INTERNATIONAL BUSINESS

(PAPER NO. BM-PT 205) Sub: 1. INTERNATIONAL FINANCIAL SYSTEM: 2. INTERNATIONAL MONETARY FUND (IMF): 3. WORLD TRADE ORGANISATION (WTO): 4. THE INDIAN FINANCIAL SYSTEM: 5. BALANCE OF TRADE: 6. BALANCE OF PAYMENT (BOP): 7. INDIAS GROWTH IN THE INTERNATIONAL BUSINESS.

1. International Financial System:

The Global Financial System refers to those financial institutions and regulations that act on the international level, as opposed to those that act on a national or regional
1

level. The main players are the global Institutions, such as IMF and World Bank, national agencies and government departments, e.g. central banks and finance ministries, and private institutions acting on the global scale e.g. banks and hedge funds. International Institution: The most prominent international institutions are the IMF, the World Bank and the WTO The International Monetary Fund (IMF) Acts as a lender of last resort to governments in financial distress, e.g. balance of payments crisis, currency crisis and debt default. Decisions are based on quotas, or the amount of money a country provides to the fund. The World Bank- Aims to provide funding take up credit risk or offer favorable terms to development projects mostly in developing countries that couldn't be obtained by the private sector. The World Trade Organization (WTO) settles trade disputes and negotiates international trade agreements in its rounds of talks (currently the Doha Round) Governament instution: Governments act in various ways as actors in the GFS: they pass the laws and regulations for financial markets and set the tax burden for private players, e.g. banks, funds and exchanges. They also participate actively through discretionary spending. They are closely tied (though in most countries independent of) to central banks that issue government debt, set interest rates and deposit requirements, and intervene in the foreign exchange market Private parties Players acting in the stock-, bond-, foreign exchange-, derivatives- and commoditiesmarkets and investment banking are: (i) Commercial banks (ii) Pension funds (iii) Hedge funds and Private Equity
=====================

2. INTERNATIONAL MONETARY FUND (IMF)

The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton Woods, United States. The IMF's membership jumped sharply in the 1960s, and again in the 1990s. The International Monetary Fund (IMF) is the international organization responsible for managing the global financial system and for providing loans to its member states to help alleviate balance of payments problems. Part of its mission is to help countries that experience serious economic difficulties. In return, the countries who are helped are obliged to launch certain "reforms," also know as "Washington Consensus" such as privatizations of government enterprises. The IMF describes itself as: "an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". International Monetary Fund or IMF is a finance monitoring organization formed on December 1945.Primary purpose of IMF is to develop policies regarding money monitoring, uniform standards for currency exchange and stable payment systems that should be mutually accepted by all the member countries of IMF. At present number of registered countries with IMF are 184, operations in 110 countries with 2600 employees. IMF also provides Training and Technical assistance in the areas of finance management system, Tax system, banking system development to its member countries through its Monetary and Exchange Affairs Department, the Fiscal Affairs Department, and the Bureau of Statistics. The Legal Department, the Bureau of Computing Services, and the area departments also coordinate. IMF also helps to draw a systematic system for foreign transactions to take place. It provides advice on microeconomic development. International Monetary Fund created for the three major purposes: 1. Monitoring national, global, and regional economic and financial developments and advising member countries on their economic policies ("surveillance"); 2. Lending members hard currencies to support policy programs designed to correct balance of payments problems; and 3. Offering technical assistance in its areas of expertise, as well as training for government and central bank officials. Every member of IMF provides a fixed quota of money to IMF. Size of amount is based on the ability of government to pay. Who governed the IMF: The IMF is governed by, and is accountable to, its member countries through its Board of Governors. There is one Governor from each member country, typically the finance minister or central bank governor. The Governors usually meet once a year, in September or October, at the Annual Meetings of the IMF and the World Bank.
3

Where from IMF get its money: The IMF's resources come mainly from the quotas that countries deposit when they join the IMF. Quotas broadly reflect the size of each member's economy: the larger a country's economy in terms of output, and the larger and more variable its trade, the larger its quota tends to be. For example, the United States, the world's largest economy, has the largest quota in the IMF. Quotas are reviewed periodically and can be increased when deemed necessary by the Board of Governors. _____________________________________

3. WORLD TRADE ORGANISATION (WTO) The world Trade organisation (WTO) was established on 1st January 1995.Government had conculed the Uruguay Round negotiations on 15 th December 1993.The WTO is the successor the General Agreement of Tariffs and Trade (GATT). The WTO has larger membership then GATT. India is one of the founder members of
4

WTO. WTOs headquarters located at Geneva, Switzarland.WTO is an international organisation which oversees a loarge number of agreement covering the rule of Trade between its members states. Objective of WTO: WTO is reiterates the objectives of GATT, which are as follows: 1. Raising standard of living and incomes, promoting full employment, expanding production and trade and optimum utilisation of worlds recources. 2. Introduce sustainable development a concept which envisages that development and environment to together. 3. Taking positive steps to ensure that developing countries, espicially the least developed ones, secure a better share of growth in world trade. The WTO has nine principles to regulate the international business. They are noted below: (1) Transferancy (2) MFN treatment (3) National treatment: Non-discremination within the countries. (4) Free Trade principles (5) Dismantling Trade barriers (6) Rule based Trading system (7) Treatment for LDCs (8) Competion principle (9) Environment protection. _____________________________

4. THE INDIAN FINANCIAL SYSTEM: The indain financial system can also be broadly classified into the Formal (organised) Financial system and the informal (unorganised) financial system. The formal financial system comes under the purview of the Ministry of Finance (MoF), the Reserve Bank

of India (RBI) , the securities and Exchange Board of India (SEBI), andother regulatory bodies. The informal financlal system consists of. Individual moneylenders such as neighbours, relatives, landlord, traders and storeowners. Groups of person operating as Fund or associations. Thease groups function under a system fo their own rules and use names such a fixed fund association and saving club. Partnership firms consisting of local brokers, pawnbrokers and non-bank financila inermdiaries such a finance, investment and chit-fund companies. Formal financial ststem consists of four segments or components.These are :a) Financial institutions, b) Financial Markets, c) Financial instruments and d) Financial services. a) Financial institutions: Financial institution classified-Banking and non-banking institution. Banking institution are creators and purveyors of credit while non-banking financial institutions are purveyors of credit. Financial institutions can also be classified as term-finance institutions such as the Industriall Development Bank of India (IDBI), the industrial credit and Investment Corporation of India (ICICI), IFCI, HBI, and SIDBI. Financial institutins can be specilised finance institutions like the Export Import Bank of India (EXIM), TFCI, Agricultural and Rural Development (NABARD) and National housing Bank. In the post-reforms era, the role and nature of activity of these financial institutions have undergone a tremendous change. Banks have now undertaken non-Bank activitires and financial institutions havetaken up banking functions. Most of the financial institutions now resort to financial markets for raising funds. b) Financial Markets: The main organised financial markets in India are the Money market and the Capital market. Money market is a market for short-term securities while the Capital market for long term securities.i.e securities having a maturity period of one year or more. Financial Markets can also be classified as primary and secondary markets. While the primary market deals with new issues, the secondary market deals with the existing securities. There are two components of the secondary market: over the counter (OTC) market and the exchange traded market. c) Financial Instrument: A financial instrument is a claim against a person or an institution for payment, at a future date, of a sum of money and /or a periodic payment in the form of interest or dividend. The termand/or implies that either of the payments will be sufficient but both of them may be promised. Financial instruments represent
6

paper wealth shares, debentures, like bonds and notes. Many financial instruments are marketable as the are denominated in small amounts and traded in organied markets. Financial instruments differ in terms of marketability, liquidity, reversibility, type of options, return, risk and transaction costs. Financial instruments help financial markets and financial intermediaries to perform the important role of channelising funds from lenders to borrowers. d) Financial services: These are those help with borrowing and funding, lending, buying and sellling securites, making and enabling payments and settlements and managing risk exposures in financial markets. The major categories fo financial services are funds intermediation, payments mechanism, provision fo liquidity, risk management and financial engineering. ----------------------------------------

5. BALANCE OF TRADE:

1. 2. 3. 4.

Foreign trade reffers to a countrys trade, with other countries. It consists of export or imports of goos/services. A country received payment from other countries for its exports and makes payment to other countries for its imports. The difference between total receipts on account of exports, goods and total payment on account of import of goods is called Balance of Trade. Trade account of the balance of payment includes exports and imports of goods in a year. The difference between the value of exports of goods and value of imports of goods is called Balance of Trade. For example value of goods exports Rs. 10000/- in a year and the value of imports in the same year Rs. 6000/- then the balance of Trade Rs. 4000/-. It is surplus, balance, and opposite is called deficit. In a trade account only includes exports and imports of goods.no other items included it. Export and imports of goods also called balance of visible item only. Since independence India has always deficit Trade balance only. Import is always higher then export, main reason for this, growing population, increasing consumption requirement, need for import of capital goods for economic development. Reasons for slow growth of export are many i.e low quality and high cost of our goods. Balance of invisibles: Services are part of invisibles. These include Shipping Banking, Insurance, and consultancy services foreign travel, investment income, transfer payment. Services : Banking, Insurance, Shipping Foreign travels: Turism, torist. Investment income: Receive interest on loan or payment interest on loan. Transfer payment: Receipt Gift or payment Gift. The difference between total receipts and total payment of foreign currencies on account of invisible is called balance on account of invisibile. India, s position in case of invisible has not bad except 1990-91 only. Trade account and invisible account together constitute the Current Account.

---------------------------------------

6. BALANCE OF PAYMENT (BOP)

A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. [1] These transactions include
8

payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarises international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item. Balance of payments is the difference between the money coming in to a country and the money leaving the same country. A systematic record of all economic transations between the residents of a country and residents of foreign countries during a certain period of time. There are four components of balance of payments: 1) Current Account 2) Capital Account 3) Unilateral Payments Account and 4) Official Settlement Account. 1) Current Account: Includes visible exports and imports like goods and invisible items like receipts and payment for various services like Banking, Insurance, Transportation, Turism & travlels etc. The current account shows the net amount a country is earning if it is in surplus, or spending if it is in deficit. It is the sum of the balance of trade (net earnings on exports payments for imports) , factor income (earnings on foreign investments payments made to foreign investors) and cash transfers. Its called the current account as it covers transactions in the "here and now" - those that don't give rise to future claims. 2) Capital Account: The capital flow between two countries. The capital account records the net change in ownership of foreign assets. It includes the reserve account (the international operations of a nation's central bank), along with loans and investments between the country and the rest of world (but not the future regular repayments / dividends that the loans and investments yield, those are earnings and will be recorded in the current account. Expressed with the standard meaning for the capital account, the BOP identity is: . 3 ) Unilateral Transfers Account:: Unilateral transfers is another terms for gifts. These unilateral transfers include private remittances, government grants, disaster relief, etc. Unilateral payments received from abroad are credits and those made abroad are debits. 4) Official Settlements Accounts: It is the payments made by countries to settle a surplus or deficit in the balance of paymnets. Official reserves represent the holdings

by the government or official agencies of the means of payment that are generally accepted for the settlement of international claims. BALANCE OF PAYMENT ACCOUNT: Credit (+) Debit (-) Receipts Payments 1. Current account: Exports (a) Goods (b) Services Transfer of Payment. . 2.Capital Account: (a) Borrowing from foreign country (b) Direct investment by foreign country (a) Lending to Foreign country. (b) Direct invest to foreign country. Imports (a) Goods (b) Services Transfer of payment

3. Official settelent Account: (a) Increasing in foreign official holding and foreign currency. (a) Increase in offical resources gold

Errors & ommission. ---------------------------------------------

10