International Economics: The Exchange of Goods and Services Between Countries

1. LESSON LESSON – – 7 7 INTERNATIONAL ECONOMICS

2. MEANING EXCHANGE OF GOODS AND SERVICES BETWEEN TWO OR MORE COUNTRIES

3. SUBJECT MATTERS OF INTERNATIONAL ECONOMICS PURE THEORY OF TRADE INTERNATIONAL FINANCIAL AND REGULATORY INSTITUTION POLICY ISSUES INTERNATIONAL CARTELS AND TRADE BLOCS

4. PURE THEORY OF TRADE • causes for foreign trade, • composition, • direction and volume of trade, • determination of the terms of trade and exchange rate, • issues related to balance of trade and balance of payments.

5. POLICY ISSUES • free trade vs. protection, • methods of regulating trade, • capital and technology flows, • use of taxation, • subsidies and dumping, • exchange control and convertibility, • foreign aid, • external borrowings and foreign direct investment, • measures of correcting disequilibrium in the balance of payments etc are covered

6. INTERNATIONAL CARTELS AND TRADE BLOCS • economic integration in the form of international cartels, • customs unions, • monetary unions, • trade blocs, • economic unions • operation of Multi National Corporations (MNCs).

7. INTERNATIONAL FINANCIAL INTERNATIONAL FINANCIAL AND TRADE REGULATORY AND TRADE REGULATORY INSTITUTIONS INSTITUTIONS • IMF - International Monetary Fund . • IBRD - Industrial Bank for Reconstruction and Development. • WTO - World Trade Organisation. which influence international economic transactions and relations

8. MEANING OF TRADE EXCHANGE OF GOODS AMONG PEOPLE & COUNTRIES

9. TYPES OF TRADE INTERNAL TRADE INTERNATIONAL TRADE EXCHANE OF GOODS WITHIN POLITICAL & GEOGRAPHICAL BOUNDRIES OF A NATION EXCHANGE OF GOODS AND SERVICES BETWEEN TWO OR MORE COUNTRIES

10. DIFFERENCES INTERNAL INTERNATIONAL 1.BETWEEN DIFFERENT COUNTRIES 2.LABOUR & CAPITAL DONOT MOVE FREE. 3.NOT EASY MOVEMENT 4.DIFFERENT CURRENCY 5.DIFFERENT GEOGRAPHICAL CONDITIONS 6.DIFFERENT FINANCIAL REGULATIONS. 7.DIFFERENCE IN CUSTOMS AND TRADITIONS. 1. 2. LABOUR AND CAPITAL MOVE FREE. 3. FREE FLOW OF GOODS 4. COMMON CURRECNY 5. PHISICAL & GEOGRAOHICAL CONDITION SIMILAR 6. SAME FINANCIAL REGULATIONS. 7. NO DIFFERENCE IN CUSTOMS AND TRADITIONS. BETWEEN SAME NATION

11. THEORIES OF INTERNATIONAL TRADE RICARDO’S ADAM SMITH’S THEORY OF ABSOLUTE COST ADVANTAGE THEORY OF COMPARATIVE COST ADVANTAGE MODERN THEORY OF INTERNATIONAL TRADE

12. ADAM SMITH’S THEORY OF ABSOLUTE COST ADVANTAGE • ALL NATIONS CAN BE BENIFITTED. • TRADE BETWEEN 2 COUNTRIES ARE MUTUALLY BENEFIAL OVER ONE COUNTRIES COMMODITY WITH OTHER.

13. GRAPH AND EXPLANATION

14. RICARDO’S THEORY OF COMPARATIVE COST ADVANTAGE • A COUNTRY CAN GAIN FROM WHEN IT PRODUCES AT RELATIVELY LOWER COST. *EVEN WHEN A COUNTRY ENJOYS ABSOLUTE ADVANTAGE IN BOTH GOODS, THE COUNTRY WOULD SEPCIALISE IN THE PRODUCTION AND EXPORT OF THOSE GOODS WHICH ARE RELATIVELY MORE ADVANTAGES.

15. GRAPH AND EXPLANATION

16. MODERN THEORY OF INTERNATIONAL TRADE • DEVELOPED BY SWEDISH ECONOMIST ELI – HECKSCHER AND HIS STUDENT BERTIL OHLIN IN 1919. ALSO CALLED AS FACTOR ENDOWMENT THEORY.

17. MODERN THEORY OF INTERNATIONAL TRADE - EXPLAINS • BASIS FOR FOREIGN TRADE WAS COMPARATIVE COST DIFFERENCE AND IT CONSIDERED ONLY LABOUR FACTOR. • EXPLAINS ABOUT THE CAUSES FOR SUCH COMPARATIVE COST DIFFERENCE.

18. Heckscher - Ohlin • “A capital-abundant country will export the capital – intensive goods, • Alabour-abundant country will export the labour-intensive goods”.

19. RICH COUNTRY • A country can be regarded as richly endowed with capital only if the ratio of capital to other factors is higher than other countries.

20. COMPARISON OF CLASSICAL THEORY AND MODERN THEORY Classical Theory of International Modern Theory of International Trade Trade • The modern theory explains the phenomenon of international trade on the basis of general theory of value. * The classical theory explains the phenomenon of international trade on the basis of labour theory of value. • It presents a multi - factor (labour and capital) model. • It attributes the differences in comparative costs to the differences in factor endowments in the two countries. * It presents a one factor (labour) model * It attributes the differences in the comparative costs to differences in the productive efficiency of workers in the two countries.

21. GAINS FROM INTERNATIONAL TRADE General Advantages of International Trade Efficient Production Equalization of Prices between Countries Equitable Distribution of Scarce Materials

22. Terms of Trade • It is the rate at which the goods of one country are exchanged for goods of another country. It is expressed as the relation between export prices and import prices.

23. Types of Terms of Trade Gerald M.Meier Net Barter Terms of Trade Income Terms of Trade Gross Barter Terms of Trade

24. NET BARTER TERMS OF TRADE – PRICE OF EXPORTS AND IMPORTS • Taussig in 1927. • The ratio between the prices of exports and of imports is called the “net barter terms of trade’. • It is named by Viner as the ‘commodity terms of trade’. • Tn= (Px / Pm) x 100

25. GROSS BARTER TERMS OF TRADE – QUANTITY OF EXPORT AND IMPORT • DEVELOPED BY – TAUSSIG IN 1927 • RELATIONSHIP BETWEEN TOT. PHYSICAL Q. OF IMPORTS AND TOT. PHYSICAL Q. OF EXPORTS. • Tg= (Qm/Qx) x 100 • FOR A GIVEN Q. OF EXPORT IF MORE IMPORT CAN BE BROUGHT IT IS FAVOURABLE.

26. INCOME TERMS OF TRADE – VALUE & PRICE x Q. OF EXPORTS • GIVEN BY – G.S. DORRANCE IN 1948. • VALUE OF EXPORT X Q. OF EXPORTS PRICE OF IMPORT

27. BALANCE OF TRADE Vs BALANCE OF PAYMENTS BALANCE OF TRADE ( BOP ) TOT. V. OF CONTTRY’S EX’ & TOT. V. OF IM’ MOVEMENTS OF GOODS ARE KNOWN AS “VISIBLE TRADE” BOP FAVOURABLE BOP E>I UNFAVOURABLE BOP E< I

28. BALANCE OF PAYMENTS (BOP ) • SYSTEMATIC RECORD OF A COUNTRY’S ECONOMIC & FINANCIAL TRANSACTIONS WITH REST OF THE WORLD OVER A PERIOD OF TIME. • RECEIVED PAYMENT IS CALLED CREDIT TRANSAC. • PAYMENT TO A FOREIGN Cty IS CALLED DEBIT TRANSAC. • CREDIT SIDE shows EXPOTS OF G & S • DEBIT SIDE shows IMPORTS OF G & S .

29. COMPONENTS OF BOP’S • THE CURRENY A/C – ALL INTERNATIONAL TRANSACTIONS. • THE CAPITAL A/C – ALL FINANCIAL TRANSACTION . • THE OFFICIAL SETTLEMENTS A/C – MOVEMENTS OF INTERNATIONAL RESERVES.

30. BALANCE OF PAYMENTS DISEQUILIBRIUM B/P = 1 – BALANCED BOP B/P > 1 – FAVOURABLE BOP B/P < 1 – UNFAVOURABLE BOP

31. TYPES OF BOP DISEQUILIBRIUM • CYCLICAL DISEQUILIBRIUM – * 2 Ctys DIFFERENT PHASE OF TRADE CYCLE. * ELASTICITY OF DD’ DEFFER. SECULAR DISEQUILIBRIUM – *CHANGE IN ECONOMY – ONE STAGE TO ANOTHER. STRUCTURAL DISEQUILIBRIUM – *ECONOMIC STRUCTURE CHANGES (eg – CHANGE INTRANSPORT) • •

32. CAUSES FOR BOP DISEQUILIBRIUM 1.CYCLICAL FLUCTION – DEPRESSION & PROSPERITY. 2.STRUCTURAL CHANGES – HUGE DEVPT & INVESTMENT. 3.DEVELOPMENT EXPENDITURE – RAPID ECONOMIC DEVEPT LEADS TO Y & Pr EFFECT. 4.CONSUMERISM – HUGE CONSUMARISM LEADS TO INCREASE IN IMPORTS.

33. 5.DEMONSTRATION EFFECT – DISEQUILIBRIUM LEADS TI IMITATE WESTERN GOODS LEADS TO INCREASE IMPORTS. 6.BORROWING – THIS LEADS TO DEFICI BOP BECAUSE REPAYMENT OF LOANS SHOULD BE WITH INTREST. 7.TECHNOLOGICAL BACKWARDNESS – UNABLE TO USE THE ENERGY AVAILABLE WITH THEM. Eg – SUNLIGHT. 8.GLOBAL POLITICS – RICH Cty NEED TO SELL THERE WEAPONS LEADS TO WAR .TO WIN POOR Ctys ARE FORCED TO BUY WEAPONS .

34. MEASURES TO CORRECT BOP DISEQUILIBRIUM AUTOMATIC MEASURES MISCELLANEOUS MEASURES DELEBRATE MEASURES TRADE MEASURES

35. AUTOMATIC MEASURES • PRICE ADJUSTMENT – MARKET FORCES DD & SS • INTEREST RATE – FALL IN M’ SS IN DEFICIT Cty AND INCREASE IN THE M’ SS IN SURPLUS • INCOME ADJUSTMENT – PAYMENT INCREASE NATION EXPERIENCE RISING INCREASING. • CAPITAL FLOW – CHANGE IN INTEREST RATE LEADS TO CHANGE IN CAPITAL.

36. DELEBRATE MEASURES 1.MONETARY CONTRACTION –RBI CONTROLS CREDIT . LEADS TO Pr’ DOWN AND EXPORTS HIGH, BUT IINVESTMENT WILL COME DOWN. 2.DEVALUATION – MEANS REDUCTION IN THE EXTERNAL VALUE OF CURRENCY IN TERMS OF OTHER CURENCY. THIS MAKES EXPORTS CHEAPER AND IMPORTS DEARER.THAT IS INDIAN GOODS CHEAPER FOR FOREIGNERS AND FOREIGN GOODS COSTLIER FOR INDIANS . 3.EXCHANGE CONTROL – TOO MUCH OF CONTROL LEADS TO SMUGGLING GOODS.

37. TRADE MEASURES 1.EXPORT PROMOTION – REDUSING EXPORT DUTIES , ENCOURAGING EXPORT PRODUCTION , PROVIDING EXPORT SUBSIDIES. 2.IMPORT CONTROL – IMPOSING IMPORT DUTIES, IMPORT QUOTALICENSING IMPORTS.

38. MISCELLANEOUS MEASURES • 1. FOREIGN LOANS • 2.FOREIGN INVESTMENT • 3.DEVELOPMENT OF TOURISM • 4.PROVIDING INCENTIVES • 5. IMPORTS SUBSTITUTIONS.

39. EXCHANGE RATES THE TRANSACTIONS IN THE EXCHANGE MARKET ARE CARRIED OUT AT EXCHANGE RATES. IT IS THE EXTERNAL VALUE OF DOMESTIC CURRENCY. Eg. Rs. 75 FOR A UNIT, OF FOREIGN CURRENCY $. 1. • Rs.1 = $1 => 1947 • Rs.70 = $1 => 2018

40. TYPES OF EXCHANGE RATE SYSTEMS FIXED EXCHANGE RATES (OR) STABLE EXCHANGE RATES FLEXIBLE EXCHANGE RATES (OR) FLOATING EXCHANGE RATES

41. TYPES OF EXCHANGE RATES 1. NOMINAL EXCHANGE RATES. 2.REAL EXCHANGE RATES. 3. NOMINAL EFFECTIVE EXCHANGE RATES ( NEER ) 4.REAL EFFECTIVE EXCHANGE RATES ( REER )

42. DETERMINANTS OF EXCHANGE RATES 1.DIFFERENCIALS IN INFLATION. 2.DIFFERENTIALS IN INTEREST RATES . 3.CURRENT ACCOUNT DEFICITS. 4.PUBLIC DEBT. 5.TERMS OF TRADE. 6.POLITICAL AND ECONOMIC STABILITY. 7.RECESSION 8.SPECULATION.

43. FOREIGN DIRECT INVESTMENT ( FDI ) MEANING – • FDI means an investment in a foreign country that involves some degree of control and participation in management.It corresponds to the investment made by a multinational enterprise in a foreign country.

44. OBJECTIVES OF FDI • • • • 1.SALES EXPANSION 2.ACQUISITION OF RESOURCES 3.DIVERCIFICATION 4.MINIMIZATION OF COMPETITIVE RISK.

45. ADVANTAGES OF FDI 1.INCREASE IN INVESTMENT 2.TRANSFER OF TECHNOLOGY 3.REVENUE TO THE GOVT 4.MODERNIZATION IN INDUSTRIES 5.MANAGIRIAL REVOLUTION 6.INCREASE IN FOREIGN CAPITAL 7.INCREASE COMPETITION 8.ADDS MORE VALUE TO OUTPUT 9.FILLS THE SAVING GAP 10.COLLABORATION WITH FOREIGN INDUSTRIES 11.FDI IN DEVELOPING COUNTRIES INVEST ALSO IN LDC’s.

46. DISADVANTAGES OF FDI 1. FDI IS ONLY IN HIGH PROFIT AREAS. 2. TECHNOLOGIES MAY NOT BE APPROPRIATE TO CONSUMERS. 3. UNFAVOURABLE EFFECT ON BOP. 4. INTERFERE IN NATIONAL POLICIES. 5. ENCOURAGE IN UNFAIR AND UNETHICAL TRADE PRECTISE. 6. DESTRUCTION IN SMALL SCALE INDUSTRIES.

47. FDI IN INDIA The major sectors benefited from FDI in India are: • (i) financial sector (banking and non- banking) • (ii) insurance • (iii) telecommunication • (iv) hospitality and tourism • (v) pharmaceuticals and • (vi) software and information technology. FDI is not permitted in the industrial sectors like • (i) Arms and ammunition • (ii) atomic energy, • (iii) railways,