Business economics is a field in applied economics that uses economic theory and quantitative methods to analyze business enterprises and the factors contributing to the diversity of organizational structures and the relationships of firms with labor, capital, and product markets.
Assertion (A): Business Economic is a tool facilitating decision making in business.
1. Business economics is an integral part of traditional economics and is an extension of economic concepts to real business situations.
2. It is an applied Science in the sense of a tool of managerial decision-making and forward planning by management.
3. In other words, business economics is concerned with the application of economic theory to business management.
4. Business economics is based on microeconomics in two categories: positive and normative.
Reason (R): It provides an analytical understanding of economic activities.
1. Business economics focuses on economic issues and problems related to business organization, management, and strategy.Issues and problems include an explanation of why corporate firms emerge and exist; why they expand: horizontally, vertically, and spatially; the role of entrepreneurs and entrepreneurship; the significance of organizational structure; the relationship of firms with employees, providers of capital, customers, and government; and interactions between firms and the business environment.
2. It provides an analytical understanding of economic activities.
1. Social innovations are new social practices that aim to meet social needs in a better way than the existing solutions, resulting from – for example – working conditions, education, community development, or health.
2. These ideas are created with the goal of extending and strengthening civil society.
3. Social innovation includes the social processes of innovation, such as open-source methods and techniques, and also the innovations which have a social purpose—like activism, virtual volunteering, microcredit, or distance learning.
4. There are many definitions of social innovation, however, they usually include the broad criteria about social objectives, social interaction between actors or actor diversity, social outputs, and innovativeness (The innovation should be at least “new” to the beneficiaries it targets, but it does not have to be new to the world).
5. Opportunities for social innovation are greatest when CSR is aligned with a firm’s core skills and capabilities as effectiveness is enhanced when people do what they are best at and what they like to do.
6. Social innovation is the process of developing and deploying effective solutions to challenging and often systemic social and environmental issues in support of social progress. Social innovation is not the prerogative or privilege of any organizational form or legal structure. Solutions often require the active collaboration of constituents across government, business, and the nonprofit world.” –Soule, Malhotra, Clavier.
• FDI is allowed in India under two modes: the automatic route or through the government route.
• Companies don’t need government approval in Automatic Route.
• Companies need Government approval in Government mode.
• Provisions of the New FDI policy:
- An entity of a country, which shares a land border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only under the Government route. Hence, Statement 1 is correct.
- A transfer of ownership in an FDI deal that benefits any country that shares a border with India will also need government approval.
- Investors from countries not covered by the new policy only have to inform the RBI after a transaction rather than asking for prior permission from the relevant government department.
• India shares land borders with Pakistan, Afghanistan, China, Nepal, Bhutan, Bangladesh, and Myanmar.
• This revised FDI policy aims to curb opportunistic takeovers/acquisitions of Indian companies due to the current Covid-19 pandemic. Hence, Statement 2 is correct.
o China’s investment in the Indian business space has been expanding rapidly.
Asia-Pacific Economic Cooperation (APEC):
1. The Asia-Pacific Economic Cooperation is an inter-governmental forum for 21 member economies in the Pacific Rim that promotes free trade throughout the Asia-Pacific region.
2. Since the Economic Leaders Meeting in Bogor, representatives of APEC member economies have been working to develop a plan to realize the Bogor goal through a series of Senior Officials Meetings under the chairmanship of Japan.
3. This plan, called the Action Agenda, is the first mid-to-long-term comprehensive and concrete road map for concerted liberalization and facilitation of trade and investment in the Asia-Pacific region, along with economic and technical cooperation.
The Action Agenda consists of three pillars
2. business facilitation and
3. economic and technical cooperation.
The three pillars are expected to interact with each other in a way that will maximize the growth and prosperity in the region.
Hence, we can conclude that Military cooperation does not come under the three pillars of the Action Agenda.
The Asia-Pacific is the region where the most dynamic economic growth led by a growing momentum of voluntary liberalization, is observed. APEC member economies aim to achieve the Bogor goal by utilizing this momentum through a series of concerted actions based on voluntarism.
Balance of payment:
1. The balance of payments of a country is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world.
2. These financial transactions are made by individuals, firms, and government bodies to compare receipts and payments arising out of the trade of goods and services.
3. The balance of payments consists of three components: the current account, the capital account, and the financial account.
4. The current account reflects a country’s net income, while the capital account reflects the net change in ownership of national assets.
International Finance Corporation (IFC):
1. The International Finance Corporation (IFC) is an international financial institution that offers investment, advisory, and asset management services to encourage private-sector development in less developed countries.
2. The IFC is a member of the World Bank Group and is headquartered in Washington, D.C. in the United States.
3. It was established in 1956, as the private-sector arm of the World Bank Group, to advance economic development by investing in for-profit and commercial projects for poverty reduction and promoting development.
4. The IFC’s stated aim is to create opportunities for people to escape poverty and achieve better living standards by mobilizing financial resources for private enterprise, promoting accessible and competitive markets, supporting businesses and other private-sector entities, and creating jobs and delivering necessary services to those who are poverty-stricken or otherwise vulnerable.
5. Thus, the IFC encourages the growth of Private Sector Enterprises in member countries and not Public Sector Enterprises.
• When the EU was founded in 1957, the Member States concentrated on building a ‘common market’ for trade.
• Since 1957, the European Union has benefited its citizens by working for peace and prosperity.
• Free trade among its members was one of the EU’s founding principles.
• The European Union was a group of 28 countries that operate as a cohesive economic and political block.
• After BREXIT, The Union currently counts 27 EU countries.
• 19 of these countries use the EURO as their official currency.
• 9 EU members (Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania, Sweden, and the United Kingdom) do not use the euro.
• In 2012, the EU received the Nobel Peace Prize for having “contributed to the advancement of peace and reconciliation, democracy, and human rights in Europe.
• Switzerland is not a member state of the European Union (EU).
• India’s balance of payment was favourable before Independence.
• The balance of payments (BOP) records the transactions in goods, services, and assets between residents of a country with the rest of the world for a specified time period typically a year.
• There are two main accounts in the BoP – the current account and the capital account.
• The current account records exports and imports in goods and services and transfer payments.
• The capital account records all international purchases and sales of assets such as money, stocks, bonds, etc.
• When exports exceed imports, there is a trade surplus and when imports exceed exports there is a trade deficit.
• The balance of exports and imports of goods is referred to as the trade balance.
• Adding trade in services and net transfers to the trade balance, we get the current account balance
• The IMF’s primary objective is the overall promotion of world trade. The IMF meets its primary objective by overseeing the balance of payments, acting as a forum of world negotiation, and regulating world exchange rates.
International Monetary Fund:
• IMF Headquarters- Washington, D.C.
• IMF Member Countries – 189
• Christine Lagarde was the Managing Director of the International Monetary Fund (IMF), till September 2019.
• Lagarde is currently the President of the European Central Bank.
• The current Managing Director is Ms. Kristalina Georgieva.
The New Industrial Policy of 1991 comes at the center of economic reforms that launched during the early 1990s. All the later reform measures were derived out of the new industrial policy. The Policy has brought comprehensive changes in economic regulation in the country. As the name suggests, these reform measures were made in different areas related to the industrial sector.
The major aims of the new policy were; to carry forward the gains already made in the industrial sector; Correct the existing market distortion from the industrial sector; provide gainful and productive employment; to attain global competitiveness.
The main objectives of the Industrial Policy of the Government in India are:
1. to maintain a sustained growth in productivity;
2. to enhance gainful employment;
3. to achieve optimal utilization of human resources;
4. to attain international competitiveness; and
5. to transform India into a major partner and player in the global arena.
Thus, to achieve these aims and objectives, the government took decisions like offering VRS to shed the excess load of workers, abolishing industrial licensing, disinvestment of the public sector, encouraging foreign direct investment, removal of mandatory convertibility clause, abolishing phased manufacturing program, referring sick units to The Board for Industrial and Financial Reconstruction, etc.
1. A company identity or company image is the manner in which a corporation, firm, or business enterprise presents itself to the public (such as customers and investors as well as employees).
2. The company identity is typically visualized by branding and with the use of trademarks, but it can also include things like product design, advertising, public relations, etc.
3. Company identity is a primary goal of corporate communications, in order to maintain and build the identity to accord with and facilitate the corporate business objectives.
1. Brand equity is a phrase used in the marketing industry that refers to the perceived worth of a brand in and of itself i.e., the social value of a well-known brand name.
2. It is based on the idea that the owner of a well-known brand name can generate more revenue simply from brand recognition, as consumers perceive the products of well-known brands as better than those of lesser-known brands.
3. In other words, brand equity refers to the branding of a product name on an attention-deficit public.”
4. Companies can create brand equity for their products by making them memorable, easily recognizable, and superior in quality and reliability.
Since both company image and brand equity mainly affect the perception of external stakeholders like consumers and investors, they affect business externally.
When a company taken over another one and clearly becomes the new owner, the action is called Acquisition.
1. An acquisition is when one company purchases most or all of another company’s shares to gain control of that company.
2. Purchasing more than 50% of a target firm’s stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s shareholders.
3. When one company takes over another entity and establishes itself as the new owner, the purchase is called an acquisition.
1. Merger: Mergers are a way for companies to expand their reach, expand into new segments, or gain market share. A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity.
2. Strategic Alliance: A strategic alliance is an agreement between two or more parties to pursue a set of agreed-upon objectives needed while remaining independent organizations. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses, and shared risk.
Liberalization is the precondition for privatization and globalization. Liberalization is a broad term that usually refers to fewer government regulations and restrictions, mainly on economic activities. Thus liberalization is basically a change in the economic philosophy of a state.
Core features of liberalization are:
1. A change in the attitude of the state towards an industrial society.
2. A change from a centrally-planned economy to a market-led country.
3. A change from excessive government intervention to minimal intervention.
4. A change from nationalization to privatization.
Reducing the number of reserved industries from 17 to 8 is an example of decentralization /Privatization.
Opening up the economy to the world by attaining international competitiveness is an example of globalization.
TRIM-Trade-related Investment Measures”, an agreement within the Uruguay Round trade negotiations.
TRIPS- Agreement on “TRADE-RELATED ASPECTS OF INTELLECTUAL PROPERTY RIGHTS”
- GAAT : General Agreement on Tariffs and Trade
- SAARC: South Asian Association for Regional Cooperation
- SAFTA: The South Asian Free Trade Area
- NAFTA : The North American Free Trade Agreement
- RCEP: Regional Comprehensive Economic Partnership
- NATO: North Atlantic Treaty Organization
1. The National Institution for Transforming India (NITI Aayog, was formed on January 1, 2015. NITI Aayog is the premier policy ‘Think Tank’ of the Government of India.
2. NITI Aayog is established with the aim to achieve Sustainable Development Goals and to enhance cooperative federalism.
3. The Prime Minister of India is the ex officio Chairperson of the NITI Aayog.
Its initiatives include: “15-year road map”, “7-year vision, strategy, and action plan”, AMRUT, Digital India, Atal Innovation Mission, Medical Education Reform, agriculture reforms (Model Land Leasing Law, Reforms of the Agricultural Produce Marketing Committee Act, Agricultural Marketing and Farmer Friendly Reforms Index for ranking states), Indices Measuring States’ Performance in Health, Education and Water Management, Sub-Group of Chief Ministers on Rationalization of Centrally Sponsored Schemes, Sub-Group of Chief Ministers on Swachh Bharat Abhiyan, Sub-Group of Chief Ministers on Skill Development, Task Forces on Agriculture and up of Poverty, and Transforming India Lecture Series.
International trade means economic transactions or exchange of goods and services occurring between different nations.
Economists usually believe that international trade is equally beneficial to all the countries involved.
While entering international trade there are various payment methods used which have their own feature, some of those are explained below:
1. Bill of Lading:
• It is one of the most vital documents required during the shipping process of the trade.
• A completed Bill of Lading refers that the carrier has received the freight as decided and the contract between the freight career and the shipper has taken place.
2. Letter of Credit:
• It is also known as a “Credit Letter” and is one of the most secure methods of payment as it is a letter from a bank that guarantees the seller that the buyer will pay the correct amount on or before the time specified.
• Due to this reason the exporter is best assured of being paid for the products sold.
3. Open Account:
• In Open Account transactions, in international sales, the goods are shipped and delivered before the payment is due.
• The due period in international sales is about 30, 60, or 90 days.
• This method is used when the parties involved in the transaction fully trust each other and it is the most beneficial method for the importer and involves the highest risk for the exporter.
• Documentary Collections usually involve a draft that requires the buyer/importer to pay the amount mention on the draft either at sight (document against payment) or at a future certain date (document against acceptance).
• Documentary Collections offer no verification process and limited resources in the course of non-payment, as here banks only act as facilitators of the clients.
• It is less secure as compared to Letter of Credit due to which costs are lower as well.
The most secure method of payment for Exporter and Importer is stated in ascending order below:
Exporter: Cash-in-advance > Letter of Credit > Documentary collection > Open Account > Consignment
Importer: Consignment > Open Account > Documentary Collection > Letter of Credit > Cash-in-advance.
A country’s treasure means something which is of great value for that country, it could be wealth like money, gold or precious metal, and even a person esteemed as rare or precious.
There are different theories explained by different economists some of which are explained below:
1. Gold Theory: Gold theory states that paper money can be easily convertible into a fixed amount of gold. It means that in the monetary system, the amount of gold a country has will back the value of money of that nation i.e. the standard unit of currency is a fixed quantity of gold.
2. Ricardo Theory: This theory states that a country must concentrate on producing those commodities which they have a competitive advantage to produce or in which they specialize and can achieve higher standards of consumption and they should import other commodities from different countries so that international trade takes place on a continuous basis.
3. Mercantilism Theory: This theory states that a country’s wealth can be measured by the amount of wealth it constitutes in the form of gold or precious metals it possesses. It also states that countries should export more as compared to their imports so that the Balance of Payment is favorable and that countries could acquire more such metals.
4. Hecksher Theory: This theory states that the countries in which capital is more as compared to labour that country must focus on producing and exporting capital-intensive products and import labor-intensive products and the countries which have labour more as compared to capital must focus on producing and exporting labour-intensive products and import capital intensive products.
Mercantilism Theory was founded by “Adam Smith” who is also know as the “Father of Modern Economics”.
There was a constitution of the International Financial Conference in New Hampshire, USA in Bretton Woods Hotel in 1994, and the agreement signed during that conference is known as Bretton Woods Agreement. This agreement led to the formation of the IMF (International Monetary Fund) and IBRD (International Bank for Reconstruction and Development).
IBRD: International Bank for Reconstruction and Development whose main purpose is to aid long term economic difficulty and reduce poverty of middle-income and lower-income countries by providing them assistance.
Objectives of IBRD:
1. Provide long-term loans to member countries.
2. Reconstruction and development of the world economy.
3. Provide insurance to investors to invest in under-developed countries.
4. Settlement of Investment disputes, etc.
The World Bank Group is one of the largest sources of knowledge and funding for developing countries. IBRD and IDA (International Development Association) together form the World Bank Group. IDA focuses on the world’s poorest countries, while the IBRD helps middle-income and creditworthy poorer countries.
1. IMF: International Monetary Fund whose main purpose is to oversee the world’s monetary system by lending money to countries who are mainly facing balance of payment difficulties.
Objectives of IME:
- 1. Provide short term finances to member countries.
- 2. Increase international trade in developing economies.
- 3. To correct the disequilibrium in the Balance of Payment.
- 4. Determine multiple exchange rates of multiple currencies, etc.
2. EXIM Bank: The main function of the EXIM (Export and Import) Bank is to provide financial and other aid to importers and exporters of the country. It also coordinates the working of other institutions that work in the import-export sector on a regular basis.
3. International Bank: It is a financial entity that offers financial services, to foreign clients. These foreign clients can either be individuals or companies, though every international bank has its own policies which state with whom they do business.
Globalization refers to the growing interdependence of the world’s populations, cultures, and economies by entering into different international trades in goods, services, technology, and also flows of information, people, and investment.
1. The first phase of Globalization:
- By the end of the 18th century, Great Britain started to dominate the world, through the establishment of the British Empire with innovations like the steam engine, the industrial weaving machine, and more.
- It was the era of the First Industrial Revolution.
- The first phase of globalization also known as the first wave of globalization started around 1870 and ended with World War I in 1918.
2. Second and Third-wave of Globalization:
- The end of World War II was the era of the second wave of globalization, under the leadership of the US which was aided by the technologies of the Second Industrial Revolution like the cars and the planes and trading at the global level started to rise again and the Third Wave was followed immediately after this era.
3. Fourth Wave of Globalization:
- This is today’s era which is mostly dominated by two global powers, the US and China, the new frontier of globalization is the cyber world.
- Digitalized systems and e-commerce are the key drivers of globalization in this era.
1. World War II: It was one of the biggest wars in history involving more than 30 countries of the world. Started with the Nazi invasion of Poland in 1939 and it continued for six long years until the Allies defeated Nazi Germany and Japan in 1945.
2. The Establishment of GATT: The General Agreement on Tariffs and Trade was established and became law on 1st Jan 1948 which was signed by 23 countries in Oct 1947, after World War II. The main purpose of GATT was to make trade easier at the international level.
3. 1913, the year just before the outbreak of war, it was in this year when the GDP of the US was the world’s largest GDP, with more than $500 billion in 1990 prices.
The industry refers to a group of firms/companies that does related primary activities for their business.
1. Managerial Economics:
• It is a branch of economics that deals with the theories, tools, concepts, and methodologies to solve practical problems of business.
• These business decisions will not only affect the daily decisions in the future but also will affect the economic power of long-term decisions.
2. Economies of Concentration:
• When the number of firms in an area increases then those firms enjoy some of the benefits like availability of raw materials, transport, and communication, research and invention, etc. and they also receive financial assistance from banking and non-banking institutions.
• Here we can conclude that the concentration of all firms in the industry leads to economies of concentration.
3. Labour Economics:
• It involves the study of the factors which affect the efficiency of workers, the determination of their pay and also their deployment between different occupations and industries.
• It studies the labour force as an element in the process of production. Labour force comprises of all those working like an employee, employer, and also self-employed workers.
4. Marketing Economies:
• It is a system where the laws of supply and that of demand directs the supply of goods and services.
• Marketing economies of scale occur when the firm is able to lower the unit cost of promotion and advertising through accessing effective marketing mediums.