Registration Number : 2022100102

Correspondence Course Code : EF113

Name : Fahim Muntasir

Level : Foundation Level (FL)

Subject : Business Economics & International Business

Mail Address : [email protected]

Mobile No. : 01517125394

Assignment Number : 03
 Answer to the Question No. 01 (a)

Economists see the world through a different lens than anthropologists, biologists, classicists, or
practitioners of any other discipline. They analyze issues and problems with economic theories that are
based on particular assumptions about human behavior, that are different than the assumptions an
anthropologist or psychologist might use. A theory is a simplified representation of how two or more
variables interact with each other. The purpose of a theory is to take a complex, real-world issue and
simplify it down to its essentials. If done well, this enables the analyst to understand the issue and any
problems around it. A good theory is simple enough to be understood, while complex enough to capture
the key features of the object or situation being studied.

Sometimes economists use the term model instead of theory. Strictly speaking, a theory is a more abstract
representation, while a model is more applied or empirical representation. Models are used to test theories,
but for this course we will use the terms interchangeably.

For example, an architect who is planning a major office building will often build a physical model that sits
on a tabletop to show how the entire city block will look after the new building is constructed. Companies
often build models of their new products, which are rougher and more unfinished than the final product will
be, but can still demonstrate how the new product will work.
Of course, in the real world, there are many different markets for goods and services and markets for many
different types of labor. The circular flow diagram simplifies this to make the picture easier to grasp. In the
diagram, firms produce goods and services, which they sell to households in return for revenues. This is
shown in the outer circle, and represents the two sides of the product market (for example, the market for
goods and services) in which households demand and firms supply. Households sell their labor as workers
to firms in return for wages, salaries and benefits. This is shown in the inner circle and represents the two
sides of the labor market in which households supply and firms demand.
Economists carry a set of theories in their heads like a carpenter carries around a toolkit. When they see an
economic issue or problem, they go through the theories they know to see if they can find one that fits.
Then they use the theory to derive insights about the issue or problem. In economics, theories are expressed
as diagrams, graphs, or even as mathematical equations. (Do not worry. In this course, we will mostly use
graphs.) Economists do not figure out the answer to the problem first and then draw the graph to illustrate.
Rather, they use the graph of the theory to help them figure out the answer. Although at the introductory
level, you can sometimes figure out the right answer without applying a model, if you keep studying
economics, before too long you will run into issues and problems that you will need to graph to solve. Both
micro and macroeconomics are explained in terms of theories and models. The most well-known theories
are probably those of supply and demand, but you will learn a number of others.

Answer to the Question No. 01 (b)

From the market for gasoline can be shown in the form of a table or a graph. A table that shows the quantity
demanded at each price, such as Table 1, is called a demand schedule. Price in this case is measured in
dollars per gallon of gasoline. The quantity demanded is measured in millions of gallons over some time
period (for example, per day or per year) and over some geographic area (like a state or a country).
A demand curve shows the relationship between price and quantity demanded on a graph like Figure 1,
with quantity on the horizontal axis and the price per gallon on the vertical axis. (Note that this is an
exception to the normal rule in mathematics that the independent variable (x) goes on the horizontal axis
and the dependent variable (y) goes on the vertical. Economics is not math.)

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The demand schedule shown by Table 1 and the demand curve shown by the graph in Figure 1 are two
ways of describing the same relationship between price and quantity demanded.

$2.50

$2.00

$1.50

$1.00

$0.50

$0.00
0 100 200 300 400 500 600 700 800 900

Quantity Demanded (millions of gallons)

Figure 1. A Demand Curve for Gasoline. The demand schedule shows that as price rises, quantity
demanded decreases, and vice versa. These points are then graphed, and the line connecting them is the
demand curve (D). The downward slope of the demand curve again illustrates the law of demand—the
inverse relationship between prices and quantity demanded.

Price (per gallon) Quantity Demanded (millions of gallons)

$1.00 800

$1.20 700

$1.40 600

$1.60 550

$1.80 500

$2.00 460

$2.20 420

Table 1. Price and Quantity Demanded of Gasoline

Demand curves will appear somewhat different for each product. They may appear relatively steep or flat,
or they may be straight or curved. Nearly all demand curves share the fundamental similarity that they slope
down from left to right. So, demand curves embody the law of demand: As the price increases, the quantity
demanded decreases, and conversely, as the price decreases, the quantity demanded increases.

Figure 2 illustrates the law of supply, again using the market for gasoline as an example. Like demand,
supply can be illustrated using a table or a graph. A supply schedule is a table, like Table 2, that shows the
quantity supplied at a range of different prices. Again, price is measured in dollars per gallon of gasoline

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and quantity supplied is measured in millions of gallons. A supply curve is a graphic illustration of the
relationship between price, shown on the vertical axis, and quantity, shown on the horizontal axis. The
supply schedule and the supply curve are just two different ways of showing the same information. Notice
that the horizontal and vertical axes on the graph for the supply curve are the same as for the demand curve.

$2.50

$2.00

$1.50

$1.00

$0.50

$0.00
0 100 200 300 400 500 600 700 800

Quantity Demanded (millions of gallons)

Figure 2. A Supply Curve for Gasoline. The supply schedule is the table that shows quantity supplied of
gasoline at each price. As price rises, quantity supplied also increases, and vice versa. The supply curve (S)
is created by graphing the points from the supply schedule and then connecting them. The upward slope of
the supply curve illustrates the law of supply—that a higher price leads to a higher quantity supplied, and
vice versa.

Price (per gallon) Quantity Supplied (millions of gallons)

$1.00 500

$1.20 550

$1.40 600

$1.60 640

$1.80 680

$2.00 700

$2.20 720

Table 2. Price and Supply of Gasoline

The shape of supply curves will vary somewhat according to the product: steeper, flatter, straighter, or
curved. Nearly all supply curves, however, share a basic similarity: they slope up from left to right and
illustrate the law of supply: as the price rises, say, from $1.00 per gallon to $2.20 per gallon, the quantity
supplied increases from 500 gallons to 720 gallons. Conversely, as the price falls, the quantity supplied
decreases.

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Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the
horizontal axis, the demand curve and supply curve for a particular good or service can appear on the same
graph. Together, demand and supply determine the price and the quantity that will be bought and sold in a
market.

Figure 3 illustrates the interaction of demand and supply in the market for gasoline. The demand curve (D)
is identical to Figure 1. The supply curve (S) is identical to Figure 2. Table 3 contains the same information
in tabular form.

$2.50

$2.00

$1.50

$1.00

$0.50

$0.00
0 100 200 300 400 500 600 700 800 900

Quantity Demanded Quantity Supplied

Figure 3. Demand and Supply for Gasoline. The demand curve (D) and the supply curve (S) intersect at
the equilibrium point E, with a price of $1.40 and a quantity of 600. The equilibrium is the only price where
quantity demanded is equal to quantity supplied. At a price above equilibrium like $1.80, quantity supplied
exceeds the quantity demanded, so there is excess supply. At a price below equilibrium such as $1.20,
quantity demanded exceeds quantity supplied, so there is excess demand.

Price (per Quantity demanded (millions of Quantity supplied (millions of

gallon) gallons) gallons)

$1.00 800 500

$1.20 700 550

$1.40 600 600

$1.60 550 640

$1.80 500 680

$2.00 460 700

$2.20 420 720

Table 3. Price, Quantity Demanded, and Quantity Supplied

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Remember this: When two lines on a diagram cross, this intersection usually means something. The point
where the supply curve (S) and the demand curve (D) cross, designated by point E in Figure 3, is called
the equilibrium. The equilibrium price is the only price where the plans of consumers and the plans of
producers agree—that is, where the amount of the product consumers want to buy (quantity demanded) is
equal to the amount producers want to sell (quantity supplied). This common quantity is called
the equilibrium quantity. At any other price, the quantity demanded does not equal the quantity supplied,
so the market is not in equilibrium at that price.

In Figure 3, the equilibrium price is $1.40 per gallon of gasoline and the equilibrium quantity is 600 million
gallons. If you had only the demand and supply schedules, and not the graph, you could find the equilibrium
by looking for the price level on the tables where the quantity demanded and the quantity supplied are equal.

The word “equilibrium” means “balance.” If a market is at its equilibrium price and quantity, then it has no
reason to move away from that point. However, if a market is not at equilibrium, then economic pressures
arise to move the market toward the equilibrium price and the equilibrium quantity.

Imagine, for example, that the price of a gallon of gasoline was above the equilibrium price—that is, instead
of $1.40 per gallon, the price is $1.80 per gallon. This above-equilibrium price is illustrated by the dashed
horizontal line at the price of $1.80 in Figure 3. At this higher price, the quantity demanded drops from 600
to 500. This decline in quantity reflects how consumers react to the higher price by finding ways to use less
gasoline.

Answer to the Question No. 01 (c)

Market equilibrium is a market state where the supply in the market is equal to the demand in the market.
The equilibrium price is the price of a good or service when the supply of it is equal to the demand for it in
the market. If a market is at equilibrium, the price will not change unless an external factor changes the
supply or demand, which results in a disruption of the equilibrium.

The equilibrium price is the only price where the plans of consumers and the plans of producers agree—

that is, where the amount consumers want to buy of the product, quantity demanded, is equal to the amount

producers want to sell, quantity supplied. This common quantity is called the equilibrium quantity. At any

other price, the quantity demanded does not equal the quantity supplied, so the market is not in equilibrium

at that price.

The word equilibrium means balance. If a market is at its equilibrium price and quantity, then it has no

reason to move away from that point. However, if a market is not at equilibrium, then economic pressures

arise to move the market toward the equilibrium price and the equilibrium quantity.

The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is

no tendency for price to change.

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Any price below the equilibrium price, it is called excess demand or shortage. When the quantity demanded
is excesses or exceeds the quantity supplied, so that the amount at that price is the excess demand or the

shortage and it’s equivalent to quantity demanded less quantity supply. So, at that particular price people

have to buy less product at the same amount of price.

Any price above the equilibrium price, it is called excess supply or surplus. The condition that exists when
quantity supplied exceeds quantity demanded at the current price. At this position, the quantity supply is
greater than the quantity demand. So, at this moment, people can buy more product or can get more option
to buy at the same amount of money.

Answer to the Question No. 02 (a)

In economics, marginal cost is the additional cost associated with producing one extra unit of a product.
Businesses rely on this information to help them make decisions related to pricing and production goals. In
a purely competitive market, marginal cost and supply will always be equal. Graphically, these can both
can be illustrated by the same positively-sloped cost curve, and will overlay one another at every price
point. In a market that is less than perfectly competitive, however, the relationship between marginal cost
and supply changes and the two values are no longer equal. As price levels increase, the quantity of goods
and services that businesses produce will also increase. For example, a firm that makes cars will sell a
certain number of units at one price, but if the market price goes up, the firm will make more cars in order
to maximize profit. The inverse is also true, resulting in decreased production as market prices go down.
This same type of relationship can also be seen when examining marginal cost, though for different reasons.
The law of diminishing returns states that as firms increase resources needed to ramp up production,
marginal cost will decline, bottom out, then start to rise. To understand why, consider a car factory with
100 workers. Adding 25 more workers can help increase production and bring down the marginal cost of
each new car. If the firm were to add another 100 workers, however, these employees would start to slow
each other down, or get in each other's way, resulting in an increase in marginal cost. From this example,
one can see that as supply rises, price will also increase automatically. In a perfectly competitive market,
firms will set production rates at the exact point where price equals marginal cost. By doing so, they are
able to maximum profits and efficiency. Given that price is constantly fluctuating due to natural market
forces, production rates, or supply, will continuously change as well. This relationship between marginal
cost and supply holds at every price point, and continues to hold as price fluctuates.

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 Answer to the Question No. 02 (b)

Definition of productive efficiency

This is defined as producing goods and services for the lowest cost. Productive efficiency is said to occur
on the production possibility frontier. On the PPF curve, it is impossible to produce more of one good
without producing less of another.

Allocative Efficiency definition

Allocative efficiency is quite different and is more concerned with the distribution and allocation of
resources in society.
Allocative efficiency looks at the marginal benefit of consumption compared to the marginal cost.
Allocative efficiency will occur at an output when marginal benefit (price) = marginal cost.

We can say:
• Allocative efficiency occurs where price = marginal cost (MC)
• Monopolies are often said to be allocatively inefficient because they are able to set the
price higher than marginal cost. See: Monopoly

Related to allocative efficiency is the concept of social efficiency. Social efficiency makes a point of
taking into account all externalities so we can try and equate social marginal benefit and social marginal
cost.

There would be no point in being productively efficient if all resources are diverted to making guns. We
could be producing on a production possibility frontier but, if it is all guns, society would not have
enough food or health care.

An anecdote from the Soviet Union under Communist days tells how factories were given targets to
produce certain quantities of goods. They often did this with great vigor and were productively efficient,
but often they were producing goods which weren’t needed by society. There is a story that one factory
made left-hand boots that nobody wanted, so at the end of the day they would efficiently burn them and
the next day start again! They were productively efficient but not allocatively efficient.

However, productive efficiency is still important. If goods are produced at a lower cost, it enables society
to have a better trade-off and enable the scope for people to consume more goods and services.

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 Answer to the Question No. 02 (c)

The basic objective of financial management is to maximize the wealth of the shareholders or the value of
the firm. The value of a firm is inversely related to the cost of capital of the firm. So in order to maximize
the value of a firm, the overall cost of capital of the firm should be minimized.

The cost of capital is of utmost importance in capital structure planning and in capital budgeting decisions.

• In capital structure planning a company strives to achieve the optimal capital structure in order to
maximize the value of the firm. The optimal capital structure occurs at a point where the overall cost
of capital is minimum.
• Since overall cost of capital is the minimum rate of return required by the investors, this rate is used
as the discount rate or the cut-off rate for evaluating the capital budgeting proposals.

Cost of capital is an important concept in financial management. Various financing and investing deci-

sions depend upon the cost of capital of a firm. There are several factors that make cost of capital of a

firm high or low.

Some of the important factors are discussed below:

1. Demand and Supply of Capital:

Demand and supply of capital affects the cost of capital. If the demand for funds in the economy

increases, lenders will automatically increase the required rate of return and vice-versa. Supply of funds

has an inverse relation to cost of capital: If supply of fund increases then the cost of capital decreases; and

if the supply of funds decreases, the cost of capital increases.

2. Market Condition:

The market condition of the product produced by the project for which a fund is required is an important

factor for determining the cost of capital. Funds required for risky projects increases the cost of capital, as

lenders demand a higher rate to compensate their risk. On the other hand, if the market condition of the

products produced by the project is such that it will have a high and secured return, then the risk will be

lower and obviously the cost of capital will be less.

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3. Unsystematic Risk:

Unsystematic risk is of two types: Business risk and financial risk. Business risk arises due to investment

decisions of the company. Financing risk arises due to financing decisions, i.e. proportion of debt and

equity in the capital structure. Business risk and financing risk affect the overall cost of capital of a firm.

A firm’s total unsystematic risk is the sum of business and financing risks. The cost of capital is directly

proportional to the total unsystematic risk of the firm.

4. Volume of Financing:

Volume of financing also affects the cost of capital. High volume of capital also increases the overall cost

of capital due to issue related costs and the greater risks involved. The liquidity risk associated with high

volume of capital also increases cost of capital. If the firm uses lower volume of capital, then the suppliers

of the fund remain more assured of their fund and the cost of capital reduces.

Answer to the Question No. 03 (a)

The kinked demand curve theory of oligopoly seeks to expand on the rigidity of prices under oligopolistic
market. It is argued that given an existing price in an oligopolistic market, if a single firm inclines its price,
the rivals of the firm do not respond. However, if the firm declines its price, other rival firms will cut down
their prices too.
This clearly explains the reason as to why an individual firm will have a kink at the existing price level and
the consequence of this is, the price won't change for small changes in cost and demand.
Empirical evidence remains fixed about this situation, and the model of kinked demand is criticized on
theoretical ground majorly due to its arbitrariness in regard to both the existing price and the response of
the firms.
This criticism has been addressed through the provision of equilibrium foundation to the theory in question.
Through the consideration of price competition in duopoly, it is shown that under equilibrium, both firms
will charge a sufficiently high common price and this collusive outcome is sustainable by the use of kinked
demand strategy.
Neither of these theories predict price rigidity. This is the phenomena that the original theory of kinked
demand seeks to elaborate.

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 Answer to the Question No. 03 (b)

i) Given that the firm has a serious financial situation at the moment, the decision they make could be one
that leans more towards less financial expenditure so as not to make the situation worse, this would imply
repairs and fixes of the current machinery to avoid worsening the current financial situation.
ii) If the machinery is to be scrapped after the next production run, then the firm's decision should be
influenced by choosing an option that gives higher benefit and returns without necessarily considering the
risk undergone. Therefore, if a new machinery would mean higher returns, profits, and overall benefits, it
would be the go-to decision considering that even if they repaired the existing one, it would still be scrapped
after the next production run despite the repair costs incurred.

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 Answer to the Question No. 04 (b)

Frictional Unemployment

Frictional unemployment is a type of unemployment that arises when workers are searching for new jobs
or are transitioning from one job to another. It is part of natural unemployment and hence is present even
when the economy is considered at full employment.

Unlike other kinds of unemployment, frictional unemployment does not increase during an economic
recession. On the contrary, during a recession, it tends to decline because workers become more
concerned about job security since fewer job opportunities are available in the market.

Structural Unemployment
Structural unemployment refers to a mismatch between the jobs available and the skill levels of the
unemployed. Unlike cyclical unemployment, it’s caused by forces other than the business cycle. It occurs
when an underlying shift in the economy makes it difficult for some people to find jobs. It is harder to
correct than other types of unemployment.

Cyclical Unemployment
Cyclical unemployment is the component of overall unemployment that results directly from cycles of
economic upturn and downturn. Unemployment typically rises during recessions and declines during
economic expansions. Moderating cyclical unemployment during recessions is a major motivation behind
the study of economics and the goal of the various policy tools that governments employ to stimulate the
economy.

Natural Unemployment
Natural unemployment, or the natural rate of unemployment, is the minimum unemployment rate resulting
from real or voluntary economic forces. Natural unemployment reflects the number of people that are
unemployed due to the structure of the labor force, such as those replaced by technology or those who
lack certain skills to gain employment.

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 Answer to the Question No. 05 (a)

Bangladesh recorded one of the fastest growth rates in the world in the past few years with a stable economic
performance that has helped to reduce poverty and social inequalities. GDP growth reached 8.2% in 2019
and remained positive at 3.5% and 4.6% in 2020 and 2021 despite the international effect of the COVID-
19 pandemic. It is forecasted to pick up to 6.5% in 2022 and 7.2% in 2023, according to the updated IMF
forecasts from October 2021. The post-pandemic global economic recovery and the private consumption
boosted by strong remittance flows from the Bangladeshi diaspora around the world are expected to be the
key drivers of growth in 2022.
The general government gross debt remained relatively low in 2020 and 2021 - at 38.9% and 39.9% of GDP
respectively - as a result of a tight fiscal policy. Nonetheless, the tax base is narrow owing to a number of
exemptions, weighing on public revenue. Public debt ratio to GDP is consequently anticipated to increase
to 41% in 2022 and remain stable in 2022. A new VAT law was introduced at the start of the fiscal year
2019-20 in an attempt to increase tax income; however, its impact has been limited since the launch.
Financial situation of the banking sector remains weak due to a large share of non-performing loans and an
increase in restructured loans. Inflation moderated to 5.6% in 2020 and 2021, and is expected to remain
stable in 2022 (5.7%) and in 2023 (5.8%) despite the COVID-19 pandemic. Current account deficit was
estimated to have narrowed to -1.1% of GDP in 2021 and was forecasted to reach -1.5% in 2022 and -1.9%
in 2023. Bangladesh is one of the most vulnerable countries in the world to climate change, with extreme
weather events estimated to have caused a loss of around 1.8% of GDP in the past few decades. The country
has taken measures to promote green financing and is seeking grants from the international community,
notably via the Green Climate Fund.
The Bangladeshi economy relies on its enormous human resources, rich agricultural soils and abundant
water resources. Agriculture represented 12.9% of GDP and employed 38% of the total workforce in
2021 (World Bank, 2022). Main crops include rice, tea, jute, wheat, sugarcane, tobacco, spices, and fruits.
Bangladesh is the world's fourth biggest rice producer, although shortages caused by natural disasters
occasionally force the country to import rice.
Industry represented 29.5% of GDP and employed 22% of the total workforce in 2021 (World Bank,
2022). Textile is by far the largest industry, accounting for more than 80% of the country's total exports.
Secondary industries include paper, leather, fertilizers, metals, and pharmaceuticals.
Services accounted for 53.4% of GDP and employed 40% of the total workforce in 2021 (World Bank,
2022). Microfinance and computing are among the largest sectors, with the country's technology exports
reaching around USD 1 billion per year. The government aims to increase technology exports to USD 5
billion by 2021.

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 Answer to the Question No. 05 (b)

Changing the political culture

Bangladesh was founded on a vision of a democratic, secular and just society, but that vision remains
unfulfilled. Democracy and social justice have remained largely elusive, and we could not prevent the use
of religion in our politics. More seriously, the annihilation of opposition appears to have become a political
obsession. If the founding ideals of Bangladesh are to be fulfilled, we must change our political culture and
practice the politics of inclusiveness, tolerance and consensus.
Electoral reforms
Free, fair and credible elections are necessary to create a government with the consent of the people. The
11th parliamentary election was marred by allegations of the denial of people's voting rights. Based on its
research of 50 constituencies, the Transparency International Bangladesh (TIB) questioned the credibility
of the election, claiming that the fears about possible rigging under a party-based government had come
true. Therefore, we must clean up our electoral process and seriously consider reforming our electoral
system, including the adoption of a proportional representation system.
Independent judiciary
We must ensure the independence of the judiciary and the rule of law by separating the judiciary from the
executive—by restoring the original Articles 115 and 116 of our Constitution. We must frame a law to
appoint and remove judges in the upper judiciary. We must also stop influencing the judiciary, and end the
practice of filing frivolous lawsuits and withdrawing cases based on political considerations.
Campaign against corruption
We must initiate an all-out campaign against corruption by creating special tribunals to try and deliver
exemplary punishment to corrupt officials. We must take effective measures to prevent illicit transfer of
money abroad and bring such money back. An ombudsman must also be appointed.

Answer to the Question No. 05 (c)

Tax revenues are regarded as the fundamental source for the welfare development of a nation. Tax payers
in Bangladesh is classified into 6(six) section; Private Ltd. Companies, Public Ltd. Companies, Financial
Institutions, Rental Tax Payers, Professionals (Doctor, Lawyer, Engineer) and Individuals. Tax is one of
the most important assets of nations which is collected from the citizens in different forms and are being
utilized by different developmental schemes for the country through which the citizens are benefited and is
one of the most prime sources of domestic resource mobilization. In Bangladesh, the taxation policies are
liberal and are classed into two parts; individual tax and corporate tax. Taxes are payable for the year of
assessment of fiscal year July-June. Individual taxes are schemed as per income, setting a certain amount
as the starting base, such as(Asia Trade Hub, Bangladesh Tax) On the first Tk. 60,000.00(approx. €600) of
total income - no tax obligation On the next Tk. 40,000.00(approx. €400) of total income - 10% On the next
Tk. 50,000.00(approx. €500) of total income - 15% On the next Tk. 1,50,000.00(approx. €1.500) of total

13
income - 20% On the balance of total income - 25% Corporate taxes are classified into two segments;
industrial companies’ tax and services companies’ tax. For industrial companies whose shares are being
publicly traded is accountable to pay 35% taxes while those whose shares are not publicly traded have to
pay 40% taxes off its total income. Service companies such as banks, financial institutions, leasing
companies, insurance companies, etc. has to pay 45% taxes (Asia Trade Hub, Bangladesh Tax). 44 Tax
holiday system exists in Bangladesh as per NBR (National Board of Revenue) rules and regulations. Local
companies that are suffering from long term lose or foreign companies that started its operation in the
country under trial basis are among few that enjoys this facility.
Bangladesh is not the only country where tax fraudulent is common. Developed nations are truly victims
of such incidents too, although it is not to be denied that severe judiciary law exists against such an act and
control over the issues of fraudulent is strong. Tax-payers possesses the tendency not to pay the required
amount of tax deserved by GOB, through tax avoidance, bribing and evasion, tax-payers constantly keeps
on frauding the tax payable amount. Bangladesh being backward through technological point-of-view is
repeatedly failing to gain strong control to stop tax fraudulent and materialize data’s to obtain full
knowledge and information on the exact number of business entities existence. GOB initiated several
policies to stop tax fraudulent and to ensure that required taxes are being deposited by the payers to the tax
authority and NBR.

Answer to the Question No. 06 (a)

Study of export scenarios identifies many motivators Ultimately, the export decision centers on improving
profitability, boosting productivity, and achieving diversification.
Exporting helps companies:

• Increase profitability,
• Improve productivity,
• Diversify activities.

PROFITABILITY
Exporting opens opportunities to increase profits. Often, companies sell their products for higher prices
abroad than at home. Foreign markets may lack competitive alternatives. Or, they may be in different stages
of the product's life cycle. Mature products at home often face price competition, whereas growth stages in
foreign markets tolerate premium prices.

PRODUCTIVITY
Exporting helps companies improve productivity, creating options to use scarce resources, such as capital
and labor, more efficiently. Productivity is often linked to increasing economies of scale; exploiting
capacity spreading costs over more customers improves efficiency. Hence, selling more products to more
people in more markets drives productivity gains. The US. International Trade Commission reports that

14
despite facing trade barriers and other impediments, SMEs that export outperform those that do not. Besides
more than doubling the total revenue of their non-exporting counterparts, their revenue per employee, a
rough measure of labor productivity, was more than 70 percent higher than that of the non-exporters.

DIVERSIFICATION
Exporting diversifies activities, thereby fortifying a firm's adaptability to business cycles and disruptive
innovations. Serving customers in different markets reduces a firm's vulnerability to the loss of a local buyer
while safeguarding its bargaining power with suppliers. Different growth rates in different markets enable
an exporter to use strong sales in one country to offset weak sales in another. SpinCeut, for example, saw
export markets in faster growing Asia as a means to reduce its overdependence on the slowing U.S.
economy.

Answer to the Question No. 06 (b)

R&D :
R&D is an important means for achieving future growth and maintaining a relevant product in the market.
There is a misconception that R&D is the domain of high-tech technology firms or the big pharmaceutical
companies. In fact, most established consumer goods companies dedicate a significant part of their
resources towards developing new versions of products or improving existing designs. However, where
most other firms may only spend less than 5 percent of their revenue on research, industries such as
pharmaceutical, software or high technology products need to spend significantly given the nature of their
products.

Product Life Cycle :

The international product life cycle is a theoretical model describing how an industry evolves over time
and across national borders. This theory also charts the development of a company’s marketing program
when competing on both domestic and foreign fronts. International product life cycle concepts combine
economic principles, such as market development and economies of scale, with product life cycle marketing
and other standard business models.
The four primary elements of the international product life cycle theory are: the structure of the demand for
the product, manufacturing, international competition and marketing strategy, and the marketing strategy
of the company that invented or innovated the product. These elements are categorized depending on the
product’s stage in the traditional product life cycle. Introduction, growth, maturity, and decline are the
stages of the basic product life cycle.

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 Answer to the Question No. 06 (c)
Economies of scale occur when increasing output leads to lower long-run average costs. It means that as
firms increase in size, they become more efficient.

Diagram of economies of scale

Small firms have higher

average cost

Increasing output leads

to lower average cost
P1

P2

Q1 Q2

Increasing output from Q1 to Q2, we see a decrease in long-run average costs from P1 to P2.

Economies of scale are important because they mean that as firms increase in size, they can become more
efficient. For certain industries, with significant economies of scale, e.g. aeroplane manufacture, it is
important to be a large firm; otherwise, they will be inefficient.

Answer to the Question No. 07 (a)

Balance of trade (BOT) is the difference between the value of a country’s imports and exports for a given
period and is the largest component of a country’s balance of payments (BOP).
Dynamics of the Trade Balance and the Terms of Trade: The terms of trade, in this paper, is the relative
price of imports to exports, and the trade balance is the ratio of net exports to output.
The balance of trade is part of a larger economic unit, the balance of payments (the sum total of all
economic transactions between one country and its trading partners around the world), which includes
capital movements (money flowing to a country paying high interest rates of return), loan repayment,
expenditures by.

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The balance of payments is rarely a way of listing receipts and payments in international
transactions for a country. Balance of payment is an application of double-entry book keeping
and if entry is done in a proper way, debits and credits will always balance; hence in a way, the
balance of payment will always be in equilibrium. It is important to understand in what way the
balance of payments can be in dis-equilibrium and in what sense it will always be in equilibrium.

Cash in Advance
The cash in advance method is the safest for exporters because they are securely paid before goods are shipped and
ownership is transferred.
Typically, payments are made by wire transfers or credit cards.
This is the least desirable method for importers because they have the risk of goods not being shipped, and it is also
not favorable for business cash flow.
Cash in advance is usually only used for small purchases.
No exporter who requires only this method of payment can be competitive.

Letter of Credit
A letter of credit, or documentary credit, is basically a promise by a bank to pay an exporter if all terms of the
contract are executed properly. This is one of the most secure methods of payment.
It is used if the importer has not established credit with the exporter, but the exporter is comfortable with the
importer’s bank.
Here are the general steps in a letter of credit transaction:
• The contract is negotiated and confirmed
• The importer applies for the documentary credit with their bank
• The documentary credit is set up by the issuing bank and the exporter and the exporter’s bank (the collecting
bank) are notified by the importer’s bank
• The goods are shipped
• Documents verifying the shipment and all terms of the sale are provided by the exporter to the exporter’s bank
and the exporter’s bank sends the documents to the importer’s issuing bank
• The issuing bank verifies the documents and issues payment to the exporter’s bank
• The importer collects the goods

Documentary Collection
A documentary collection is when the exporter instructs their bank to forward documents related to the sale to the
importer’s bank with a request to present the documents to the buyer as a request for payment, indicating when and
on what conditions these documents can be released to the buyer.
The importer may obtain possession of goods if the importer has the shipping documents.
The documents are only released to the buyer after payment has been made.

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Open Account
An open account is a sale in which the goods are shipped and delivered before payment is due usually in 30, 60, or 90
days. An open account is a sale in which the goods are shipped and delivered before payment is due usually in 30, 60,
or 90 days. Foreign buyers often want exporters to offer open accounts because it is much more common in other
countries, and the payment-after-receipt structure is better for the bottom line.

Consignment
Consignment is similar to an open account in some ways, but payment is sent to the exporter only after the goods have
been sold by the importer and distributor to the end customer.
The exporter retains ownership of the goods until they are sold.
Exporting on consignment is very risky since the exporter is not guaranteed any payment.
Consignment, however, helps exporters become more competitive because the goods are available for sale faster.
Selling on consignment reduces the exporter’s costs of storing inventory.

Answer to the Question No. 07 (b)

There are various types of letters of credit in trade transactions. Some of these are classified by their
purpose. The following are the different types of letters of credit:

Commercial LC
A standard LC is also called a documentary credit. For more information, click on Commercial LC.
Export/Import LC
The same LC becomes an export or import LC depending on who uses it. The exporter will term it as an
exporter letter of credit whereas an importer will term it as an importer letter of credit. For more information
click on Export/Import LC
Transferable LC
A letter of credit that allows a beneficiary to further transfer all or a part of the payment to another supplier
in the chain or any other beneficiary. This generally happens when the beneficiary is just an intermediary
for the actual supplier. Such LC allows the beneficiary to provide its own documents but transfer the money
further. For more information click on Transferable LC.
Un-transferable LC
A letter of credit that doesn’t allow the transfer of money to any third parties. The beneficiary is the only
recipient of the money and cannot further use the letter of credit to pay anyone.

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Revocable LC
An LC that issuing bank or the buyer can alter at any time without any notification to the seller/beneficiary.
Such types of letters are not in use frequently as the beneficiary is not provided any protection. For more
information click on Revocable LC.
Irrevocable LC
An LC that does not allow the issuing bank to make any changes without the approval of all the parties.
Standby LC
A letter of credit that assures the payment if the buyer does not pay. After fulfilling all the terms under
SBLC, if the seller proves that the promised payment was not made. In this situation, the bank will pay to
the seller. In a nutshell, it does not facilitate a transaction but guarantees the payment. It is quite similar to
a bank guarantee. For more information, click on Standby LC.
Confirmed LC
Which the seller or exporter acquires the guarantee of payment from a confirming bank (also called the
second bank). This is primarily to avoid the risk of non-payment from the first bank. For more information,
click on Confirmed LC.
Unconfirmed LC
A letter of credit that is assured only by the issuing bank and does not need a guarantee from the second
bank. Mostly the letters of credit are an unconfirmed letter of credit.
Revolving LC
When a single LC is issued for covering multiple transactions in place of issuing separate LC for each
transaction is called revolving LC. They can be further classified into Time Based (Could be Cumulative
or Non-Cumulative) and Value-Based. For more information, click on Revolving LC
Back-to-Back LC
Back-to-back LC is an LC which commonly involves an intermediary in a transaction. There are two letters
of credit, the first issued by the bank of the buyer to the intermediary and the second issued by the bank of
an intermediary to the seller. For more information, click on Back-to-Back LC.
Red Clause LC
A letter of credit that partially pays the beneficiary before the goods are shipped, or the services are
performed. The advance is paid against the written confirmation from the seller and the receipt. For more
information, click on Red clause LC.
Green Clause LC
An LC that pays advance to the seller is just not against the written undertaking and a receipt, but also a
proof of warehousing the goods. For more information, click on Green Clause LC.
Sight LC
A letter of credit that demands payment on submitting the required documents. The bank reviews the
documents and pays the beneficiary if the documents meet the conditions of the letter. For more
information, click on Sight LC.

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Deferred Payment LC
An LC that ensures payment after a certain period. The bank may review the documents early but the
payment to the beneficiary is made after the agreed-to time passes. It is also known as Usance LC. For more
information, click on Deferred payment LC.
Direct Pay LC
A letter of credit where the issuing bank directly pays the beneficiary and then asks the buyer to repay the
amount. The beneficiary may not interact with the buyer.
Inland LC
An inland letter of credit is used for transactions in the home country.

Answer to the Question No. 08 (b)

According to the new import policy approved on February 7th, 2022 Bangladeshi retailers who import goods of less
than 500,000 US dollars will be exempted from issuing letters of credit and settled by contract and telegraphic transfer.
Moreover, in the bonded warehouse system part of the new policy, 100% of Bangladesh's export-oriented enterprises
import raw materials and goods needed for six months without any back-to-back letter of credit.
Another noteworthy latest news is that Bangladesh's central bank instructed its banks to check the validity and forgery
of the import registration certificate (IRC) when opening letters of credit (LC) in its notice, it said: Authorized desire
banks must ensure that the original and latest IRC is used when opening letters of credit for enterprises

Trade policy reform has focused on elimination of QRs. rationalization of the tariff structure, simplification
of import procedures, exchange rate liberalization and various measures to stimulate export growth. As
noted earlier, these reforms were initiated in the early eighties with the support of the IPCs and were aimed
at encouraging exports by reducing the anti-export bias of policy

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