International Trade 2.docx

A PROJECT REPORT ON “WHY WE NEED INTERNATIONAL TRADE” IN PARTIAL FULFILLMENT OF THE REQUIREMENT PRESCRIBED FOR B.A. LLB (HONS.) SEMESTER-2 Submitted To:

Submitted By;

Dr. Mahendra Parihar

Name: Tanay Khandelwal

Associate Professsor

Registration No. : 161401106 MANIPAL UNIVERSITY, JAIPUR

(Dehmi Kalan, Jaipur-Ajmer Highway, Jaipur-303007)

2017

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ACKNOWLEDGEMENT

I hereby acknowledge the help and support of the teachers, who helped me in compiling this project. I thank the faculty and management of Manipal University Jaipur, School of Law, as the resources that were necessary to complete the project were provided by them. I am highly indebted to my teacher “Dr. Mahendra Parihar” for his guidance and constant supervision as well as for providing necessary knowledge regarding the subject at hand and also for his support in completing the project. I would like to express my gratitude towards my parents and friends for their kind cooperation and encouragement which help me in completion of this project.

_______________ TANAY KHANDELWAL

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CERTIFICATE

This is to certify that Mr. Tanay khandelwal, student of B.A. LL.B. (Hons.) Semester II, School of Law, Manipal University Jaipur has completed the project work entitled “WHY WE NEED INTERNATIONAL TREADE?” under my supervision and guidance. It is further certified that the candidate has made sincere efforts for the completion of this project.

DATE: 30/03/2017

_______________ Dr. Mahendra Parihar

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Contents INTERNATIONAL TRADE .................................................................................................................. 5 INCREASED EFFICIENCY OF TRADING GLOBALLY................................................................... 5 WHY INTERNATIONAL TRADE IS IMPORTANT? ......................................................................... 6 ADVANTAGES OF INTERNATIONAL TRADE................................................................................ 9 DISADVANTAGES OF INTERNATIONAL TRADE ....................................................................... 10 CONCLUSION ..................................................................................................................................... 10 WEBLIOGRAPHY............................................................................................................................... 11

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INTERNATIONAL TRADE International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labour, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labour, on the other hand, would result in you having to pay less for your new shoes. Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewellery, wine, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country's current account in the balance of payments1

INCREASED EFFICIENCY OF TRADING GLOBALLY Global trade allows wealthy countries to use their resources - whether labour, technology or capital - more efficiently. Because countries are endowed with different assets and natural resources (land, labour, capital and technology), some countries may produce the same good more efficiently and therefore sell it more cheaply than other countries. If a country cannot efficiently produce an item, it can obtain the item by trading with another country that can. This is known as specialization in international trade. Let's take a simple example. Country A and Country B both produce cotton sweaters and wine. Country A produces 10 sweaters and six bottles of wine a year while Country B produces six sweaters and 10 bottles of wine a year. Both can produce a total of 16 units. Country A, however, takes three hours to produce the 10 sweaters and two hours to produce the six bottles of wine (total of five hours). Country B, on the other hand, takes one hour to produce 10 sweaters and three hours to produce six bottles of wine (total of four hours). 1

http://www.investopedia.com/articles/03/112503.asp

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WHY INTERNATIONAL TRADE IS IMPORTANT? Countries trade with each other when, on their own, they do not have the resources, or capacity to satisfy their own needs and wants. By developing and exploiting their domestic scarce resources, countries can produce a surplus, and trade this for the resources they need. Clear evidence of trading over long distances dates back at least 9,000 years, though long distance trade probably goes back much further to the domestication of pack animals and the invention of ships. Today, international trade is at the heart of the global economy and is responsible for much of the development and prosperity of the modern industrialised world. Goods and services are likely to be imported from abroad for several reasons. Imports may be cheaper, or of better quality. They may also be more easily available or simply more appealing than locally produced goods. In many instances, no local alternatives exist, and importing is essential. This is highlighted today in the case of Japan, which has no oil reserves of its own, yet it is the world’s fourth largest consumer of oil, and must import all it requires. The production of goods and services in countries that need to trade is based on two fundamental principles, first analysed by Adam Smith in the late 18th Century (in The Wealth of Nations, 1776), these being the division of labour and specialisation. 

DIVISION OF LABOUR

In its strictest sense, a division of labour means breaking down production into small, interconnected tasks, and then allocating these tasks to different workers based on their suitability to undertake the task efficiently. When applied internationally, a division of labour means that countries produce just a small range of goods or services, and may contribute only a small part to finished products sold in global markets. For example, a bar of chocolate is likely to contain many ingredients from numerous countries, with each country contributing, perhaps, just one ingredient to the final product.

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

SPECIALISATION

Specialisation is the second fundamental principle associated with trade, and results from the division of labour. Given that each worker, or each producer, is given a specialist role, they are likely to become efficient contributors to the overall process of production, and to the finished product. Hence, specialisation can generate further benefits in terms of efficiency and productivity. Specialisation can be applied to individuals, firms, machinery and technology, and to whole countries. International specialisation is increased when countries use their scarce resources to produce just a small range of products in high volume. Mass production allows a surplus of good to be produced, which can then be exported. This means that goods and resources must be imported from other countries that have also specialised, and produced surpluses of their own. When countries specialise they are likely to become more efficient over time. This is partly because a country's producers will become larger and exploit economies of scale. Faced by large global markets, firms may be encouraged to adopt mass production, and apply new technology. This can provide a country with a price and non-price advantage over less specialised countries, making it increasingly competitive and improving its chances of exporting in the future. 

DIFFERENCES IN TECHNOLOGY

Advantageous trade can occur between countries if the countries differ in their technological abilities to produce goods and services. Technology refers to the techniques used to turn resources (labour, capital, land) into outputs (goods and services).2 

DIFFERENCES IN RESOURCE ENDOWNMENTS

Advantageous trade can occur between countries if the countries differ in their endowments of resources. Resource endowments refer to the skills and abilities of a country’s workforce, the natural resources available within its borders (minerals, farmland, etc.), and the sophistication of its capital stock (machinery, infrastructure, communications systems).

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http://catalog.flatworldknowledge.com/bookhub/28?e=fwk-61960-ch02_s01

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

DIFFERENCES IN DEMAND

Advantageous trade can occur between countries if demands or preferences differ between countries. Individuals in different countries may have different preferences or demands for various products. For example, the Chinese are likely to demand more rice than Americans, even if consumers face the same price. Canadians may demand more beer, the Dutch more wooden shoes, and the Japanese more fish than Americans would, even if they all faced the same prices. 

EXISTENCE OF ECONOMIES OF SCALE IN PRODUCTION

The existence of economies of scale in production is sufficient to generate advantageous trade between two countries. Economies of scale refer to a production process in which production costs fall as the scale of production rises. This feature of production is also known as “increasing returns to scale.” 

EXISTENCE OF GOVERNMENT POLICIES

Government tax and subsidy programs alter the prices charged for goods and services. These changes can be sufficient to generate advantages in production of certain products. In these circumstances, advantageous trade may arise solely due to differences in government policies across countries. But these two countries realize that they could produce more by focusing on those products with which they have a comparative advantage. Country A then begins to produce only wine and Country B produces only cotton sweaters. Each country can now create a specialized output of 20 units per year and trade equal proportions of both products. As such, each country now has access to 20 units of both products. We can see then that for both countries, the opportunity cost of producing both products is greater than the cost of specializing. More specifically, for each country, the opportunity cost of producing 16 units of both sweaters and wine is 20 units of both products (after trading). Specialization reduces their opportunity cost and therefore maximizes their efficiency in acquiring the goods they need. With the greater supply, the price of each product would decrease, thus giving an advantage to the end consumer as well.

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Note that, in the example above, Country B could produce both wine and cotton more efficiently than Country A (less time). This is called an absolute advantage, and Country B may have it because of a higher level of technology. However, according to the international trade theory, even if a country has an absolute advantage over another, it can still benefit from specialization. 

OTHER POSSIBLE REASONS:

International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity of foreign direct investment (FDI), which is the amount of money that individuals invest into foreign companies and other assets. In theory, economies can therefore grow more efficiently and can more easily become competitive economic participants. For the receiving government, FDI is a means by which foreign currency and expertise can enter the country. These raise employment levels, and, theoretically, lead to a growth in the gross domestic product. For the investor, FDI offers company expansion and growth, which means higher revenues.

ADVANTAGES OF INTERNATIONAL TRADE International trade brings a number of valuable benefits to a country, including: 1. The exploitation of a country's comparative advantage, which means that trade encourages a country to specialise in producing only those goods and services which it can produce more effectively and efficiently, and at the lowest opportunity 2. Producing a narrow range of goods and services for the domestic and export market means that a country can produce in at higher volumes, which provides further cost benefits in terms of economies of scale. 3. Trade increases competition and lowers world prices, which provides benefits to consumers by raising the purchasing power of their own income, and leads a rise in consumer surplus. 4. Trade also breaks down domestic monopolies, which face competition from more efficient foreign firms.3 3

http://www.economicsonline.co.uk/Global_economics/Why_do_countries_trade.html

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5. The quality of goods and services is likely to increases as competition encourages innovation, design and the application of new technologies. Trade will also encourage the transfer between countries. 6. Trade is also likely to increase employment, given that employment is closely related to production. Trade means that more will be employed in the export sector and, through the multiplier process, more jobs will be created across the whole economy.

DISADVANTAGES OF INTERNATIONAL TRADE Despite the benefits, trade can also bring some disadvantages, including: 1. Trade can lead to over-specialisation, with workers at risk of losing their jobs should world demand fall or when goods for domestic consumption can be produced more cheaply abroad. Jobs lost through such changes cause severe structural unemployment. The recent credit crunch has exposed the inherent dangers in overspecialisation for the UK, with its reliance on its financial services sector. 2. Certain industries do not get a chance to grow because they face competition from more established foreign firms, such as new infant industries which may find it difficult to establish themselves. 3. Local producers, who may supply a unique product tailored to meet the needs of the domestic market, may suffer because cheaper imports may destroy their market. Over time, the diversity of output in an economy may diminish as local producers leave the market.

CONCLUSION International trade can also further cultural ends. Trade involving fine arts, crafts, or luxury items is wholesome since it facilitates the healthy interpenetration of cultures. Such items are also helpful to those in leadership positions or elites who, by force of their functions, need to understand the distinct mentality of those in other nations. Adopting a calculated cosmopolitan attitude facilitates this process without harming the distinctive local character of the person.

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Thus, international trade should and must exist. It should be both ample and common, especially when satisfying basic needs. However, it should not dominate or destroy local culture and production.4

WEBLIOGRAPHY 1. http://www.returntoorder.org/2015/10/the-need-for-international-trade/ ON 29/03/2017 @ 5:00 p.m. 2. http://www.economicsonline.co.uk/Global_economics/Why_do_countries_trade.html ON 29/03/2017 @ 5:20 p.m. 3. http://www.investopedia.com/articles/03/112503.asp ON 29/03/2017 @ 5:30 p.m. 4. http://catalog.flatworldknowledge.com/bookhub/28?e=fwk-61960-ch02_s01 ON 29/03/2017 @ 5:40 p.m.

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http://www.returntoorder.org/2015/10/the-need-for-international-trade/

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