is not at all necessary to have a business establishment in some central location. It could be started even at the residence of its proprietor. It can be started with a relatively low amount of capital.

Advantages: Mail order business offers the following advantages to the seller and the buyer:

(i) The buyer needs not travel a long distance to reach the retail store to get the delivery of goods. He can get them at the place of his residence. He is generally given a money-back guarantee. He can return the goods if the goods are not upto the mark.

(ii) The mail-order business houses can be located in less expensive localities. There is no need to maintain a large sales, force and to have showrooms for the display of goods. Thus, the cost of operation of the business is quite low.

(iii) Goods can be procured after receiving orders from the customers. Thus, blocking of capital can be avoided and a businessman can operate with a small investment. It need not require heavy expenditure on building and other infrastructural facilities.

(iv) The seller is able to establish direct touch with his customers. He can directly know the reactions of his customers and satisfy them if they have any grievance or misapprehension. The biggest advantage of mail-order business from the point of view of consumers is that unnecessary middlemen between the buyers and sellers are eliminated.

(v) Mail order business is very much suitable where prospective customers are scattered over a wide area. Under this system, the goods can be sent to all the places having postal services.

(vi) The post office acts as the carrier of goods and the collector of sale proceeds. The chances of bad debts are nil. A businessman can meet the needs of a large number of customers scattered throughout the country with the help of a facility provided by the post office.

Goods suitable for Mail Order Business – Only those goods are suitable for sale through the post which has the following characteristics:

1. Goods should be durable and not perishable.
2. Goods should be standardised or graded.
3. Goods should bear a brand name or trademark.
4. Goods should be easy to handle.
5. Goods should be light and not bulky or heavy.
6. Goods should have a steady and wide demand.
7. Goods should be easily explained to buyers through descriptions or pictures.
8. Goods should be relatively valuable in proportion to weight. Books, footwear, artificial jewellery, watches, readymade garments, fountain pens, toys, hosiery products, and toilet goods are suitable for the mail-order business.
9. Goods which involve the least possible competition in the market, and
10. Goods which can be described through pictures etc are suitable for this type of business. Goods should be easily transported at a low cost.

Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 1 Nature and Significance of Management Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Nature and Significance of Management NCERT Solutions for Class 11 Business Studies Chapter 1

Nature and Significance of Management Questions and Answers Class 11 Business Studies Chapter 1

Question 1.
Which of the following does not characterise business activity?
(a) Production of goods & Services.
(b) Presence of risk
(c) Sale or exchange of goods & Services
(d) Salary or wages.
Answer:
(d) Salary or wages.

Question 2.
Which of the broad categories of industries cover oil refinery and sugar miles?
(a) Primary
(b) Secondary
(c) Territory
(d) None of them.
Answer:
(b) Secondary

Question 3.
Which of the following cannot be classified as an auxiliary to trade?
(a) Mining
(b) Insurance
(c) Warehousing
(d) Transport.
Answer:
(a) Mining

Question 4.
The occupation in which people work for others and get remunerated in return is known as –
(a) Business
(b) Employment
(c) Profession
(d) None of them.
Answer:
(b) Employment

Question 5.
The industries which provide support services to other industries are known as –
(a) Primary industries
(b) Secondary Industries
(c) Commercial industries
(d) Territory industries.
Answer:
(d) Territory industries.

Question 6.
Which of the following cannot be classified as an objective of business?
(a) Investment
(b) Secondary Productivity
(c) Innovation
(d) Profit earning.
Answer:
(a) Investment

Question 7.
Business risk is not likely to arise due to –
(a) Changes in government policy
(b) Good management
(c) Employee dishonesty
(d) Power-failure.
Answer:
(b) Good management

Short Answer Type Questions

Question 1.
State the different types of economic activities.
Answer:
Economic activities are those by which we can earn our livelihood. Economic activities may be further divided into three categories, namely business, profession, and employment, e.g., a person running a garment business, a doctor operating in his clinic, and a teacher teaching in a school – all three are doing so to earn their livelihood and are, therefore, engaged in economic activity.

Question 2.
Why is business considered an economic activity?
Answer:
Business is essentially an economic activity because it involves the production and distribution of goods and services for earning profits.

Business As An Economic Activity

(1) Efficient use of Resources: A business enterprise makes efficient use of scarce resources like men, money, material and machine. Business involves the efficient utilisation of various resources for the production of goods and services. Labour, materials, capital, and machinery are important inputs of the business. The businessman organizes these resources to utilise them for producing and supplying the goods desired by society.

(2) Creation of Utilities: Business makes goods more useful by creating utility, such as form utility, place utility, and time utility. When raw materials are converted into finished goods, form utility is created. Goods are transported from the producer to the consumer and thus place utility is created. Moreover, business firms carry on production throughout the year and store goods in warehouses to make them available when demanded by the consumers. This is how time utility is created.

(3) Satisfaction of Human needs: Business activities are intended to serve the general public. They do so by making available those goods and services which can satisfy the needs of society. Moreover, the business also satisfies the needs of businessmen through economic gains or profits. The satisfaction of customers is an important economic activity of a business.

(4) Regular dealings: A single transaction cannot a business firm is continuously engaged in production and exchange goods and services for its customers.

(5) Profit motive: People pursue business as an occupation o means of livelihood. The main purpose of every business activity is to earn profits. In other words, business is a source of income for t businessman. It keeps him busy in an economic occupation. A business that does no earn profits cannot survive for long. Profits are essential for growth and expansion.

(6) Risk element: As an economic activity, business involves an element of risk of economic loss. Such loss might occur because of theft, fire, earthquake, flood, etc. Various other risk factors are chan in consumers tastes, fashion and demands changes in technology increase in competition, shortage of raw-material, etc. affect the business.

Question 3.
Explain the concept of business.
Answer:
The term ‘business’ is derived from the word ‘busy’. Thus, business means being busy. However, in a specific sense, business refers to any occupation in which people regularly engage in an activity with an objective of earning profit: The activity may consist of production or purchase of goods for sale or exchange of goods or supply of services to satisfy the needs of other people in the society.

Question 4.
How would you classify business activities?
Answer:
Business Activities – Classification

All business activities may be classified mainly into two groups
(i) Industry
(ii) Commerce.

The industry covers production, manufacturing, or processing of goods and services, while commerce is concerned will d distribution of goods and services to ultimate users or consumers. Industry 3 and commerce may further sub-divided into the followings:

Question 5.
What are various types of industries?
Answer:
The industry refers to economic activities, which are connected with the conversion of resources into useful goods. Industries may be divided into three broad categories namely primary, secondary and tertiary. Primary Industries include all those activities, which are connected with the extraction and production of natural resources and reproduction and development of living organisms, plants, etc.

Question 6.
Explain any two business activities which are auxiliaries to trade. .
Answer:
Auxiliaries to trade
These are services facilitating trade. In other words, these services remove the hindrances before the business and are known as transportation, communication, banking, insurance, warehousing and marketing, etc.

(1) Transportation – It creates a place of utility in goods by overcoming the business of distance. From each other. The hindrance of this distance is removed by transportation facilities. Goods produced at one place may be transported to different comers of the world. The means of transport available to us are as under:

Transport widens the market and helps to equalise prices at different places.

(2) Communication – The successful operation of the business requires that there must be contact between buyers and sellers of the commodity. Communication between diem is required for placing order, making complaints, making payments, deciding the terms of transactions and other related information. The various means of communication are correspondence, telegram and telephone services. The modem means of communication are fax, STD services, pagers and cellular phones etc. Communication facilities like postal services, telephone and others are necessary’, so that producers, traders and consumers, interact with each other.

(3) Insurance – There is risk in every walk of business. There is risk from fire, damage, accident and storms etc. Loss of goods due to misshaping damages the prospects of the business. It is, therefore, necessary that there must be certain agencies to undertake these risks. Insurance is based on the pooling of risks. There are insurance companies, which issue fire, marine, accident and other policies and undertake the responsibility to compensate for the loss upon payment of certain premiums.

(4) Warehousing – There is time gap between the production and consumption of goods, so it is necessary that goods must be kept safe, secured and intact for this period. This hindrance of the business is removed by storing the goods in various private and public godowns. Certain goods are stored in cold storage for their off-season use. Warehousing these days has become an important element of the business. Warehousing helps to stablise prices through the continuous supply of goods.

(5) Marketing – Marketing in modern business has assumed a very’ important place. In order to accelerate the pace of growth of the business, it is necessary that sales should go on multiplying. Competition being in the market it is very difficult to push sales. It has now been necessary for the business to adopt sales promotion and advertising measures together with attractive packaging and standard quality of goods. Advertising and publicity are the tools helpful in marketing the products and to create the demand of the product in the consumer’s minds.

Question 7.
What is the role of profit in business?
Answer:
An objective is the starting point of business. Every business is directed to the achievement of certain objectives. Objectives refer to all the business people want to get in return for what they do. It is generally believed that business activity is carried on only for profit.

Businesspersons themselves proclaim that their primary objective is to produce or distribute goods or services for a profit. Every business is said to be an attempt on the part of business people to get more than what has been spent or invested or, in other words, to earn profit which is the excess of revenue over cost.

However, it is being increasingly realized nowadays that business enterprises are part of society and need to have several objectives, including social responsibility to survive and prosper in the long run. Profit is found to be a leading objective but not the only one.

Although earning a profit cannot be the only objective of a business its importance cannot be ignored. Every business is an attempt to reap more than what has been invested, and profit is the excess of revenue over cost.

Profit may be regarded as an essential objective of business for various reasons:

1. It is a source of income for business persons
2. It can be a source of finance for meeting the expansion requirements of the business
3. It indicates the efficient working of the business
4. It can be taken as society’s approval of the utility of business and
5. It builds up the reputation of a business enterprise.

But, earning a profit cannot be the sole objective of a truly successful business. In the words of Urwick, “Earning of profit cannot be the objective of business more than eating is the objective of living. In fact, service to the community is the real objective of the business.

Therefore, modem business houses aim at making a profit through service. As Ford had observed mere money chasing is not business’. This may result in the neglect of social objectives. However, too much emphasis on profit to the exclusion of other objectives can be dangerous for good business.

Obsessed with profit, Business managers may neglect all other responsibilities towards customers, employees, investors, and society at large. They may even be inclined to exploit various sections of society to earn an immediate profit.

This may result in the non-cooperation or even opposition from the affected people against the malpractices of business enterprises. The enterprises might lose business and may be unable to earn a profit. That is the reason why there is hardly any sizable business enterprise whose only objective is the maximization of profit.

Question 8.
What is business risk? What is its nature?
Answer:
Business Risks – Meaning & Nature
Business risk arises due to uncertainly about the future course of action. It has already been observed that one of the basic features of the business is ‘risk’, i.e.. possibility of some loss or adverse happening. There is always a possibility- of loss in business because of uncertainties in the natural, political, economic, social, and technological environment.

For instance, who could foresee the terrorist attack on the World Trade Centre (WTC) in New York on 11th September 2001,? This single happening had adverse effects on investors, stockbrokers, airlines, hotels, importers, exporters, and other business firms throughout the world. There are uncertainties regarding prieefall, technological changes, competition, and change in government policies, etc.

Meaning and Types of Business Risk – According to B O. Wheeler, ”Business risk means the possibility of some occurrence which might lead to some loss for the business”. In other words, business risk refers to the possibility of loss or inadequate profits due to some unexpected events which are beyond the control of the businessman. For example, the demand for a firm’s product may go down due to changes in fashion or the availability of better substitutes. This might lead to a loss for the firm.

In the words of C.O. Hardy “Business risk refers to uncertainty as regards cost, loss or damage.” In fact, the risk is an inherent feature of any business. Business risks are common to all businessmen from a small vendor to a big industrialist. There may, however, be differences in degrees of different types of risks. The possibility of loss for the business does exist though it is not measurable.

The most common types of business risks include :

• Purl and Speculative Risks.
• Property and Personal Risks
• Internal and External Risks
• Static and Dynamic Risks.
• Insurable and Non-insurable Risks.

Nature of Business Risks – The nature of business risks shall be clear from the following features :
(i) Uncertainty – Uncertainty is an important feature of any business. Fluctuations in demands or prices, the possibility of book debts turning into bad debts, wrong estimates of demand and supply, changes in Government policies, improvements in technology, natural calamities, etc., are some of the examples of uncertainties which influence the business.

(ii) Risk is an essential element of business – Risk is an inevitable feature of the business. No business can be run without some element of risk in it. In fact, business means assuming risk Peter F.Drucker remarked, “Bearing of risk is an essential element of the business.” For example, when a businessman decides to introduce a new product, he is taking a calculated risk. Business activities are planned for the future and the future is always uncertain. Therefore, the risk is inherent in the business.

(iii) Reward for undertaking risks is profit – ‘No risk, no gain is an important principle which is applicable to all types of business. An entrepreneur assumes risks and in consideration, he gets a reward, that is profit. Generally, heavy risks result in higher profits.

(iv) Degree of risk depends upon the nature of business – The nature of business (/.<?., types of goods and services produced and sold) and the volume of operations determine the degree of risk. For instance, a business dealing in fashionable items has a higher degree of risk as the current fashion may not last long.

(v) Variability – The degree of risk is influenced by the time factor. For instance, a business may experience a greater degree of risk when there is political instability in the country or fear of terrorism, communal riots, natural calamity, etc. The degree of risk also varies with the time period and degree of competition.

(vi) Difficult to measure – It is very difficult to measure accurately the degree of business risks. A businessman cannot predict all the risks likely to arise in business.

Long Answer Questions

Question 1.
Explain the characteristics of the business.
Answer:
The features or essential characteristics of business activities are:

1. Economic activity: Business is an economic activity of the production and distribution of goods and services. It provides employment opportunities
2. Buying and Selling: The business involves the purchase of raw material, plants, and machinery, stationary, property, etc. And also, it sells the finished products to the consumers, wholesalers, retailers, etc.
3. Continuous process: Business is not a one-time activity. A single transaction of trade cannot be termed as a business. It is a continuous process of production and distribution of goods and services.
4. Profit Motive: The primary goal of a business is usually to obtain the highest possible level of profit, Profit is an indicator of success and failure of business. It is a return on investment. Profit acts as a driving force behind all business activities.
5. Risk and Uncertainties: Risk is defined as the effect of uncertainty arising on the objectives of the business. Risk is associated with every business.

Question 2.
Compare business with profession and employment.
Answer:
Comparison Between Business, Profession And Employment
Given below are the main points of difference between business and other economic activities, e.g. profession and employment or service.

(1) Mode of Establishment-A business enterprise is established when an entrepreneur takes a decision to start some business activity. In a profession, on the other hand, the membership or enrolment of a recognised professional association or institution is essential. In order to take up employment, a person has to enter into a contract of service between employer & employee.

(2) Nature of Activity – A business deals with providing goods and services to satisfy human wants. On the other hand, a professional renders personalised service of a specialised nature to his clients. An employee performs the work assigned by the employer under the contract of service.

(3) Qualifications – No formal education is required in order to carry on a business. But for a profession, specialised knowledge and training are essential. Minimum educational qualifications are prescribed for every profession. In the case of employment, the qualifications required depend upon the nature of the job.

(4) Main Objective – In business, the basic motive is to earn profits. Every business involves the element of profit on capital invested. A professional, on the other hand, is expected to emphasise the service motive and sense of mission. That is why a rigorous code of ethical behaviour is laid down in every profession. In case of service, the motive of an employee is to earn salary and receive other benefits.

(5) Capital – A business can’t be run without the amount of capital. Every business requires capital depending upon the nature and scale of operations. A professional also has to invest some capital to establish an office for rendering professional services. There is no need for capital in case of employment.

(6) Degree of Risk Involved – There is an inherent element of risk in business and profession, but practically no risk is involved in case of employment. There can be losses in business, but returns are never negative in profession and employment.

Comparison between Business, Profession and Employment

Question 3.
Explain with examples the various types of Industries.
Answer:
Industries may be divided into three broad categories namely primary, secondary and tertiary.
1. Primary industries:
These include all those activities which are connected with the extraction and production of natural resources and reproduction and development of living organisms, plants etc. These industries may be further subdivided as follows.

(i) Extractive industries:
These industries extract or draw out products from natural sources. Extractive industries supply some basic raw materials that are mostly products of the geographical or natural environment. Products of these industries are usually transformed into many other useful goods by manufacturing industries. Important extractive industries include farming, mining, lumbering, hunting, and fishing operations.

(ii) Genetic industries:
These industries remain engaged in breeding plants and animals for their use in further reproduction. For the breeding of plants, the seeds and nursery companies are typical examples of genetic industries. In addition, activities of cattle, breeding farms, poultry farms, and fish hatchery come under the class of genetic industries.

2. Secondary industries:
These are concerned with using the materials, which have already been extracted at the primary stage. These industries process such materials to produce goods for final consumption or for further processing by other industrial units. For example, mining of iron ore is a primary industry, but manufacturing of steel by way of further processing of raw irons is a secondary industry.

Secondary industries may be further divided as follows:
(i) Manufacturing industries:
These industries are engaged in producing goods through the processing of raw materials and thus creating form utilities. They bring out diverse finished products that we consume or use through the conversion of raw materials or partly finished materials in their manufacturing operations.

Manufacturing industries may be further divided into four categories on the basis of the method of operation for production. E.g.: Iron and steel industry, Cotton. Textile Industry, sugar Industry.

• Analytical industry analyses and separates different elements from the same materials as in the case of oil refinery.
• Synthetically industry combines various ingredients into a new product, as in the case of cement.
• The processing industry involves successive stages for manufacturing finished products, as in the case of sugar and paper.
• Assembling industry which assembles different component parts to make a new product, as in the case of television, car, computer.

(ii) Construction of industries:
These industries are involved in the construction of buildings, dams, bridges, roads as well as tunnels and canals. Engineering and architectural skills are an important part of the construction industry.

Tertiary industries:
These are concerned with support services to primary and secondary industries that provide service facilities. As business activities, these may be considered part of commerce because as auxiliaries trade these activities assist trade. Included in this category are transport, banking, insurance, warehousing, communication, packaging, and advertising.

Question 4.
Describe the activities relating to commerce.
Answer:
Commerce:
Commerce deals with the buying and selling of goods, exchange of commodities, and distribution of finished goods. In other words, commerce is the sum total of trade and auxiliaries to trade. It means that commerce is the combination of trade and distribution activities of goods and services.

Commerce links producers and consumers. The main object of commerce is to ensure smooth distribution of goods and services to satisfy consumer needs.

Definition of Commerce:
“Commerce is a term that embraces all those functions involved in making, buying, selling and transport of goods. “- Dr.E. Thomas

According to J.Stephenson, “Commerce means the sum total of those processes which are engaged in the removal of the hindrances of person (trade) place (transport and insurance) and time (Warehousing) in the exchange (Bank and finance) of commodities. ”

It means that commerce is not restricted to trade but it includes all those activities which, facilitate trade, and aids of the trade such as transportation, communication, financing, insurance, warehousing, and marketing

Trade
Trade means the purchase and sale of goods with a profit motive. It involves the exchange of goods and services between buyers and sellers. It is the nucleus of commerce as all activities revolve around trade.

Trade activities must be performed to earn a profit. It means that activities having service motive and emotional aspect are not trade activities.

Trade is the central activity of commerce. Other activities of commerce such as transportation, communication, financing, insurance, warehousing the marketing are the supporting activities of trade.

Trade activities may be shown as under

Internal/Home trade – Purchase and sale of goods within the boundaries of the country is called internal trade. The purchaser and seller of the commodity belong to the same country and the payment is

made in the currency of the country, to which buyers and sellers belong. For example, the trade between two cities, two villages, villages, and cities or even between two persons of the same place within the boundaries of the country is called internal trade. On the basis of volume. Internal trade is classified as wholesale and retail trade:

(1) Wholesale trade – It involves the purchase and sale of goods belonging to a specific type of variety, in bulk. A wholesaler purchases a huge quantity of goods from producers/manufacturers, stores it in the big godowns, and sells in small quantities to retailers. Wholesalers constitute a link between producers and retailers provides useful services to both the manufacturers and retailers. They are criticized for hoarding goods, creating artificial scarcity, indulging in black-marketing and other malpractices. In spite of all these defects, they render valuable services to society and must remain in the market.

(2) Retail trade – It relates to the selling of goods by retailers to ultimate consumers. They acting as a link between wholesalers and consumers and render valuable services to both. The retail trade is situated among consumers. It arranges different goods from different places and makes them available to members of the society residing in its locality. These traders inform the producers through the wholesalers about the attitudes, likes and dislikes, preferences, traditions, and habits of the consumers.

They educate consumers about the utility and working of new products. They are organised in the forms of Departmental Stores, Multiple Shops, Cooperative Store, Super Bazars and self-service stores, etc.

Foreign Trade or International Trade – The trade between two countries is known as foreign trade. The purchasers and sellers in this type of trade belong to different countries. The payment in foreign trade is made in foreign currency. The foreign trade may be sub-divided into import and export and entrepot! or re-export trade.

(1) Import trade – It involves the purchase of foreign goods for use in the domestic market. Purchasing goods by an Indian trader from a trader of USA, Russia, UK and Japan etc. is the example of import trade.

(2) Export trade – The type of trade in which goods are sold and sent to firms located outside the country is known as export trade. Selling and sending goods by Indian firms to other firms located outside India, say Germany, Iraq and Saudi Arabia, etc. is export trade.

(3) Entrepot trade – It involves the import of foreign goods with a view to re-exporting them. For example, importing goods from Germany and Japan by Indian firms and “exporting it to Nepal and Bhutan is entrepot trade. There are certain countries I five Nepal and Bhutan, which do not have seaports. These countries import their goods through third countries. Nepal and Bhutan also import their goods from abroad through India for which we charge a certain commission.

Auxiliaries To Trade

Activities which assist or support business and trade are known as auxiliaries to trade. They are an integral part of commerce as they remove various hindrances in the production and distribution of goods. These include Transport. Insurance, Financing, Banking, and marketing discussed as follows

(1) Transportation and Communication – It helps in removing the hindrance of place in the exchanges of goods and services. It facilitates trade by assembling and distributing goods. It overcomes the barrier of distance and creates place utility. Transport widens the market and helps to equalise prices at different places.

It makes available the distribution of goods among far-flung areas. Quick and economical means of transport such as railway s, roadways, airways and shipping have widened the scope of trade to include international transactions. Communication facilities such as postal services, telephone and others are also necessary so that producers, traders, and consumers may exchange information with one another.

(2) Warehousing – There is generally a line lag between the production and consumption of goods. This problem can be solved by storing the goods in warehouses. Many products such as wheat, sugar, rice, etc. are produced in a particular season but they are needed throughout the year.

Proper storage arrangements must be made in order to make such goods available. Besides, it is necessary to store commodities such as woolen garments and umbrellas to meet the desired
seasonal demand. Warehousing removes the hindrance of time and thereby creates time utility. It helps to stabilise prices through the process of continuous supply of goods.

Warehouses are of three types, namely, private, public and bonded. Private warehouses are owned by merchants and producers for their own ‘storage needs. Public warehouses are owned by wharfingers, port trusts, etc. Bonded warehouses are set up by customs authorities to store goods which are liable to customs duty.

(3) Banking and Finance – There is usually a time gap between production/purchase and sale of goods. During this period businessmen need funds to carry on their business. Banks and other financial institutions facilitate the required credit in various forms.

Banks also perform the business activity by providing safe and quick means for the remittance of money. They collect bills, cheques, etc. from their customers. Banking removes the hindrance of raising finance and credit on one’s own. Therefore, banks may be regarded as traders in money and credit.

(4) Insurance – Business involves several types of risks — due to fire, flood, theft, etc. Insurance removes the hindrance of risk. Insurance provides a cover against the loss of goods in transit and storage. Insurance is based on the “pooling of risks.” A large number of people who are subject to a particular risk contribute to a common fund, out of which compensation is paid to those few who actually suffer the loss.

There are various types of insurance, e.g. fire insurance, marine insurance, workmen’s compensation insurance, life insurance, etc. Insurance company performs the useful service of compensating the loss to the insured goods through fire, theft, flood or any other hazard.

(5) Advertising and Publicity – It is a useful function of bridging the knowledge gap about the availability and use of goods. They remove the hindrance of knowledge. The main purpose of advertising is to create and sustain demand. Advertising has become essential for quick disposal of goods in the modern era of large-scale production.

In the absence of advertising, consumers may remain ignorant of the availability of goods and services and businessmen may not be able to sell their products. There are various forms of advertising and publicity, such as the press, outdoor displays, radio, television, letters to customers, fairs, exhibitions, cinema, etc.-Advertising facilitates mass consumption of goods. Advertising is necessary to bridge the information gap.

(6) Packaging – Good packaging facilitates delivery’ of quality products to the consumers and also increase the like of the product. Packaging helps protect the goods from damage during transport and warehousing. It also makes the goods attractive. Packaging helps in the conveyance and handling of goods.

It removes the hindrance diFrisk by keeping goods safe and free from spoilage. Trade and transport of goods have become easier and safer due to improvements in the art and methods of packaging.

Question 5.
Why does the business need multiple objectives? Explain any five such objectives.
Answer:
Objectives Of Business
The objective of business means the purpose for which a business is established and carried on. The objective provides the direction towards which all business activities will be directed. Therefore, every businessman must select and define the objectives carefully and cleanly.

Though profit motive constitutes the primary objective of business activities, it should not lead us to conclude that profit is the sole objective of business. Objectives of a business are multi-dimensional in nature. They can be classified into three categories, namely,
(1) economic objectives
(2) social objectives and
(3) human objectives.

Business Objectives
Economic Objectives – Business is an economic activity and following are the economic objective of a business.
(i) Earning of Profits – No business can survive without making adequate profits. Profit is essential to meet the cost of factors of production. Entrepreneurship is one of the important factors of production. Just as other factors get their rewards, the entrepreneur must get reward for his efforts and taking of risk. Moreover, every businessman will like to see that the business he is managing should grow. This is possible only if the business earns sufficient profits for investing them into the business for expansion.

(ii) Creation of Customers or Markets – A business can earn profits by satisfying consumer needs. Thus, the business must aim at winning and satisfying the customers. Peter F. Drucker has rightly said, “There is only one valid definition of business purpose, i.e., to create a customer. ” Customers are created through advertisement and sales promotion and delivering them ‘want satisfaction.’

(iii) Innovations – Innovation is the activity of exploring and discovering ways and means of making products more useful, exploring new markets etc. A business can succeed only with the help of new designs, improved techniques, better machinery etc. Innovation is the result of creative thinking, research and development, computer-aided design and computer-aided manufacturing.

(iv) Best use of Resources – Business is expected to make best use of scarce resources of men, machine, material, methods and money. Proper allocation and efficient planning to use these resources achieve the purpose of profitability and sustainability in the business.

Social Objectives – Business does not exist in a vacuum. It is an integral point of society. In other words, the business must be socially responsible. The decision taken by the business has a great influence on the socio-economic conditions in the country. For example, the quality of the product offered and its prices will have an influence on the standard of living of the people.

The type of technique of production (labour intensive or capital-intensive) will have an influence on employment opportunities for the job-seekers. Therefore, it is in the interest of businesses to pursue certain objectives expected by the society.

Social objectives of a business denote its obligations to society including customers, employees and the government. The important social objectives include the following:
(i) Better Quality Goods – The business must provide better quality products as desired by the customers. The products should be durable, genuine (not duplicate) and safe. The prices charged for the goods should also be reasonable. The important objective of a business is to produce and supply goods of proper quality to satisfy consumer’s expectations.

(ii) Fair Trade Practices-The business should follow fair business practices at all times. It should avoid anti-social practices like hoarding, black-marketing, over-charging the buyers, etc. Businessmen must avoid unfair trade practices like spurious products or misleading advertisements to mislead or exploit the people.

(iii) Generation of employment opportunities – A business is expected to provide means of livelihood to members of society. Business has tremendous scope for the generation of employment opportunities for the unemployed. Further, a business should employ suitable people without any discrimination based on caste, creed, sex or religion. Business firms pursue this objective can improve their public image.

(iv) Employees’ Welfare – success of any business depends on significant contribution towards the welfare of employees. Besides providing fair wages, the business should also provide good working conditions, canteen facility, housing, transport and medical facilities, etc. to the employees. These measures would increase the productive efficiency of the workers.

Human Objectives :
A business is directly linked with two important groups, namely, (a) customers, and (b) employees. Both these groups must have a feeling of having been treated as human beings by the business enterprise. As human beings, customers expect courteous service and fair dealings from the business. The employees look forward to the business enterprise for the following objectives:

(i) the employees are treated as partners in the business and not as inferior lot; they should get fair wages and healthy working conditions;
(ii) they are able to acquire and develop new skills in the process of employment; and
(ii) they derive job satisfaction.

Question 6.
Explain the concept of business risk and its causes.
Answer:
Business Risks – Meaning
Business activities are not very safe. Business units are surrounded by innumerable risks generated by economic, natural, physical and human aspects.

“Business risks may be defined as uncertainty in regard to cost, loss or damage.” — C.O.Hardy
“Risk is the chance of loss. It is the possibility of some unfavourable occurrence.” — Wheeler

Causes of Business Risks :
Business risks arise due to a variety of causes which may be classified into the following categories:
(1) Natural Causes – Nature is an important cause of business risks. Human beings have no control over the nature. Natural calamities such as flood, drought, famine, earthquake, volcanic eruption, lightning, snowfall, hailstorm, tide, epidemic, etc. result in heavy loss of life, property and income.

Even the death of the owner or a partner may cause the business to be shut down. Human beings have little control over nature. Therefore, natural causes of business risks are beyond the control of a businessman.

(2) Human Causes – Human causes are very important causes of business risks. Negligence or carelessness on the part of an employee may lead to serious fire or accidents involving loss of life and property. There may be loss due to spoilage, breakage, etc. Ignorance may result in grave errors in estimating demand for products. A feeling of false pride or prejudice may lead to strike or lockout. Inefficient management is often the cause of loss in business.

Irrational approach of the management, or the owners of business is also a type of human failure causes business risk. A business like Enron Corporation in U.S.A. incurs heavy losses which leads to bankruptcy mainly due to unplanned decision of the management at the top.

(3) Economic Causes – Economic causes relates to changes in market conditions. Fluctuations in demand and prices are well-known. Availability’ of cheaper substitutes may affect the sale of relatively costly products. Excessive competition may bring down the prices of products.

Competing businesses may employ more effective techniques of sales promotion. For example, Colour T.V. has replaced Black & White T.V. from the market.

(4) Physical and Technical Causes – Technical changes and mechanical defects also result in business risks. Changes in technology may make the machines obsolete before their expected life. Mechanical failures such as the explosion a boiler, leakage of gas, etc. may lead to heavy loss of life and property. Assets used in business may depreciate in value due to shrinkage, loss in weight, vaporisationvgtc. Stoppage of work due to power failure may cause loss. There be loss or damage to goods in transit.

(5) Political and Legal Causes – Such causes of risk include changes in government policies, policies relating to foreign trade, collaboration of MNC’s licencing and taxation policies and changes in law. A businessman may suffer loss due to restrictions on imports and exports and fluctuations in exchange rates. Government control on production and distribution of certain products may deprive businessmen from profits. Changes in government policies and laws are, thus, an important cause of business risks.

Question 7.
What factors are important to be considered while starting a new business. Explain.
Answer:
Starting A New Business
The person who undertakes to bear the risk and uncertainty of a new business is known as ‘entrepreneur. Webster’s dictionary defines an entrepreneur as one who organises, manages and assumes the risks of a business enterprise. At the time of starting a new business, a businessman must take decisions regarding the various factors of production and resources like men, machines & materials.

The entrepreneur going to start a new enterprise must have various qualities like wide knowledge, skills, experience, foresightedness, dynamism outlook, self-confidence, and willingness to take risks. If an entrepreneur or businessman lacks these qualities, he cannot successfully launch a new enterprise.

Starting a new business is complex and as difficult as the birth of a child. The entrepreneur has to act both as a mother and a midwife. The ultimate success of a business depends upon the various considerations essential for the successful running of a business enterprise.

Factors to be Considered for Starting a Business – While starting a business following factors have to be considered
(1) Selection of Line of Business – He will determine the market demand for the products, he wants to produce and the margin of profit he expects from the sale of products. He will prepare a systematic report of the exercise he undertakes. This is known as ‘feasibility report’ or ‘project report’.

While selecting the line of business, a number of criteria must be kept in view. The most important criterion is the expected rate of return on capital to be invested. That line of business will be preferred which is expected to yield higher rate of return on capital invested and has chances of further growth: Besides this, the degree of risk involved in the line of business is also important. The businessman has to decide what type of risk he can afford to take. The line of business chosen must be technically feasible.

(2) Choice of Form of Ownership – A good form of ownership should be easy to form simple to operate flexible & durable. The choice of the form of organisation will determine the authority of the entrepreneur starting the business. However, in certain lines of business, there is no choice left in the selection of the form of organisation. For instance, the insurance and banking business can be done only by the joint-stock companies.

Size of the business will also determine the form of organisation. Company form of organisation is more suitable in case of large scale operations. Sole tradership or partnership is suitable for small scale and medium scale operations. The other factors which affect the choice of the form of ownership are capital, requirements, managerial skills requirement, the limit of liability, tax liability, legal formalities, etc. A careful analysis and reconciliation of technical, managerial, financial, market & other factors should be determined by the size of the unit.

(3) Financial Planning – Proper planning and control of finance are essential to success in business. Adequate funds must be provided at the right time for the start and continuity of the business unit.

Capital is required for investment in fixed assets like land, buildings, machines, and equipment and in current assets like materials, supplies and book debts. Capital is also needed for meeting the day-to-day expenses of the business. In the case of small enterprises, the promoters can provide funds from their own savings.

But in case of large enterprises, funds have to be raised from various sources like the general public, commercial banks, financial institutions, etc. It is of utmost importance to have adequate capital for meeting the initial needs and future requirements of the business.

(4) Location of Business – The location of a business enterprise is an important decision as it influences the costs, profitability and growth needs for expansion diversification & modernisation, etc. should be taken into account. As far as possible, the location must be optimized so that the costs of production and distribution are the lowest possible. Location is selected on the basis of access of raw-material, availability of labour, transportation & banking facilities.

(5) Size of Business Unit. The size of the firm is influenced by various factors like technical, managerial, financial and marketing facilities. Some factors favour the larger size while others operate to restrict the scale of operations. An attempt should be made to achieve the size at which the average cost per unit is minimum.

Usually, businessmen start their operations at a small or medium scale. If new ideas are to be tried out, it is preferable to start with a small-scale operation. This will help in adapting to changes without much loss. Thus, the entrepreneur must determine the size of business operations before he arranges capital and other resources for the business.

(6) Machines and Equipment – Machinery and Equipment should be placed in a proper sequence so as to permit a smooth flow of materials through necessary operations. It will depend upon various factors like availability of funds, size of production, and the nature of the production process.

The benefits to be derived from the machine and equipment must justify the amount of investment made on therti. Availability of repair and maintenance services and spare parts is also an important consideration while selecting a particular machine or equipment.

(7) Workforce – The entrepreneur cannot run the business himself alone. He has to take the help of a number of persons including skilled and unskilled workers and managerial staff. The employment of the right types of persons fertile enterprise is necessary, otherwise, there will be a huge wastage of time, money, and efforts.

They have to be given the necessary training to increase their efficiency. The workforce must be motivated through monetary and non-monetary incentives to make their best possible contribution towards the accomplishment of organizational objectives.

(8) Procedural Formalities – In the case of a sole proprietorship or a partnership, there are practically no procedural formalities. Only permission from the municipality is to be taken to start the specified line of business. Registration of a partnership firm is also not compulsory.

Government regulation is the minimum possible if the partnership firm operates on a small or medium scale. But a joint-stock company is exposed to greater procedural formalities both at the time of incorporation and during its life. Incorporation of a company is compulsory. For this purpose, many documents have to be prepared and fee deposited with the Registrar of Companies. A public company also needs a ‘Certificate to Commence Business’ before it could start business operations.

(9) Launching the Enterprise – The completion of physical, organizational, and financial aspects leads ultimately to the actual launching of the enterprise.

Detailed, Step-by-Step NCERT Solutions for 12 Business Studies Chapter 13 Entrepreneurship Development Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.

Entrepreneurship Development NCERT Solutions for Class 12 Business Studies Chapter 13

Entrepreneurship Development Questions and Answers Class 12 Business Studies Chapter 13

Multiple Choice Questions

Put a tick (√) against the most appropriate answer to the following questions.

Question 1.
Entrepreneurs undertake
(a) Calculated risks
(b) High risks
(c) Low risks
(d) Moderate and calculated risks
Answer:
(a) Calculated risks.

Question 2.
In economics, which of the following is not a function of the entrepreneur?
(a) Risk-taking
(b) Provision of capital and organisation of production
(c) Innovation
(d) Day to day conduct of business
Answer:
(d) Day to day conduct of business.

Question 3.
Which of the following statements does not clearly distinguish between entrepreneurship and management?
(a) Entrepreneurs found the business; managers operate it
(b) Entrepreneurs are the owners of their businesses; managers are employees
(c) Entrepreneurs earn profits; managers earn salaries
(d) Entrepreneurship is once for all activity; management is a continuous activity
Answer:
(d) Entrepreneurship is once for all activity; management is a continuous activity.

Question 4.
In the roles and functions of the entrepreneur identified by Kilby, which of the following is not an aspect of’ political administration’?
(a) Dealing with public bureaucracy
(b) Managing human relations within the firm
(c) Introducing new production techniques and products
(d) Managing customer and supplier relations
Answer:
(c) Introducing new production techniques and products.

Question 5.
Which of the following attitudes is not generally associated with sucessful entrepreneurship.
(a) Investing in R & D
(b) Live your business day by day
(c) Innovate and improvise continually
(d) Produce as per customers’ requirements
Answer:
(b) Live your business day by day.

Short Answer Type Questions

Question 1.
Clarify the meaning of the term ‘enterpreneur’, ‘entrepreneurship’ and ‘enterprise’.
Answer:
Entrepreneurship is the process of setting up one’s own business as distinct from pursuing any other other economic activity, be it employment or practising some profession. The person who sets up his business is called an entrepreneur. The output of the process, that is, the business unit is called an enterprise.

No society can wait for the chance of “birth” of entrepreneurs to pursue its developmental plAnswer: In fact, plans for economic development would bear little fruit unless entrepreneurship development is regarded as a deliberate process of making people aware of entrepreneurship as a career at an early age and creating situations where they may actually make a choice to become entrepreneurs.

When we make this choice, we become a job-provider rather than a jobseeker, besides enjoying a host of other financial and psychological reward. Taking to entrepreneurship is surely more a matter of aspiring to become an entrepreneur rather as being born as one.

We are aware that entrepreneurship is regarded as one of the four major factors of production, the other three being land, labour, and capital. However, it should surprise we that as regards its French origin, -the term ‘entrepreneurship’ (derived from the word ‘entreprende’ meaning ‘to undertake’) pertained not to economics but to undertaking of military expeditions.

So is true of many terms in management such as stratagy (a course of action to beat the competition, the ‘enemy’) and logistics (movement of men and machines for timely availability), etc. Historically, as wars are followed by economic reconstruction, it should be no surprise that military concepts are used in economics and management.

It may be pointed out that whereas the wars are rare and far between, in today’s competitive world, entrepreneurs wage wars everyday. There is a tremendous pressure to continually develop new products, explore new markets, update technology and devise innovative ways of marketing and so on.

The term ‘entrepreneur’ was first introduced in economics by the early 18th century French economist Richard Cantillon. In his writings, he formally defined the entrepreneur as the “agent who buys means of production at certain prices in order to sell the produce at uncertain prices in the future”.

Since then a perusal of the usage in the future.” Since then a*perusal of the usage of the term in economics shows that entrepreneurship implies risk/uncertainly bearing, coordination of productive resources; introduction of innovation; and provision of capital.

Question 2.
Why is entrepreneurship regarded as a creative activity?
Answer:
Creative Activity : Entrepreneurship is creative in the sense that it involves creation of value. We must appreciate that in the absence of entrepreneurship ‘matter’ does not become a “resource”. By combiningthe various factors of production, entrepreneurs produce goods and services that meet the needs and wants of the society.

Every entrepreneurial act results in income and weath generation. Even when innovations destory the existing industries, for example, zerox machines destroyed, – carbon paper industry, mobile telephoney threatens land line/basic telephony, net grins accruing to the econmy land such entrepreneurial actions us commendable as the act of creative destruction.

Organisation of Production : Production, implying creation of form , place, time and memory combined utilisation of diverse factors of production, land labour, capital and technology. Entrepreneur, in response to a perceived business opportunity mobilises these resoures into a productive enterprise or firm.

It may be pointed out that the entrepreneur may not be possessing any of these resources, he may just have the idea that he promotes among the resources providers. In an economy with a well-developed financial system, he has to convince just the funding institutions and with the capital so arranged enter into contracts of supply of equipment, materials, utilities (such as water and electricity) and technology.

What lies at the core of organisation of production is the knowledge about availability and location of the resources as well as the optimum way to combine them. An entrepreneur needs negotiation skills to raise these in the best interests of the enterprise. Organisation of production in also involves products development and development of the market for the product. Besides, entrepreneur may be required to develop even the sources of supply of requisite inputs.

For example, weather it is a matter of putting together an automobile manufacturing unit or manufacture of burger/pizza, besides cultivating a market and developing to suit its tastes and preference there would be need to develop a pool of suppliers of the diverse components or elements that go into their manufacture.

Question 3.
Entrepreneurship undertake “moderate risks”. Eloborate this statement.
Answer:
Risk-Taking : As the entrepreneur contracts for an assured supply of the various inputs for his project, he incurs the risk of paying them off whether or not the venture succeeds. Thus, the landowner gets the contracted rent, capital providers gets the contracted interest, and the workforce get the contracted wages and salaries. However, there are no assurance of profit to the entrepreneur.

It may be pointed out that the possibility of absolute ruin may be rare as the entrepreneur does everything with in his control to risk the business. For example he may enter into prior contract with the customers of his production so much so that he may just be contract manufacturer or marketer of someone elses products! What is generally implied by risk-taking is that realized profit may be less than the expected.

It is generally believed that entrepreneur take high risk. Yes, individuals opting for a carrer in entrepreneurship take a bigger risk that involved in a carrer in employment or practice of a profession as there is no “assured” payoff. In practice, for example, when a person quits a job to start on his own, he tries to calculate whether he or she would be able to earn the same level of income or not.

To an observer the risk of quiting a well-set and promising career seems a “high” risk, but what the person has taken is a calculated risk. The situation is akin to a motorcycist in the ring of death” or a trapeze artist in circus. While the spectators are in the awe of the high-risk, the artists have taken a calculated risk given their runing, skills, and of course confidence and daring.

It is said that the entrepreneur thrive on circumstances whereas favouring and against success area even, that is a 50 :50 situations. They are so sure of their capabilities that they convert 50% chance into sucess.

They avoid situations the higher risk as they hate failure as anyone would do, they dislike lower risk situations as business caures to be a game/fun! Risk as such is more than a financial stake, becomes a matter of personal stake, where less than expected performance causes displeasure and distress.

Question 4.
How does entrepreneurship result in increasing the spectrum and scope of economic activity?
Answer:
Need for Entrepreneurship : Every country whether developed or developing, needs entrepreneurs. Whereas, a developing country needs entrepreneurs to intiate the process of development, the developed one needs entrepreneurship to sustain it.

In the present India context, where on the one hand, employment opportunities in public sector and large- scale sector are shrinking and on the other, vast opportunities arising from globalisation are waiting to be exploited; entrepreneurship can really take India to the heights of becoming a super economic power.

Studies by Global Entrepreneurship monitor, a research program involving annual assessment of the national level of entrepreneurial activity account for the differences in the level of economic growth to the extent of as much as 33%.

What is that the entrepreneurs do to effect economic development? This leads us to a discussion of the functions of the entrepreneurs in relation to economic development. As the entreprise is the object of their endervour, it is also necessary that we examine their functions in relation to the enterprise as well.

Thus, the need for entrepreneurship arises from the functions the entrepreneurs perform in relation to the process of economics development and in relation to the business enterprise.

Increasing the spectrum and scope of Economic Activities : Development does not merely mean ‘more’ and ‘better’ of the existing, it also and crucially means diversification of economic activities-across the geographic, sectoral and technological scope.

We are aware that underdeveloped countries are caught in the vicious cycles on the demand as well as supply side. Entreprenesurs penetuate into and break these cycles. For example, by organising and orienting domestic production for exports. Thus, production (and there by of generation of Income) is not cdhstrained by the inadequacy of domestic demand. (Demand-side vicious cycle). In today’s context we are that India is posed to become a manufacturing hub for the global markets for diverse products.

Economic development is also constrained by the supply-side pressures resulting into absence of capacity to meet the demand whether domestic or overseas. Entrepreneurs mobilise local and even overseas resources to augment the productive capacity of a country. Indian multinational giants is fast becoming a reality.

Entrepreneurs lead the process of economic development via bringing about sectoral change. You must be aware that as the economics grow, percentage of GDP originating from argiculture ‘decreases and the orginating in industry and services sectors goes up. Entrepreneurs through their decision to divest from the state sectors and invest in green-field sectors bring about a virtu# transformation of the economy from “underdeveloped” to an “emerging” and “developed” status.

Question 5.
Describe briefly the role of achievement motivation in entrepreneurship.
Answer:
Anybody who has a perception of self efficacy and is yet to feel intrested in or motivated by the idea of being of their own comprise a potential, future source of entueneurship. The standard and method of motivation differ from person to person. Achievement or self actualisation is a powerful drive to motivate the person.

Entrepreneucial situation is characterised by personal accomplishment in competitive situation and involving higher standards of excellance. Encouraged by achievement, the entire preneur use his tallent in the right direction. Achievement implies a desire to accomplish something difficult, to master, moniuplak or organise physical objects and human beings to achieve high standards. Further it means to overcome obstacles and attain a high standard, to excel one’s self, to rival and surpass other.

Enterpreneurship provides the best opportunity for making best use of other talents and resources to sucessfully achieve organisational objectives.

Long Answer Types Questions

Question 1.
Describe briefly the steps involved in starting a new business.
Answer:
In terms of the process of stating of New business therefore, an entrepreneur is on the look out for and spots the business opportunity, assesses its value, develops it in the form of a product services idea, assembles the resources and gets going see fig.

These elements are ho sequential as the figure may convey, the entrepreneur may have to address to all these elements-simultaneously. Yet depending upon their backgrounds, the individual entrepreneur may prefer one over the other. For example, technicians tend to be over obsessed with the production aspect, those with marketing background may over emphasie creation of market.

Investor type entrepreneurs may be over concerned with the returns from the project. One should resist the temptation of looking at the business only from one’s own narrow prespective. Having said this, it is apt that we provide a brief description of the various issues that may be relevant at each stage.

Opportunity Scouting
Entrepreneurial opportunities have to be actively searched for. One may rely on personal observation, discovery or invention. Personal constract and experience or may also help in identifying business opportunities. Alternatively, one may rely on published reports, surveys and the like.

Narayan Reddy of Virchow Laboratories relied on the personal discovery of the molecule during his employment with phamaceutical company. As observation means seeing/hearing/ smelling with a purpose, opportunity spotting presupposes tendency to look at the things and phenomenon form an entrepreneurial mildset. Most of us have a consumer’s mindset. If we see any object of desire, may be a pen, laptop, latest model of the mobile phone or some body eating pizza or burger, we crave to have the same thing for ourselves.

The entrepreneurial mind, on the other hand starts working out, what would be the market Size, where to procure it from and a what price, will I able to woo the customers from the existing players and how by selling it cheaper by providing more value or by better service and soon. Entreprenneuical opportunities may also be identified through a process of research of international, domestic sector / industrial analysis.

For example, post WTO, international trade and investment have become freer of restrict ions. Tentile quotas are being phased out, and, there are greater opportunities for tentile and tentile made ups from India. A lobal outsourcing is on the rise and India offers huge and varied pool of technical manpower that marks it a cost effective destination for in bound global out-sourcing in manufacturing as’well as Information-Technology Enabled Servies (ITES).

Identification of specific product, offering While the environment scan leads to the discovery of more generalised business opportunities, these is a need to zero in on the a specific product or services idea, for example, trade liberlisation since WTOs has resulted in export opportunities, but the question is what to export and where? Clearly decision on specific product offering necessitates decisions on who is buying, why, and what are the value expectations. You will be able to succed when the value delivered not only meet, but also exceed customers, expectations and create a “VOW!” impact. – Feasibility Analysis

The product offering idea must be technically feasible, that is it should be possible with the available technology to convert the idea into a reality. And this should be possible at a cost that can be converted by tffe price it will fetch; in other words, the idea must be economically feasible too.

The project cost should be with in the.resources available and the resources provides should be reasonably sure of an appropriate return on (profit) and return of (safety and liquidity) of their investments. That is, the idea must be financially viable as well.

There should be enough sales in the immediate and the prospect of growth in the foreseable future, there should be adequate assurance on the commercial and other legal restrictions/necessity of prior appovals for setting up the business. It is also to be decided as to whether the business will be organised as a proprietary concern/parthership firm/ company or cooperative entity.

As noted earlier too/entrepreneurial function do not come to an end with business start up. He often looks after its day-do-day operations and strives for its stability and growth. The following diagram may be presented for economic fesibility.

Question 2.
Examine the nature of relationship between entrepreneurship and economic development.
Answer:
Enterpreneurial roles and functions dearly seem onerous. Perhaps that is why many shy away to simples, softer and safer options of employment and practice of profession. Entrepreneurial going may be tough; but then that is where the tough get going.

Do not worry if presently you may find yourself short on those competencies, values and attitudes. It is just a matter of making up your mind for a carrer in entrepreneurship and grooming yourselves for it. This takes us to the discussion of the process of entrepreneurship development.

Entrepreneurship does not emerge, spontaneously. Rather it is the outcome of a dynamic process of interaction between person and the environment. Ultimately the choice of entrepreneurship as a career lies with the individual, yet he must see it as a desirable as well as a feasible option.

In this regard, it becomes imperative to look at both the factors in the invironment as well as the factors in the individual as having a nearing on the perception of desirability and feasibility and thereby entrepreneurship development.

The Role Of Environment In Entrepreneurship Development:-

Entrepreneurs bring about economic growths development, and the latter in turn provides a tertile soil for the flourshing of enterpreneurship. There certainly is a mutually facilitating reciprocity between economic growth and entrepreneurship development.

Relationship between Entrepreneurship and Economic Development : In general, capitalist economy with its emphasis on individual achivement is more suitable for entrepreneurship. Lower rates of taxation on personal income, lower rates of interest and moderate inflation stimulate entrepreneurical activity.

(Can you think why it is so?) Moderately low external value of domestic or in other words, moderately lower exchange rates, stimulate import substituting and export promoting entrepreneurship. (Can you rationalise why?).

Well developed financial system, good infrastructure, helpful bureaucracy all these have a favourable impact or entrepreneurship. Specially designed and dedicated institutions such as National Institude for entrepreneurship and small Business Development (visit, niesbud. nic. in), Entrepreneurship Development Institute of India (visit, www.ediindia.org) that conduct entrepreneurship awareness and entrepreneursurship development programmes (EAPs and EDPs) a further fillip to this activity.

An important enabler or disabler of entrepreneurship is the prevailing socio-cultural milieu. Those socities that respect individual freedom to choose among occupations, that encourage the spirit of enquiry, exploration and experimentation, celebrate individual accomplishment and in general accord important status to the entrepreneurs are likely to have selfsustaining supply of able and willing men and women for taking to entrepreneurship as a carrer clarify have motivation and abilities impact an individual’decision to choose entrepreneurship as a carrer.

Mr Nagarufun was desirous of starting a small scale industry and also had a sense of efficacy or readiness to pursue it given his qualifications, experience and the necessary values, attitudes and motivation (the opening case does not elaborate this. We will discuss that at suitable places). Even you may like to see as to where do you find yourself on the desirability (willingness) – (efficacy ability) matrix.