Collective Action in Finance Module 1

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Questions and Answers

What does microfinance provide?

Credit services for middle-income individuals

Financial services for poor, low-income clients (correct)

Financial services for affluent clients

Mortgage services for homeowners

Micro-credit offers large amounts of credit to entrepreneurs.

False

What year did the 'modern' microfinance concept begin in rural Bangladesh?

1976

Before lending money, banks want to be sure of the borrower's 5Cs, which include Character, Capacity, Capital, Collateral, and __________.

Conditions Signup and view all the answers

Match the Creditworthiness Assessment factor with its description:

Character = Repayment & work history Capacity = Ability to take loans and repay them Capital = Wealth Collateral = Assets lender can take if loan is not repaid Conditions = National/local economic outlook Signup and view all the answers

What is a Free Trade Area (FTA)?

Created when two or more countries agree to eliminate barriers to trade on all goods coming from other members. Signup and view all the answers

What is a Customs Union (CU)?

Entities behave as one unit and have common external trade policies. Signup and view all the answers

What is a Common Market (CM)?

A Common Market involves free trade among members plus free movement of labor and capital. Signup and view all the answers

What is an Economic Union (EU)?

Economic Union entails full integration, including a common currency and unified economic policies. Signup and view all the answers

What is a Preferential Trade Area (PTA)?

Countries agree to reduce trade barriers on selected goods imported from other members of the area while still maintaining separate policies for non-members. Signup and view all the answers

Explain the 'container principle' or the law of increased dimensions.

Doubling the height and width of a tanker or building leads to a more than proportionate increase in the cubic capacity. Signup and view all the answers

How can collective action groups along the value chain take advantage of Economies of Scale?

All of the above Signup and view all the answers

Vertical Integration involves the purchase of companies at various stages of the value chain.

True Signup and view all the answers

_______ Integration occurs when a company acquires similar or competitive businesses.

Horizontal Signup and view all the answers

Match the following types of integration with their descriptions:

Vertical Integration = Acquiring companies at different levels of the value chain Horizontal Integration = Acquisition of similar or competitive businesses Conglomeration or Diversification = Mixing various businesses to spread out risks and performance fluctuations Signup and view all the answers

Study Notes

Module 1: Collective Action in Finance

Microfinance: financial services for poor, low-income clients, providing credit to those who otherwise would not have access to credit services.
Micro-credit: very small amounts of credit (loans) extended to small-scale entrepreneurs.
History of Microfinance:
- Birth of modern microfinance occurred in 1976 in rural Bangladesh.
- Dr. Muhammad Yunus, professor of economics, started microfinance to help poor people, including 42 women who made bamboo stools.
Entrepreneur: someone who starts, organizes, and manages their own business.
Capital: wealth (e.g., money or goods) that can be used to produce more wealth.
Sources of Credit:
- Family and friends
- Informal financial institutions (moneylenders, landlords)
- Formal financial institutions (banks, cooperatives)
Collective Action in Microfinance:
- Instead of collateral, loans are secured using the honor of a peer group.
- If one person fails to make payments, the others in the lending circle will be denied future credit.

Module 2: Collective Action in Production, Processing, Marketing, and Consumption

Economies of Scale:
- Unit cost advantage from expanding quantity produced.
- Improvement in long-run productive efficiency.
- Leads to lower prices and higher profits.
Types of Economies of Scale:
1. Technical Economies of Scale
2. Specialization Economies of Scale
3. Marketing Economies of Scale
4. Purchasing Economies of Scale
5. Managerial Economies of Scale
6. Financial Economies of Scale
7. Network Economies of Scale
8. Risk-Bearing Economies of Scale
Examples of Economies of Scale:
- Division of labor in mass production of motor vehicles and electronic products
- Learning by doing: average costs of production decline in real terms as a result of production experience
- Monopsony Power: a large group can purchase factor inputs in bulk at discounted prices

Module 3: Collective Action among Firms

Market Integration:
- Relationship of a firm in a market.
- Expansion process of a firm to consolidate additional functions and activities under one single management.
Types of Market Integration:
1. Vertical Integration
2. Horizontal Integration
3. Conglomeration or Diversification
Vertical Integration:
- Purchase of companies at any level of the value chain.
- A company has complete control over one or more stages in the production or distribution of a product.
Horizontal Integration:
- Acquisition of a similar or competitive business.
- Types of consolidation: acquisition, merger, take-over.
Examples of Horizontal Integration:
- Facebook's acquisition of Instagram
- Walt Disney's integration of Pixar Animation Studios

Module 4: Collective Action among Countries

Trading Bloc:
- A group of countries that agrees to reduce/eliminate trade barriers among members.
- Form of political and/or economic integration.
Customs Union (CUs):
- Involves the removal of trade barriers between members.
- Plus the acceptance of a common (unified) policy of trade barriers on non-members.
Common Market (CMs):
- Eliminate internal barriers.
- Adopt common external barriers.
- Allow free movement of resources.
Examples of Common Market:
- Mercosur, COMESA, ECOWAS### Comparative Advantage
The ability to produce goods at a lower opportunity cost, not necessarily at a greater volume or quality.

Advantages of Membership in Trading Blocs

Free trade within the bloc, encouraging members to specialize.
Market access and trade creation, leading to lower prices and increased demand/consumption.
Economies of Scale.
Job creation.
Protection from cheaper imports from outside the bloc.

Disadvantages of Membership in Trading Blocs

Loss of benefits from free trade with non-members.
Distortion of trade, reducing the benefits of specialization and comparative advantage.
Trade inefficiencies, making goods and services from non-members more expensive.
Trade diversion, favoring inefficient producers within the bloc over efficient ones outside.
Retaliation from different groups.

Types of Trading Blocs

Preferential Trade Area (PTAs): countries agree to reduce trade barriers on selected goods imported from other members.
Free Trade Area (FTAs): countries agree to eliminate barriers to trade on all goods coming from other members.
Customs Union (CUs): eliminates internal barriers and adopts common external barriers.
Common Market (CMs): allows free movement of resources among members and adopts a uniform set of economic policies.
Economic Union (EUs): eliminates internal barriers, adopts common external barriers, and adopts a uniform set of economic policies.
Full Integration (FIs): entities behave as one unit, eliminating internal barriers, adopting common external barriers, and adopting a uniform set of economic policies.