International Trade

International trade A PRESENTATION BY Group 10 Harpreet Madhusmita Sarvesha Sudipta Sumanta Yogesh

TOPICS FOR DISCUSSION • • • • • • • •

Introduction The world of trade Theory of absolute advantage Theory of comparative advantage Theories of international trade Terms of trade Quota, tariff and protection India – The story so far

INTRODUCTION • What is international trade ? International trade is exchange of capital, goods, and services across international borders or territories • Why international trade ? The fact remains that the natural resources of earth are not evenly distributed

The world of international trade

Growth in world real GDP and world merchandise exports Growth in merchandise exports

Growth in real GDP

Source: Trade Statistics, WTO (www.wto.org)

The theory of absolute advantage (Adam Smith) • A country has an absolute advantage over another in the production of a good if it can produce it with less resources than the other country. • Example

The theory of comparative advantage (David Ricardo) • A country has a comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost i.e. if it has to forgo less of other goods in order to produce it. • Example : Output /day of work Country

Vials of vaccine

No of TV sets

USA

6

3

KOREA

1

2

Theories of trade • Theorem one - Heckscher-Ohlin trade theorem : A country tends to specialize in the export of a commodity whose production requires intensive use of its abundant resources and imports a commodity whose production requires intensive use of its scarce resources

Terms of trade

It is defined as the quantity of domestic goods that must be given in exchange for one unit of imported good Measures of terms of trade : • Net barter terms of trade • Gross barter terms of trade

Tariffs , quotas and voluntary restraint agreement Tariffs : When Government imposes tax on imported goods into a country Quota : A quota sets a limit, a maximum, on the amount of a given good that can be imported VRA : When a country ask another country to volunteer to restrict its firm’s exports to the former country

Arguments for Trade Barriers • • • • • •

High Transition Cost Infant Industry Arguments The National Security Arguments The Retaliation Arguments The foreign subsidies Arguments Environment & Labour standards Arguments

HOW TO REDUCE TRADE BARRIERS • Unilateral Disarmament • Multilateral Negotiations • Regional Trading Areas

India’s Rank Factor

Rank

Factor

Rank

Population

2

Milk production

1

Area

7

Butter and ghee production

1

Arable land

2

Sugar production

2

Irrigation area

1

Merchandise exports

31

Tractors in use

2

Merchandise imports

26

Nitro fertiliser consumption

2

Service exports

22

Rice production

2

Service imports

19

Wheat production

2

GNP

12

Tobacco production

2

GNP at purchasing power parity

4

Tea production

1

INDIA’S MAJOR TRADING PARTNERS. • • • • • • • • •

USA. UK. GERMANY. FORMER USSR. JAPAN. IRAN. IRAQ. AUSTRALIA. CANADA.

EXPORTS Exports

SHARE OF UK AND USA

40% 60%

USA and UK Rest of the w orld

1950-51

Exports

23% USA and UK

77%

2000-01

USA - OUR PRINCIPAL BUYER

Rest of the w orld

IMPORTS SHARE OF USA & EUROPE

Imports

35%

• USA - PRINCIPAL SUPPLIER

USA ROW

65% 1965-66

Imports

• EU ACCOUNTS FOR 24% OF IMPORTS

8% USA

92% 2000-01

ROW

India’s trade policy • Phase one : 1951 - 1985 Protective trade policy • Phase two : 1980 - 1991 Gradual liberalization of restrictive trade policy • Phase three : 1991 onwards The phase of post economic reforms

The world Trade Organization • Founded in 1995

Regulations :  Non – discrimination  Reciprocity  Fair competition  Binding tariffs

Thank you