Inflation definition and causes

Q. What is inflation. Describe the main causes of inflation. 

Ans. Meaning of Inflation: The dictionary meaning of the word inflation is expansion or an act of inflating. In the context of prices, inflation means persistent rise in general price level.

In the words of Peterson, “The word inflation in the broadest possible sense refers to any increase in the general price level which is sustained and non-seasonal in character.”

In the words of Samuelson, “By inflation we mean a time of generally rising prices.”

In the words of Shapiro, “Inflation is simply a persistent and appreciable rise in general price level.”

In short, Inflation is the process of persistent increase in the price level. 

Causes of Inflation: Inflation is the outcome of an imbalance in demand for and supply of goods. When demand exceeds supply or cost rises then inflation takes place. Thus, causes of inflation relate to:

(1) Demand Side, and (2) Supply Side.

● (1) Demand Side: Demand refers to demand for money to buy goods. Demand for money increases mainly due to the following reasons:

(i) Increase in Public Expenditure: Increase in public expenditure in a country leads to an increase in the purchasing power which in turn leads to more demand for goods and services. But after full employment there is no increase in production of goods. As a consequence, prices begin to rise causing inflation. The situation can arise even after full employment if certain bottlenecks slow down the pace of production.

(ii) Deficit Financing: When government covers its deficit by printing more notes it leads to increase in the monetary income of the people. However, production does not increase to the extent demand for goods increases. This causes price to rise. 

(iii) Cheap Monetary Policy: Cheap money policy also causes excessive increase in supply of money and thereby increase in the demand for goods and services. It results into rise in prices.

(iv) Increase in Disposable Income: Another cause of inflation is increase in the income of consumers. Demand for goods increases due to increase in consumers’ income. When some people by consuming more goods and services make relative improvement in their standard of living, it has a demonstration effect on others. They also imitate their consumption pattern, even if their present income is low. There is thus, an increase in pressure on demand resulting into high prices.

(v) Black Money: Unaccounted money is called black money. It is the outcome of tax evasion. Holders of black money squander (waste, उड़ाना, गंवाना) it on luxuries and conspicuous (attracting attention) consumption. (Conspicuous consumption means purchasing of goods and services to display wealth, status or social power rather than to satisfy practical needs.) They do not care for prices. Consequently, demand increases and price rise. 

(vi) Increase in Investment: Increase in investment also accounts for inflation. When prospects (expectations, chances) of profits are quite bright (high), firms increases their investment. There is more capital formation. Prices of goods increase under the pressure of increased demand. Prices of other goods begin to rise in sympathy (in response to, because of a similar effect). 

(vii) Reduction in Taxes: When government reduces taxes, people’s real and monetary income increase causing increase in their effective demand. This additional purchasing power in the hands of the people stimulates (increases) their demand for goods making price-rise inevitable.

(viii) Less Public Borrowing: In case of reduced public borrowing or when old debts are repaid, people have more purchasing power exerting (applying,  creating) pressure on available goods and services resulting in inflation.

(ix) Increase in Population: If the growth rate of population is higher than the growth rate of output in the country, demand for goods and services outstrips (exceeds, is more than) their supply causing rise in prices. 

(x) Increase in Exports: Rising exports push up prices on two counts: (a) More exports mean more income and hence more demand for goods and services by the exporters leading to rise in the prices. (b) More exports of consumer goods mean less supply for domestic consumption and so rise in their prices. 

● (2) Supply Side: Supply refers to the quantity of available goods or output on which people spend their income. In case of inflation supply of goods and services does not increase proportionate in the demand. As a result, there is disequilibrium in the economy. It is this disequilibrium that causes rise in prices. Following factors may be noted in this regard.

(i) Less Production: Fall in production is one of the principal causes of rise in prices. Fall in agricultural or industrial production in relation to demand leads to rise in prices. Production may fall due to diverse reasons such as, disputes between employers and employees, natural calamities, under-utilisation of production capacity or non availability of the strategic (important/crucial) inputs. 

(ii) Artificial Scarcity: Hoarders and Profiteers create artificial scarcity of goods by way of hoarding.

(iii) Taxation Policy of the Government: High rates of sales tax, excise duty, corporation tax, expenditure tax, etc., discourage production. Under the situation even when demand for goods remain constant there will be rise in their prices. Thus, fall in production give rise to inflation.

(iv) Shortage of food grains: In the event of short fall of the production of foodgrains, pulses, edible oils, etc., their prices shoot up. This shortage may be due to failure of monsoon or more production of cash crops than food crops.

(v) Industrial Disputes: Sometimes industrial disputes may culminate (result) into strike or lockout. It causes fall in supply or production and hence rise in prices.

(vi) Technical Changes: New inventions ever take place in this dynamic age of science. Switching over to new techniques takes time, with the result production process is slowed down. However, technicians and specialists are paid their remuneration as usual. This increases cost of production only to accelerate the inflationary pressure.

(vii) Lack of Raw Materials: Lack of raw materials within the country and little hope of its availability from abroad reduces production and pushes up prices.

(viii) Natural calamities: Agricultural production is occasionally (कभी-कभार) exposed (open, not protected) to such natural calamities as floods and droughts, prices of the agricultural products therefore rise.

(ix) Productive Set up: Sometimes production pattern in the country undergoes such a change that producers begin to produce more and more luxury goods or basic and heavy goods. It is so because production of these goods is more profitable that mass consumer goods. Consequently, income of the labourers increases and so also their demand for wage goods. This causes the prices of such goods to rise very much.

(x) War: Production of consumer goods falls heavily during war time, because productive resources are diverted to the production of war-goods. It raises the prices of production goods.

(xi) International Causes: In modern times different countries have trade relations with one another. Price rise in one of the trading countries has its effect on other countries as well. Inflation in one country spreads through other countries through trade. For example, one of the reasons for global inflation in modern times is the price-hike of petrol and petroleum products.

(xii) Industrial Policy of Government: If industrial policy of the government is restrictive, it would adversely affect supply. If the setting up of a new industry is strictly controlled, then production would fail to cope with demand and so prices will rise.

(xiii) Bottlenecks in Production: When the supply of electricity, coal, means of transport, etc., becomes erratic, production slows down. As a consequence, supply falls and prices rise.

Personality Definition and Theories

 Q. Define Personality. Explain the various theories of personality.

Ans. Meaning of Personality: Personality refers to that role which a person displays to the public. It combines both the psychological and physical aspects with the help of which one comes to have a special adjustment to the circumstances. It is only on the basis of personality that a person appears to be different from the other members of the group. 

In the organisational behaviour human behaviour is primarily the focus of study and personality happens to be an important aspect of human behaviour. It is, therefore, important for the managers to study personality so that they are able to control the behaviour of their subordinates. 

Definition of Personality: 

(i) According to Allport, “Personality is the dynamic organisation with the individual of those psycho-physical systems that determime his unique adjustments to his environment.”

(ii) According to Valentine, “Personality is the sum total of innate and acquired disposition.”

(iii) According to Burges, “Personality is an individual’s unique and relatively stable pattern of behaviour, thoughts and feelings.”

Theories of Personality: The following are the leading theories of personality:

● I. Psycho-Analytical Theory: This theory of personality was propounded by Sigmund Freud. In order to establish his theory, Freud divided the mind of a human being into three parts, i.e., conscious, pre-conscious and unconscious. Apart from this, he brought out the fact that the following three factors play an important role in the formation of personality. 

(1) Id: Id represents the unconscious mind of a human being. Its chief characteristic is that it wants immediate satisfaction of the desires in the unconscious mind of a person. It is a sort of metal agency which happens to be present in a human being right from his birth. According to Freud it happens to be a store house of innumerable rumnants of the memory of various ancestors. It does not bother about the consequences of its actions. That is perhaps the reason that the moment some tension is built-up his/her Id makes efforts to get rid of it. In order to get rid of tension Id makes use of one of the following two methods:

(a) Primary Process: According to this process, a person makes/forms a mental picture of the thing that he/She desires. With this effort a person gets rid of tension but this is short-lived. For example, a person happens to be hungry and if he happens to create a picture of his/her favourite food in his/her mind, he/she will get rid of tension at least for some time but he/she will not be satisfied.

(b) Reflex Action: Under it, a person behaves in a manner as to show that he/she happens to be tension-free. Here a person makes use of the inherited behaviour pattern, e.g., by showing his satisfaction by sneezing, coughing or batking eye-lids. 

Although both the above mentioned methods can make a person tension-free temporarily but they cannot restore him to a state of tranquility or comfort. To get rid of tension the actual or the real thing is required and not its shadow or reflection. 

(2) Ego: At the time of birth an infant has only Id in its mind. As it comes in contact with the outward environment, its Id starts getting affected. Consequently, another part of human mind develops which is called Ego. Ego is created because of Id and it fulfils the objectives of Id very intelligently. On the one hand, the mental pictures of the desires falling under Id are created, and are considered to be everything, and the person likes to fulfill his desires unmindful of their being right or wrong. On the other hand, a person makes use of knowledge or intelligence under Ego. He starts making use of language and thinking and makes efforts to control his uncontrolled impulses. Now he starts making a distinction between a mental picture and a reality. In order to satisfy his images he starts finding his real things rather than their mental images. A hungry man would no longer create mental images of his favourite food, but he has started understanding that mental images of food do not fill his stomach. What is required is the real food and not its images. Hence, it can be observed that Ego works on the Principle of Reality and it will not be wrong to describe it as the Executive Officer of personality.

(3) Super Ego: Super Ego is a step ahead of Ego. Under ‘Id’ nobody pays attention to reality while ‘Ego’ is based on the Principle of Reality and under ‘Super Ego’ morality gets attached with reality. It can be said that Super Ego is absolutely opposite of Id. Super Ego represents the standard norms of society. It is an important factor of personality. When a child starts making a distinction between the right and the wrong and understands the difference between the moral and the immoral, the emergence of Super Ego starts appearing. It guides an individual to behave in a good manner in a society. In the above example, a hungry man gets satisfied with the mental picture of food (this is Id), then he starts understanding the difference between the mental picture and the reality (this is Ego) and now he starts realising that he happens to be vegetarian and would not accept non-vegetarian food under any condition (This is Super Ego). It is the basic quality or thinking of Super Ego that what is done should be of the highest quality. 

The theory of Freud can be understood, in a way of conclusion, that whereas Id happily tries to find out, while Ego tries to find our reality and the Super Ego tries to find out the best.

● II. Neo-Freudian Theory: Sigmund Freud developed psycho-analytical theory of personality. Some of his contemporary theorists, too, helped in advancing the thoughts of Freud. The prominent scholars included the names like Sullivan, Erikson and Horney. The ideas advanced by all these three thinkers regarding personality came to be called Neo-Freudian concept.

Sullivan laid a specific stress on the social and cultural aspects. He believed that an individual remains in perpetual contact with the social and cultural factors right since his childhood. These factors produce some kind of action and reaction. This ultimately leads to the formation of personality of an individual. It goes a long way in determining individual behaviour. It can, therefore, be said that personality is finally shaped and moulded by interpersonal behaviour.

Erikson feels that an ideal personality can be developed by making adjustment with the changing social background. 

Horney feels that concern for future happens to be a decidedly important factor in the formation of personality.

● III. Trait Theory: It has been generally observed that different people behave differently. This is because of the traits present in them which, too, happens to be different. The variety of traits is primarily responsible for giving people their separate identity. Modern psychologists feel that these traits perform the job of forming personality. It should include only those specialities which reflect themselves in different situations in their actual context. As per personality related traits, two important theories are: 

(1) Allport Trait Theory: Allport propounded this theory. He has taken the traits of personality as its base. According to this theory, the traits of people have been divided in the following two parts:

(i) Common Traits: Common traits means those traits which are commonly found in all the people of same category. Therefore, on theor basis the different people can be compared with each other. Dominance is a good example of common traits. It can be said that the dominance of one person is more than the other.

(ii) Personal Disposition: Personal Disposition means those traits which are limited to a person of a particular group or category. It obviously means that they are not found in all the people. That is the reason that there can be no comparison among different people on the basis of those traits. A comparative study of an individual can be made from different angles on the basis of personal disposition. If we say that Mr. Ankit is more active and less inactive, then it would be an example of personal disposition. Allport in his personal trait theory has laid more stress on personal disposition than common traits. He has pointed out 18000 personal disposition. Personal dispositions can be divided into following three parts:

(a) Cardinal Disposition: This is an individual trait which cannot be kept hidden. This trait is not present in all the people, but those who possess it, it becomes a base for their being widely discussed. The unshakable faith of Mahatma Gandhi in the principle of non-violence is an example of this very trait. 

(b) Central Disposition: These traits are almost found in all the people. They are nearly 5 to 10 in number, e.g., sociability, depression, self-confidence, etc. 

(c) Secondary Disposition: These traits are those traits which are less important and less consistent, e.g. hairstyle, eating habits, dress, etc. These are the traits which do not help in understanding personality. 

(2) Catell’s Trait Theory: After Allport’s trait theory of personality, Catell’s contribution is equally important. Catell took up the process of discovering those traits which go to influence personality. He took up 4500 trait out of a total of 18,000 which are pointed out by Allport. Later on this figure fell to 200 and finally it was reduced to 35. Catell has divided the traits of personality in the following two parts:

(i) Surface Traits: Surface traits refers to those traits which can be easily observed in the day to day behaviour of an individual. They are more clear and there cannot be any difference of opinion about them. For example, integrity, cheerfulness, altruism, etc. 

(ii) Source Traits: According to Catell, source traits play an important part in the formation of personality. Their number happens to be less than surface traits. Unlike the surface traits, these traits do not get reflected in the day to day behaviour of a person. According to Catell, there are 23 source traits which are found in normal individuals, while there are 12 source traits which are present only in abnormal people. Source traits are also of two types, I.e., Environmental Mold Traits and Constitutional Traits. The environmental mold traits are mostly affected by the environmental factors while constitutional traits are influenced by the heredity. 

In short, it can be said that according to Catell the source traits have an important contribution in the formation of personality.

● IV. Personality Type Theory: Personality Type Theory is the oldest theory. According to this theory, individuals can we placed in different categories on the basis of their special traits. All the people belonging to a particular category have similar traits. It means that all have a similar personality. Therefore, it can be said that there can be various types of personality. The personality type theory has been presented by Sheldon and Karljung. They are the following:

(1) Sheldon’s Personality Theory: In the year 1940, Sheldon presented his Personality Type Theory on the basis of physical formation. He studied 4,000 students in order to determine the type of personality based on the physical formation. He divided personality into the following three parts:

(i) Endomorph: In this category of personality, the people are short statured and fat. Their body is of round shape. According to Sheldon, these people are jovial, social, enjoy taking rest, and show great interest in eatables. These people are popular with others.

(ii) Mesomorph: People belonging to this type of personality, are attractively built. Their main traits happen to be assertion and aggressiveness. These people enjoy giving commands to others. 

(iii) Ectomorph: People belonging to this type of personality are lean and thin and have a good height. Physically they are not fully developed. These people like loneliness and do not want to meet people freely. They are shy by nature and they suffer from some problems with their sleep.

(2) Karljung’s Personality Theory: Karljung has made a mention of the following two types of personality.

(i) Extrovert: These people have following traits: 

● Interested in social activities.

● Like meeting people. 

● Be always happy and cheerful.

● They are of optimistic nature.

● They believe in realism.

● They are useful for society.

● They are interested in eating and drinking.

(ii) Introvert: These people possess the traits which happen to be opposite of the traits of people who are extrovert. Their chief traits are the following.  

● Not interested in social activities.

● Like living alone.

● Be always uneasy.

● Conservative by nature. 

● They are self centered.

● They do not like consulting other people.

● Ungenial behaviour.

● V. Social Learning Theory: This theory is the outcome of the research work conducted by Albert Bandura. He has given more importance to the social factors than the physical factors in the formation of personality. He supported the social learning theory on the basis of various experiments. In one of his experiments, Bandura showed a film to some children. In this film the behaviour of an adult was shown. The film had been divided into three parts. Every child was shown only one part of the film. In the first part of the film the hero displayed an aggressive behaviour and he is punished for it. In the second part of the film again the hero behaves aggressively for which he was rewarded. In the final part of the film, the hero again displayed an aggressive behaviour and at this stage, he was neither punished, nor rewarded. After showing the film every child was placed in similar conditions about which they were shown in the film. Then their behaviour was studied. It was found that children ignored that behaviour of the hero where he was punished for his aggressive behaviour. It makes it clear that a person learns from social factors and the same learning becomes helpful in the formation of his personality.

● VI. Need Theory: Need Theory of personality is propounded by Henry Murray. According to this theory, it is because of the need of the individual that he behaves in a particular way under particular circumstances. Needs create a situation of disequilibrium within an individual. Behaviour of an individual is very much influenced by the disequilibrium so developed in him. In other words, an individual feels lacking in something, he is prompted to come into action. It is expressed through his behaviour. 

Murray has divided the needs of man into the two categories: 

(i) Primary Needs: These are the basic needs of a man. For instance, food, water, air, etc. These needs are easily fulfilled. Behaviour of an individual does not undergo any particular change on account of these needs. 

(ii) Secondary Needs: These needs arise because of the psychological nature of an individual. These are:

• Achievement

• Recognition 

• Dominance 

• Autonomy 

• Affiliation

According to Murray, secondary needs are more powerful. These arise again and again. Man’s behaviour turns intense because of them. These needs go a long way in building the personality of an individual. Corresponding to rise or fall in these needs, there is change in the behaviour and personality of individuals.

● VII. Self Concept Theory: Carl Rogers has advocated this theory. It is closely related to organisational behaviour. 

Self concept implies how much we recognise ourselves and how much we are confident about ourselves. Self concept of an individual determines his concept about the external world. If an individual is doubtful of his ability, he will be afraid of the external world. On the contrary, if an individual is fully confident of himself, he will gladly accept the external world. Self concept of an individual is influenced by feedback of the environment. Feedback here implies to know what others think about us. In case feedback informs us that our opinion about ourselves is at variance with the opinion that others hold about ourselves, then there is need to re-evaluate ourselves. According to Rogers, on the basis of such re-evaluation people try to readjust themselves. Change in self concept brings about change in personality. 

It is on the basis of self concept that an individual perceives the surroundings. In other words, an individual views others in a way similar to his self concept. It can, therefore, be said unhesitatingly that behaviour of the individuals is influenced by self concept.

Since self concept of each individual differs, so a given situation is perceived by different people in different ways. That is why to get work from persons with different self concept, managers have to make use of different methods.

Mixed economy golden path between capitalism and socialism.

 Q. ‘Mixed economy is a golden path between capitalism and socialism’. Explain.

Ans. Meaning of Mixed Economy: Mixed economic system is a synthesis [combination/mixture] of the characteristics of both capitalism and socialism. Under this type of economy, on the one hand there is freedom of economic activities and on the other there is also government interference in the economic activities to achieve the objective of social welfare. In this new system, private sector and public sector co-operate with each other with a view to achieve economic objectives as well as promotion of social welfare. Thus, the economy that comes into being as a result of synthesis of private sector of capitalism and public sector of socialism is called a mixed economy. India has adopted mixed economic system.

According to Anatol Murad, “Mixed economy is that economy in which in which both government and private individuals exercise [to use or apply, काम में लाना] control over economic activities.”

According to Samuelson, “Mixed economy is that economy in which both public and private institutions exercise economic control.”

● Main Features of Mixed Economic System are:

(1) Co-existence of Private and Public Sectors: The most important feature of a mixed economy is that under it both public and private sectors work hand in hand. The main objective of both the sectors is mutual co-operation. They also supplement each other. In the interest of consumer, they also compete with each other in a spirit of healthy competition.

(2) Planned Economy and Government Control: It is the endevaour of the government to launch democratic plans with a view to achieveing economic development. These plans aim at progressive development of both public and private sectors. In order to achieve the set objectives and promote social welfare, the government keeps full control over the industries and other enterprises in the private sector.

(3) Private Property and Economic Equality: Under mixed economy, people are free to acquire private property. But in the interest of equitable distribution of wealth and income in the country, government formulates its economic policies in such a manner that there is no concentration of wealth in the hands of a few people. Government imposes various taxes on private sector. At the same time, it spends a lot of funds in the public sector to promote the welfare of the poor people. 

(4) Price Mechanism and Regulated Economy: In capitalism, the entire economy is regulated by price mechanism, that is, by the forces of demand and supply. Main economic decisions, like what to produce, how to produce and for whom to produce, are determined by price mechanism. On the other hand, under socialism, prices of goods are fixed on the directions of the government. Under mixed economy, one finds the operation (use) of both price mechanism as well as administrative (of govt.) prices. Prices of some goods are determined by market demand and supply but some prices, such as rail and bus fares, electricity tariffs etc. are largely fixed by the government. 

(5) Profit Motive and Social Welfare: Aim of production under mixed economy is to earn private profit as in capitalist economies and to promote social welfare as in socialist economies. 

In short, mixed economic system is a mixture of features of both socialism and capitalism, focussing on social welfare rather than on accumulation of wealth.

● Merits of Mixed Economy 

Mixed economy enjoys merits of both capitalism and socialism. Its main merits are: 

(1) Economic Freedom and Capital Formation: Economic freedom provides incentive to the people to work hard. It promotes setting up of more business units which in turn promotes capital formation.

(2) Competition and Efficient Production: Healthy competition among the producers keeps the standard of efficiency high. Because of the possibility of private profit, all factors work efficiently. Because of competition, all business units try to reduce their wastages, improve efficiency and make optimum utilisation of resources.

(3) Efficient Allocation of Resources: Both private and public sectors are keen to make efficient allocation of resources. Private sector makes efficient use of resources in order to earn more profit. Main motive of public sector is to promote social welfare. Thus, there is a sort of synthesis of social welfare and private profit. Thus, mixed economy promotes both – level of economic development as well as social welfare.

Price mechanism, profit motive, freedom of production and consumption can lead to efficient allocation of resources.

(4) Advantages of Planning: Mixed economy enjoys almost all advantages of planning. There is rapid development of the economy in accordance with the planned development programmes. Problems of unemployment, food shortage, poverty, etc. are properly tackled. Thus, economy works in a planned manner.

(5) Economic Equality: Objectives of economic equality can be achieved without sacrificing economic freedom. Increasing prosperity of private sector is controlled by the government in such a manner that it benefits the people at large. Government imposes tax at higher rates on rich class and spends on social welfare of poor class which in turn promotes economic equality.

(6) Freedom from Exploitation: Poor and middle class people are protected against the exploitation by rich, monopolies and landlord class. To safeguard the interests of poor labourers and farmers, government takes several legislative measures. It also helps poor and backward class people in getting employment in public sector units. Government also provides free education and free medical facilities to these people.

In short, mixed economy is a golden path between capitalism and socialism. It has the main merits of capitalism like inspiration to work, efficient organisation and economic freedom and also that of socialism like economic equality, economic planning, social welfare and lack of exploitation. It is the most useful system for the economic development of undeveloped countries.

Decision Making Techniques in Organisation.

 Q. What is Decision Making? Throw light on various techniques used for making decisions in organisations these days.

Ans. MEANING OF DECISION-MAKING: Decision-making is an important function of every manager. When a manager chooses the best alternative out of many available ones, it is called decision and the process that has been adopted in order to reach the final decision is known as the decision-making. In other words, Decision-making is a process and decision is the outcome of such a process. 

Decision-making means analysing different alternatives and arriving at decision in the face of a particular situation about what to do and what not to do. In this way, decision-making means reaching a conclusion or final decision which can be implemented as a solution of a problem. 

According to Koontz and O’Donnel, “Decision-making is the actual selection from among alternatives of a course of action.”

According to George R. Terry, “Decision-making is the selection based on some criteria from two or more possible alternatives.”

According to Louis A. Allen, “Decision-making is the work which a manager performs to arrive at conclusion and judgement.”

Thus, decision-making involves the selection of the best available alternative as a solution of some problem. It is thus clear that a decision is needed when there are many alternatives to do a work. In other words, if there is only one method of doing a work there is no need to take a decision and in that case that method in itself is a decision. 

Decision-making Techniques: Following are the major techniques of decision-making:

1. Judgement Technique: This is the most ancient and simple technique of decision-making. According to this technique, the decisions are taken on the basis of past and present experience. This technique is the most useful for day-to-day small decisions but the use of this technique for taking important decisions is not free from risks.

2. Statistical Techniques: These days statistical technique is used as an important tool in taking important decisions. The various statistical techniques used in taking decisions are the following:

(i) Theory of Probability, 

(ii) Sampling Analysis,

(iii) Correlation/Regression,

(iv) Time Series Analysis,

(v) Ratio Analysis,

(vi) Variance Analysis,

(vii) Statistical Quality Control, etc. 

3. Operation Research Techniques: Apart from statistical techniques there are other modern techniques which are called Operations Research Techniques. They are used in very important decisions. Following are the Chief Operations Research Techniques:

(i) Linear Programming,

(ii) Game Theory,

(iii) Network Analysis,

(iv) Break-even Analysis,

(v) Waiting Line or Queuing Theory,

(vi) Cost-Benefit Analysis, etc.

4. Model Building Technique: This technique is employed in manufacturing concerns. Under this technique a model of an intended product is prepared and then it is estimated whether the product is according to the taste of the customers or not. Many models of a particular product are prepared and then the decision to produce a particular model which the approval of the taste of the customers is taken.

5. Behavioural Technique: The science of behaviour has also developed many techniques of decision-making. With the help of these techniques factors affecting a particular decision are evaluated. Group decisions are an important contribution of this science.

6. Principles of Management Technique: This technique lays down that while taking decision the principles of management should be kept in mind. In reality it can be observed that the principles of management are not a technique of decision-making, but prepare only an atmosphere for decision-making process.

7. Intuition Technique: Taking decision under this technique employs one’s intuitive feelings and knowledge. The decision maker thinks about a problem and his mind suggests the solution. Decisions by this technique are quick. The correctness of the decision depends on the experience, education, training, etc., of the decision-maker.

SWOT Analysis: Components, useful/uses in budiness

 Q. What is SWOT analysis ? What are its main components ? How is it useful in business?

Ans. Meaning of SWOT analysis: SWOT analysis is an analysis undertaken by business firms to understand their external and internal environment. The term SWOT consists of four words :

S — Strengths

W — Weaknesses 

O — Opportunities 

T — Threats

It is also known as WOTS–UP analysis. SWOT analysis is applied to formulate effective organisational strategies. The business firms can match through SWOT analysis, the strengths (S) and weaknesses (W) existing within an organisation with the opportunities (O) and threats (T) operating in the environment. An effective organisational strategy according to SWOT analysis is that strategy which capitalizes on the opportunities through the use of its strengths and neutralizes the threats by minimizing the impact of weaknesses. Thus, SWOT analysis enables a business firm to use its strengths to exploit the opportunities provided by the environment. On the other hand, threats of environment are neutralized by reducing its weaknesses to the minimum level. 

Components of SWOT Analysis: The SWOT analysis consists of following components:

1. Environment: The term business environment means the aggregate of all conditions, events and influences that surround and affect the business organisation. It may be of two types:

(a) External Environment: The external environment of a business firm is that environment which includes all the factors outside the organisation. These factors provide opportunities or pose (present or constitute (make) threats to the organisation. Thus, external environment provides opportunities as well as threats. 

(b) Internal Environment: Internal environment is that environment which includes all the factors within an organisation. These factors impart strengths or cause weaknesses of a strategic nature. 

In short, the environment in which an organisation exists can be described (i) in terms of opportunities and threats operating in the external environment and (ii) in terms of strengths and weaknesses existing in the internal environment. 

2. Strengths (S): The strength of a business organisation refers to an inherent capacity by which an organisation can gain important advantages over its competitors. For example, superior research facilities and presence of developmental skills are the strengths of a business organisation. These can be used as development of new products, enabling the business organisation to have competitive advantages over its competitors.

3. Weaknesses (W): The weakness of a firm refers to an inherent limitation of a business firm. It results in significant disadvantages for a firm in comparison to its competitors. For example, over-dependence of a firm on a single product line is its weakness. It can result in losses in times of crisis.

4. Opportunities (O): The availability of opportunity is a favourable condition in the organisation’s environment. It enables it to consolidate and strengthen its position in comparison to its competitors. For example, an increasing demand for the product, produced by the business organisation is an indication of an opportunity. 

5. Threats (T): The presence of a threat is an unfavorable condition in the environment of a business organisation. It causes damages to and creates a risk for the organisation. For example, the emergence of strong new competitors is a threat to the business organisations because of the possibility of a stiff competition. 

Uses of SWOT Analysis: Following are the uses of SWOT analysis: 

1. It helps to determine the strategy of the business.

2. It is used in the initial stage of decision-making.

3. Use of external and internal factors of this analysis, help in visualising a complete picture about the future of the business. 

4. It also helps in facing the competition successfully.

5. SWOT analysis is helpful in minimising the weaknesses and maximising the strengths of the business. 

We can conclude that SWOT analysis is a systematic approach to understand the environment and formulate strategic policies.

Define Accounting. Advantages and disadvantages.

 Q. Define Accounting. Explain its advantages and disadvantages.

Ans. MEANING OF ACCOUNTING: Accounting is the art of recording, classifying, summarising and communicating financial information to users for correct decision making. It gives information on:

(i) resources available

(ii) how the available resources have been employed

(iii) the results achieved by their use.

Since accounting is a medium of communication, it is called The language of business. 

DEFINITION OF ACCOUNTING: According to American Institute of Certified Public Accountants (A.I.C.P.A.), “Accounting is the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are, in part atleast, of a financial character, and interpreting the results thereof.”

ADVANTAGES OF ACCOUNTING: Accounting offers the following advantages:

i) Useful in Management of Business: Management needs a lot of information for the efficient running of the business. All such information is provided by the accounting which helps the management in planning, decision making and controlling. For example management would like to know whether the sales are increasing or decreasing and also the speed of increase in the cost of production. All such information is provided by the accounting, which helps the management in estimating the future sales and expenses. 

ii) Provides Complete and Systematic Record: Business transactions have grown in size and complexity and it is not possible to remember each and every transaction. Accounting keeps a prompt and systematic record of all the transactions and summarizes them in order to provide a true picture of the activities of the business entity.

iii) Information Regarding Profit or Loss: Accounting reports the net result of business activities of an accounting period. The Profit & Loss Account prepared at the end of each accounting period discloses the net profit earned or loss suffered during that period. The information regarding profit is of great use to the owners and various other interested parties.

iv) Information Regarding Financial Position: Accounting reports the financial position of the business by preparing a Balance Sheet at the end of each accounting period.

v) Evidence in Legal matters: Properly maintained accounts, supported by authenticated documents are accepted by the courts as a firm evidence.

vi) Facilitates Comparative Study: By keeping a systematic record, accounting helps the owners to compare one year's costs, expenses, sales and profit etc. with those of other years. Such a comparison provides the useful informations on the basis of which important decisions can be taken more judiciously.

vii) Facilitates in Assessment of Tax Liability: Properly maintained records will be of great help when the firm is assessed to income tax or sales tax. Such records when audited are trusted by the taxation authorities.

viii) Facilitates Sale of Business: If a business entity is being sold, the accounting information can be utilised to determine the proper purchase price.

ix) Helpful in Raising Loans: Accounting information is of great help while raising loans from banks or other financial institutions. Such institutions before sanctioning loan screen various financial statements of the firm such as final accounts, fund flow statement, cash flow statement etc.

x) Helpful in Prevention and Detection of Errors and Frauds.  

DISADVANTAGES OF ACCOUNTING: Accounting provides valuable information. However, it has certain limitations which must be kept in mind while using such information. These limitations are as follows:

i) Omission of Qualitative Informations: Accounts contain only those informations which can be expressed in terms of money. Qualitative aspects of business units are completely omitted from the books as these cannot be expressed in monetary terms. Thus, changes in management, reputation of the business, cordial management-labour relations, firm’s ability to develop new products, efficiency of the management, satisfaction of fim’s customers etc. which have a vital bearing on the profitability of the firm are all ignored and omitted from being recorded because all of these are qualitative in nature.

ii) Based on Historical Costs: Accounts are prepared on the basis of historical costs (i.e., the original costs) and as such the figures given in financial statements do not show the effect of changes in price level. The assets remain undervalued in many cases particularly land and building. The outcome this practice is that balance sheet values of assets are not helpful in estimating the true financial position of the business.

iii) Influenced by Personal Judgements: Accounting is as yet an exact science and accountant has to exercise his personal judgement in respect of various items. For example, it is extremely difficult to predict with any degree of accuracy the actual useful life of an asset which is needed for calculating depreciation. The same is true about method of valuation of stock and making provision for doubtful debts. Different persons are bound to have different opinions in respect of such things and hence it will result in ascertainment of different figure of profit or loss of a business by different persons. Hence the figure of profit cannot be taken as an exact figure.

iv) Based on Accounting Concepts and Conventions: Accounts are prepared on the basis of a number of accounting concepts and conventions. Hence, the profitability and the financial position disclosed by it may not be realistic. For example, fixed assets are shown in the balance sheet according to the ‘going concern concept’. This means that the fixed assets are shown at their cost and not at their market value. The values realised on their sale may be more or less than the values stated in the balance sheet.

v) Incomplete Information: Accounting statements provide only the incomplete information because the actual profit or loss of a business can be known only when the business is closed down. 

vi) Affected by Window Dressing: Window dressing refers to the practice of manipulating accounts, so that the financial statements may disclose a more favourable position than the actual position. For example, the purchases made at the end of the year may not be recorded or the closing stock may be over-valued. Hence, correct decisions cannot be taken on the basis of such financial statements.

vii) Unsuitable for Forecasting: Financial Accounts are only a record of past events. Continuous changes take place in the demand of the product, policies adopted by the firm, the position of the competition etc. As such, the financial analysis based on past events may not be of much use of forecasting.

Marketing Research Process Procedure

 Q. Explain the procedure of conducting marketing research. 

Ans. Marketing research process consists a sequence of several steps, these steps are closely interlinked and interdependent. They are so logical that success of one depends on the prior step. Marketing research process is carried out with a series of steps which are required to be taken in a chronological order. Some commonly followed major steps involved in a marketing research project are as follows:

1. Formulation of Research Problem: The first step in any marketing research project is formulating a research problem. It is the most important stage in applied research because poorly defined problem will not give useful results. It is rightly said that, “a problem well defined is half-solved.” Poorly formulated problems create confusion and do not allow the researcher to develop a good research design. Therefore, the researcher should take into account the purpose of the study, the relevant background information, the information needed and how it will be used in decision making. 

Formulation of research problem involves discussion with the decision makers, interview with industry experts and analysis of secondary data. Formulation of research problem involves three sub-steps:

i) Discovering the managerial problem: Discovering the managerial problem is not a easy job, because these are covert (meaning hidden) and subtle (meaning complex, difficult). The dynamic and competitive world of business creates many problems for the firm. One should be alert in discovering the managerial problem well in advance of its occurrence.

ii) Defining the problem: It is really difficult to define managerial problem as it is more systematic than cause-oriented. The researcher is to go to the very roots of the problem to establish cause and effect relations. For example, the problem of falling sales may be because of wrong pricing, wrong packaging, wrong distribution system or cut throat competition. The researcher is to see the real cause of falling sales.

iii) Translating of managerial problem into a research problem: A research problem is one in respect of which the data is collected and analysed to find a solution. All management problems are not research problems. Therefore, to translate managerial problem into a research problem, the cause and effect relation must be established. Translation of managerial problem into a research problem involves the in-depth study of company’s strengths and weaknesses in respect of production, marketing, finance and study of marketing environment under which the company is working. 

Thus, it is clear that to investigate the reasons for falling sales researcher can investigate all aspects affecting sales or he may investigate the problem on the basis of product policies or pricing policies or distribution policies or other marketing policies of the company. But it is sure that before assigning research project to the researcher, the problem in hand must be well defined, because a well defined problem leads to a better solution.

2. Situation Analysis: Situation analysis is important to obtain background information on the problem. Situation analysis means the circumstances under which the research is being conducted. Situation analysis generally consists of following information:

(i) Products of the company

(ii) Company itself its competitors and the industry in general

(iii) Its markets

(iv) Its channels of distribution 

(v) Its sales organisation 

(vi) Its advertising and sales policies

This analysis enables the researcher to arrive at a hypothesis or a tentative presumption on the basis of which further investigation may be done. Hypothesis are tentative statements describing relationship between concepts or possible cause and effect relationships. 

Formulation of research problem helps to specify and precise the scope of marketing problem. It makes research both economical and meaningful.

3. Developing Research Design: Research design is the heart of marketing research. Once the research problem is defined, the next step is to determine research design. A research design specifies the methods and procedures for conducting a marketing research. A research design is the master plan for the conduct of marketing research. Research design keeps the study right on the track making it to keep pace with the problem requirements and makes possible best result with minimum resources and possible procedures. Research design specifies the methods for data collection and data analysis i.e, 

(i) How would tĥe data be collected?

(ii) Which instruments for data collection would be used?

(iii) What sampling method would be used?

The choice of research design will depend essentially on the nature of the problem on which the research is to be undertaken. Another factor is the scope of the research project. Research having wider scope has different research design from a research having limited scope. 

Research designs are classified by the purpose of research and data collection efforts. These are: 

(i) Exploratory Research Design: An exploratory research design focuses on the discovery of ideas and is generally based on secondary data. This design aims at defining the research problem and identifying the possible alternative solutions. Information for exploratory research are gathered from the internal sources, interviews with knowledgeable persons and from secondary sources. 

(ii) Descriptive Research Design: It is most commonly used research design. A descriptive study is undertaken when the researcher wants to know the characteristics of certain group on the basis of age, education, income, occupation, etc. The purpose of descriptive research design is:

1. to describe the phenomena,

2. to describe the consequences of possible alternative course of actions,

3. to describe the potential market in terms of present and future attitude of the customers and 

4. to describe the product image.

(iii) Causal Research Design: A causal research design is undertaken when the researcher wants to know the cause and effect relationship between two or more variables. 

Formulation of research design involves the following steps: 

1. Determining the objectives of the research project.

2. Determining the scope of the research project.

3. Determining the methods for collection of data.

4. Designing the questionnaire.

5. Deciding sampling process and sample size.

6. Decision regarding analysis and interpretation of data.

7. Determining the time required for research work.

8. Determining the budget of completion of research project.

9. Designing the personnel and administrative set-up.

10. Preparing the research proposal and getting it approved. 

4. Collection of Marketing Data: Once the research design is finalised, the next step before the researcher is to go for data collection. A comprehensive research study requires both primary and secondary data. 

(i) Primary Data: Primary data is one which is originally collected by the researcher specifically for the project in hand through questionnaire and interviews. Collection of primary data is time and money consuming affair. It is an unpublished but latest and relevant to the problem and most accurate. It may be collected by survey, observation or experimentation method. Primary data sources includes: Company’s salesman, consumers, middlemen, executives, suppliers, competitors and trade associations. 

(ii) Secondary Data: Data originally collected by someone else for other purpose but can be used for research project in hand is known as secondary data. Such data or information may not be latest but accurate and reliable. It costs less in terms of time and money. The sources of secondary data are: Internal company records, Government Publications, Government Reports, Publication of Research Organisations, Publications of Trade Associations and Chamber of Commerce, Reports and Journals etc. 

The researcher has to decide whether he has to collect primary data or depend on secondary data. Sometime the researcher study is based on both primary data as well as secondary data. When a study is based on secondary data, it is necessary to satisfy oneself that the available data are matched with the objectives of research project. One should be familiar with the authentic sources of such data, their periodicity, the concept used in compilation and their limitations, if any. The researcher should look to the secondary data first, if needed information are already available, the time and expense of gathering it from primary sources can be saved. 

If the decision in favour of primary data is taken, then one has to decide the method of data collection. Following three methods are available for collecting primary data. 

I. OBSERVATION METHOD: Suggests that data are collected through one’s observation. This method is non-reactive as data are collected without the direct participation of the respondent. In observation method, actions of the respondents are observed either directly mixing with them or indirectly without getting mixed up with them. 

II. EXPERIMENTATION METHOD: The experimentation method emphasis on the creation of controlled environment where some variables are allowed to vary and cause-and-effect relationship is studied. 

III. SURVEY METHOD: In marketing research, field surveys are commonly used to collect primary data. With the use of survey method, we are able to collect wide range of valuable information, which may not be possible in observation and experimentation methods. Surveys can be (i) personal, (ii) telephonic and (iii) by mail. Personal interviews are suitable when detailed information are to be collected. Telephonic survey is suitable when limited information is sought in a short period of time. Mail survey is used when respondents are scattered over a large geographical area and detailed information are required. Sometimes a combination of two or more methods could also be used. 

5. Determining Sampling Design and Sample Size: When the marketing researcher has decided to carry out a field survey, he has to decide whether it is to be census survey or sample survey. In census survey, all members of the relevant universe are contacted. In research surveys, it is not possible to contact the entire population because of cost, time and energy involved in it. Therefore, researcher has to establish a ‘sample’ or the representative group from whom the information may be collected. It is called as sample survey. 

In determining the sampling design, the researcher must specify:

(i) Sampling frame

(ii) Sample selection process 

(iii) Size of the sample

(i) Sampling frame: Sampling frame is the list of population elements from which sample will be drawn. 

(ii) Sample selection process: The sample selection process requires that the form of the sample must be specified. Will it be probability sample in which each population element has a known chance of being selected, or will it be a non-probability sample? The type of sample design chosen will depend on its suitability and the availability of the requisite sampling frame.

(iii) Sample size: Sample size means how many units to be surveyed? The researcher has to select a relevant fraction of the population which is the representative of the entire population or universe. In any case, the sample size must not be increased more than 10 per cent of the universe. 

6. Field Work and Data Collection: Field work is the most expensive of all the steps in a research project. Interviewing and supervision are two important aspects of field survey. The task of interviewing seems to be simple, but in reality, it is one of the most difficult task in marketing research. Because respondents are generally hesitant in giving information. If the researcher is carefully selected or trained, he may use his tactics and intelligence to persuade the respondents to answer the questions.

Supervision of field staff is equally important to ensure timely and proper completion of the field survey. Proper selection, training, supervision and evaluation of field force help to minimise data-collection errors. 

7. Analysis and Interpretation of Data: Once the field survey is over and filled questionnaires have been received, the next step is to aggregate the data in a meaningful manner. The data are first edited, coded and tabulated for the purpose of analysing them. 

Editing refers to the process by which collected data are reviewed to check that they are complete, consistent and that the instructions were followed. Editing facilitates tabulation.

Once the questionnaire forms have been edited they must be coded. Coding involves assigning numbers or letters codes to the observations, so that can be properly analysed.

Tabulation implies data arrangements as to classes and weightages. If the questionnaire has been well planned, tabulation work is very much facilitated. From the tabulated summaries, conclusions may be drawn. The editing, coding and tabulation functions are common to most research studies. The researcher should have a well thought out framework for processing and analysing the data and this should be done prior to the collection of data. The editing, coding and tabulation is must when the researcher has huge amount of data concerning the research project in hand.

It is necessary that the researcher gives as much importance to the analysis and interpretation if data as he has given to their collection. In the absence of proper analysis, data may be rendered useless resulting in a waste of time and money. The analysis of data can be conducted by using simple statistical tools like percentages, averages and measures of dispersion. The collected data may be analysed by using diagrams, graphs, charts, pictures, etc. Data may be cross-tabulated to produce useful relationships among the variables involved. 

Interpretation of data includes conclusion, summary and recommendations of research based on the statistical analysis. Thus, interpretation is a minute and meticulous work involving the use of mental facilities of sound judgement and clear vision to reach a cut-off point. 

8. Report Preparation and Presentation: Once the data have been tabulated, analysed and interpreted, the marketing researcher is to present his findings to the users in the form of research report. The report should be written in clear language, properly paragraphed and should be able not only to hold the interest of the reader but also convince him by presenting it with necessary evidences. 

While preparing a research report, the researcher should follow the principles of objectivity, coherence, clarity in the presentation of ideas and use of charts and diagrams. The essence of good research report is that it effectively communicates its research findings in simple and lucid manner. Latest visuals and colour combinations such as charts, graphs, diagrams, photographs are to be used. The findings and recommendations must be clear, precise and feasible. The report should be in written form and must be technically accurate as well as it should be understandable and useful. 

The research report must contain the following sequence:

1. Title page with name of organisation from whom it has been conducted

2. Table of contents, alongwith charts and diagrams used in the report

3. Preface

4. Statement of objectives and hypothesis with statement of marketing problem.

5. Research methodology containing (a) Research design, (b) Assumptions, (c) Data collection methods and instruments used, (d) Sampling plan, (e) Field survey, (f) Scheme of analysis and interpretation of data, (g) Scope and (h) Limitations 

6. Analysis of collected data

7. Interpretation of data 

8. Findings of the research study

9. Conclusions arrived at and recommendations suggested

10. Appendices: contain - (a) Copy of questionnaire used, (b) Glossary of terms, (c) Tables, (d) Maps, (e) Charts, (f) Photographs, (g) Bibliography 

9. Follow-up of Recommendations: .In the last, the researcher should follow up his study and see that his recommendations must be implemented. The researcher gets satisfaction and the user rich returns for his investments made in research only when the research findings are implemented in the form of objectives, policies, strategies, procedures and methods. 

Each step described above is more complex when actually performed. Because each involve number of issues to be decided. Marketing research attempt to achieve the scientific way in their research projects ɓy using a series of steps referred to collectively as the marketing research process.

Methods of International Payment.

 Q. Explain different methods of International Payment.

Ans. There are various methods of settling transactions in international marketing. These methods involve different degrees of risk for exporter and importer. These methods differ in degree of flexibility in terms of payment schedules. Main methods of payment in international marketing are:

1. Cash in Advance: In this method, exporter asks the importer to make payment in advance before the shipment of goods. The exporter is relieved of the task of collection of funds from importer. The exporter has no risk of bad-debts as he receives due amount in advance and can also use these funds in business. For importer, payment in advance involves cash flow problem and risk. It is possible that the exporter may not send the goods, may make excessive delay in delivery of goods or may supply low quality goods. So, this method of payment is beneficial for exporter and to the disadvantage of importer. If the exporter is in dominating position due to his unique innovative products or due to good demand of his products then he will insist on the importer for making payment in advance. Further, if credit-worthiness of importer is less or there is political or/and economic crisis in importer’s nation then exporter will ask the importer to make payment in advance.

2. Letter of Credit (L/C): Letter of credit is issued by the importer’s bank on the demand made by importer. When importer sends an order with the exporter, then exporter will ask importer to send letter of credit. It is a sort of guarantee give by importer’s bank to exporter or his bank to pay the specified amount. As L/C is issued and signed by the importer’s bank, it creates trust in the mind of exporter and he feels secure regarding his payment. Importer’s bank will issue letter of credit to importer only after getting itself satisfied about the credit-worthiness of importer. The issuing bank of L/C will ask the importer to make some cash deposit or to pledge something as security and/or also ask for collateral security. The issuing bank of L/C will also charge some commission depending upon the value of L/C from the importer. The letter of credit also facilitates the exporter in getting pre-export finance against it. L/C is an obligation of the issuing bank but it is also treated as financial responsibility of the importer. 

Importer will request his bank to issue letter to credit. In this letter, importer’s bank promises to make payment to exporter’s bank on behalf of importer, subject to fulfilment of certain terms and conditions. Letter of credit is valid up to the date of expiry. If importer’s bank is not well known in the exporter’s country or there is economic or political crisis in the importer’s nation then exporter may insist on confirmed letter of credit.

● Types of Letter of Credit 

1. Revocable Letter of Credit: This letter of credit can be revoked or terms of letter of credit can be changed without consulting the exporter. It provides no protection to exporter as terms of such letter can be changed to the disadvantage of exporter. It is not a popular form of letter of credit as it can be invalidated at any time.

2. Irrevocable Letter of Credit: In this type of letter of credit, the terms and conditions can not be changed unless both parties agree to such change. It cannot be revoked by importer nor can its terms be changed to the disadvantage of exporter without his consent. It provides sense of security to the exporter regarding recovery of payment. This type of L/C is widely used.

3. Transferable Letter of Credit: This type of letter can be transferred to third party by exporter or holder of such letter. It is a negotiable instrument.

4. Non-Transferable Letter of Credit: This type letter of credit cannot be transferred by exporter to third party. It is non-negotiable. If exporter transfers it to third party then issuing bank will not be responsible for its payment.

5. Confirmed Letter of Credit: In some cases, issuing bank of importer may not be well known or political/economic situation of importing country may not be stable then exporter may require that the letter of credit should be confirmed by the designated bank in the exporter’s country. The exporter’s bank will despatch this L/C to the designated bank for its confirmation. On receiving confirmation from designated bank, the exporter is relieved and gets assurance about credit-worthiness of importer’s bank. Confirmed and irrevocable letter provides maximum security to the exporter.

6. Unconfirmed Letter of Credit: If letter of credit is not confirmed by designated bank of exporter’s natuon or exporter/exporter’s bank do not send L/C for confirmation, it is called unconfirmed L/C. If exporter and importer have long business relations or importer’s issuing bank is well known, then letter of credit is not sent for confirmation.

7. Ancillary/Back to Back Letter of Credit: It is a type of assisting L/C based on original L/C. The exporter in whose favour L/C has been issued, may request his bank, to issue another L/C, (on the security of original L/C) in favour of his supplier of raw material/components, etc. This type of L/C helps the exporter to get pre-shipment finance against the L/C received from the importer. If exporter has to purchase raw material/components from any supplier on credit then exporter can request his bank to issue L/C against the security of original L/C. This newly L/C helps the exporter in procuring raw material/components on credit.

8. With Recourse Letter of Credit: This letter of credit is issued with a condition that if exporter’s bank is not able to recover the amount from importer’s bank, but has already made payment to exporter, then exporter’s bank can demand the refund of already paid amount alongwith interest from exporter. The exporter’s bank, instead of taking action against importer’s bank, claims refund from exporter. So exporter does not feel secured in such case. Due to this reason, such letter of credit is not much popular.

9. Without Recourse Letter of Credit: In this type of letter of credit, if the exporter’s bank is not able to recover the amount from importer’s bank, but has already paid to the exporter then exporter’s bank cannot claim refund of money from exporter. The exporter’s bank can take legal action against importer’s bank for the recovery of amount already paid to exporter. In this type of L/C, exporter feels safe. 

10. Revolving letter of Credit: This type of L/C is popular among such exporters and importers who indulge in regular and continuous foreign trade transactions. Instead of providing letter of credit for each business transaction separately, importer provides a single letter of credit of large amount and of long duration. This large amount is like ceiling limit. With each business transaction, a separate L/C is not sent. Exporter bank makes payment to exporter for every business transaction till the ceiling or time period of L/C is exhausted. It makes payment in foreign trade transactions very convenient. If the individual trade transactions are of small amount but are very frequent then revolving L/C is very suitable.

● Advantages of Letter of Credit

(i) The exporter is relieved of risk of bad-debts.

(ii) The exporter gets the payment immediately after handing over shipment documents to his bank.

(iii) The exporter can arrange pre-shipment funds against the security of letter of credit.

(iv) It is more beneficial to importer in comparison to the method of advance payment.

(v) All terms and conditions are written in letter of credit. Exporter’s bank and importer’s bank also become party to this letter. So this document becomes more authentic and clear. Hence, chances of dispute are minimized.

(vi) Importer feels assured about timely delivery of goods as exporter is under obligation to despatch the goods for shipment before the expiry of validity period of letter of credit, otherwise the exporter cannot get amount against L/C.

(vii) Importer can get better terms by sending letter of credit.

(viii) The clearance from exchange control authorities becomes easier due to involvement of exporter’s bank and importer’s bank. The authorities feel that provisions of foreign exchange regulations have been duly compiled.

● Limitations of Letter of Credit 

(i) Validity period of letter of credit is very short.

(ii) It is complicated method of payment as it involves excessive formalities. The terms and conditions of trade have to be written in L/C in the initial stage only, which may be difficult for exporter and importer.

(iii) If there is any discrepancy in documents presented by exporter, i.e., these documents are not in confirmity with terms and conditions then importer’s bank can withhold the payment although goods have already been shipped by exporter.

(iv) Revocable letter of credit offers little security to exporter as it can be revoked anytime.

(v) Importer’s bank, exporter’s bank and confirmating bank (Designated Bank) make huge charges which inflates the transaction cost of foreign trade.

3. Bill of Exchange (Draft): It is an important instrument used in international trade to make or receive payment. In export-import transactions, exporter writes the bill instructing the importer or his agent (importer’s bank) to make specified payment on specified date. The exporter is drawer of the bill and importer/importer’s bank is drawee of the bill. The importer/importer’s bank accepts this bill by signing it and returns the accepted bill to the drawer of the bill. This bill is treated as Bill Receivable (B/R) for the exporter and Bill Payable (B/P) for the importer. The bill of exchange can be of two types — sight bill and time bill. Sight bill is different from time bill.

Sight bill is payable by the drawee on its presentation, while the time bill is payable after a specified time period. In case of time bill, it is payable on due date. Due date/maturity date of bill is computed by adding the specified time period and 3 grace days to the date of issue of bill. The drawer of bill (in case it is a time bill) can get it discounted from his bank. In this case, after deducting discount charges, bank will make immediate payment to the holder of the bill. If the bill is discounted from the bank, then the bank (holder of the bill on due date) will receive the payment of the bill from the drawee on its due date.

In case of sight bill, documents of title are handed over to importer only after receiving the payment, so exporter is secure in case of sight bill. Here, no credit period is allowed to importer. In case of time bill, documents of title are handed over to importer before receiving the payment. So, time bill is risky for exporter, but it is to the advantage of importer. Here, credit period is allowed by exporter to importer. If the bill is accepted by the importer, then it is called trade acceptance, and if the bill is accepted by the importer’s bank, then it is called banker’s acceptance. In international trade, generally exporters insist the importers for bank’s acceptance to generate more trust and to get secure about its payment.

4. Open Account: In case of open account method, exporter makes the shipment of goods, sends all documents to importer and allows credit for a specified period to importer. In the method, letter of credit or banker’s acceptance are not required. Title of goods is transferred from exporter to importer without receiving any assurance from importer. This method is used when importer enjoys good credit-worthiness, there is long trade relationship between exporter and importer, exporter is financially sound, and there is no economic/political crisis in importer’s nation. But this method is very risky for exporter, as in the absence of banking channel (Lack of L/C, banker’s acceptance) and trade acceptance (Bill of exchange), it is very difficult for exporter to recover the amount in the situation of default in payment. Exporter has no other way to recover his amount except to take legal action, which is generally costly, lengthy and cumbersome. When there is excessive competition in foreign market, the exporter has to sell goods through open account due to risk of losing the client.

5. Consignment Method: In this method, exporter makes shipment of goods to foreign consignee. These goods are shipped at the cost of consignor. The exporter retains the title of goods until these are sold and bear the whole risk. The consignee acts as agent of exporter and sells goods on behalf of exporter. The foreign consignee will make payment only when he has sold the goods and has recovered the amount. The foreign consignee will make payment only when he has sold the goods and has recovered the amount. The foreign consignee will remit the amount after deducting his expenses and commission. If goods remain unsold then foreign consignee may send the goods back to exporter at the exporter’s expense. So the exporter has to wait for payment for long time and further he may not get any payment if goods remain unsold. So this method involves huge risk to the exporter. The exporter sends goods on consignment only when the foreign consignee is very trustworthy and there is good demand for exporter’s products in foreign market.

6. Counter-trade: Counter-trade is a trade agreement that has a requirement to import as a condition to export. Counter-trade is a bilateral trade agreement between two nations, under which a nation imports from another country on the condition that other country will also imports products of same value from the first country. This type of trade agreement does not require foreign exchange, hence it does not put any burden on balance of payments of a country. It is a type of barter trade. 

Counter trade is a trade practice which is based on barter trade and is used by trading partners who lack in foreign exchange. In counter trade, exporter accepts goods or services from the importer in partial or full payment of his products. If the exchanged goods are not of equivalent value then balance is carried forward in the books of both parties and will be settled in future counter trade transactions. The payment in future trade transactions may involve some conflict between exporter and importer due to various reasons viz. fluctuations in exchange rate, delay in delivery, defective packaging, discrepancy in documents, change in regulations of exchange control, economic or political crisis, etc. The legal remedy for settlement of disputes is very complicated, costly and time consuming as both parties belong to different nations and have different legal set-up. Counter-trade does not involve any such problem. 

● Types of Counter-trade

(1) Barter Trade: It is the simplest form of counter-trade. In barter trade, direct exchange of goods/services takes place between two nations without cash. It can be at the same point of time or the two transactions can be at different points of time but within a specified time period.

(2) Counter-purchase: In this agreement, a firm agrees to purchase specific goods from the country to which sales are made. Suppose a US firm sells goods to Indian company. Indian company has to make payment in US dollars, but US firm instead of receiving the export proceeds in cash, agrees to spend the export proceeds on import of some specific commodity from Indian company in a specified time period. Money exchange takes place in accounting books only. In reality, money does not change hands.

(3) Switch Trading: In this type of counter-purchase agreement, exporter is given counter-purchase credits in consideration of goods sold by him. These counter-purchase credits can be sold/transferred to any third party. Suppose, exporter does not want to import any product against these counter-purchase credits, then he can sell these counter-purchase credits to any trading house, that wants to import goods from that nation. 

General Agreement on Tarrifs and Trade (GATT) and later World Trade Organisation (WTO) has criticised counter-trade as it restricts the free flow of goods from one country to another country. Under counter-trade, benefits of competition do not reach the ultimate consumers. 

7. Gold: In the past, payments in international trade transactions were made mainly through gold. But now gold as a mode of payment has only theoretical importance.