Download Foreign Trade And Policy - Notes - Finance and more Study notes Foreign Trade in PDF only on Docsity!
FOREIGN TRADE AND POLICY
OBJECTIVES
To give broader understanding of the foreign trade and it‘s policy. This unit given students an understanding of the aspects that how the various theories explain the development of foreign trade between the nations.
The main objectives of this unit are:
- To analysis similarities and differences between internal and international trade.
- To provide an overview of various theories in foreign trade.
- To evaluate the terms of trade between the nations.
- To analysis the concept of Balance of Payment and Adjustment Mechanism in Balance of Payment.
STRUCTURE
- Introduction
- Meaning of International Trade
- Similarities and Differences between Internal and International Trade
- Gains from International Trade
- Adam Smith‘s Theory of Absolute Differences in Cost
- David Ricardo‘s Theory of Comparative Cost
- Haberler‘s Theory of Opportunity Cost in International Trade 6.7. Heckscher-Ohlin Theory or Modern Theory of International Trade
- Terms of Trade
- International Trade in Services
Table-1 shows the growth of world merchandise exports. The table indicates that during
1950-60, the value of world exports more than double. In the next decade it increased nearly 2 ½ times. During the 1970s, the value of the world exports increased by about 5 ½ times. Worldwide inflation, particularly the successive hikes in oil prices, significantly contributed to this unprecedented sharp increase in the value of world exports. During 1980-90, the value of world exports increased by 80 per cent. Between 1990 and 2000, it increased by over 90 per cent. In fact, exports of developing countries have been increasing faster than those of the developed.
Historically, trade growth consistently outpaced overall economic growth for at least 250 years, except for a comparatively brief period from 1913 to 1950 characterised by heavy protectionism which was almost a by-product of the two World Wars. Between 1720 and 1913, trade growth was about one-and-a-half times the GDP growth. Slow GDP growth between 1913 and 1950 - the period with the lowest average economic growth rate since 1820 – was accompanied by even slower trade growth, as war and protectionism undermined international trade. This period was also plagued by the great depression.
The Second half of the twentieth century has seen trade expand substantially faster than output. In the last two decades of the twentieth century, world trade has grown twice as fast as world real GDP (6 per cent versus 3 per cent).
That trade has been growing faster than world output means that a growing proportion of the national output is traded internationally. The foreign trade-GDP ratio (i.e., the value of the exports expressed as a percentage of the
1.1 Meanings of International Trade:-
Internal trade or domestic trade refers to the exchange of goods and services between the buyers and sellers within the political boundaries of the same country. It may be carried on either as a wholesale trade or a retail trade. External trade or international trade, on the other hand, is the trade between different countries i.e. it extends beyond the political boundaries of the countries engaged in it. In other words, it is the trade between two countries. Hence, it is also known as foreign trade.
The need for international trade was not so compelling in those days. Trading with nations beyond the seas was not, however unknown to ancient Indians. Evidences about our international trade are found in the ancient literatures of our country particularly in our Sangam Literatures. There was a regular ―Trade Route across the seas to the distant Jawa and Sumatra islands in the east and up to the Arabian Peninsula in the west. But the volume of such trade was insignificant and continued to remain so tight through the middle ages and up to the advent of the British rule in India. It is only after the establishment of the British rule that India‘s foreign trade took a definite shape.
International trade on large scale has become a phenomenon of the 20 th^ century
especially after the Second World War. There is practically no country today, which is functioning as a closed system. Even socialist countries like Russia and China are now taking
concrete steps to capture foreign markets for the products produced in their country. International trade, thus, has become as essential ingredient of the normal economic life of any country. In terms of economic development, international trade is a potentially effective engine of growth.
However, there are certain special features, which differentiate internal
trade from international trade. They are explained as following manner:
- Demand and Supply: Demand and supply cannot work out their full effects where foreign trade is concerned. Where as such factors can work out their full efforts in the case of internal trade.
- Physical Obstacle to Commerce: Where international trade is carried on, a far greater degree of inequality between conditions of production in different countries is necessary to stimulate trade when the countries are widely separated than when they are adjoining.
- Artificial Barriers to Trade: The natural difficulties may be increased by artificial barriers to trade, either through prohibitive laws as in war time of through customs duties or protective tariffs in the context of international trade.
- Obstacles to Migration of Labour: Serious obstacles to the migration of labour from country to country such as language differences are often prohibitive, while feelings of patriotism help to keep men in their own country. According to Briggs ―For every man who will so change his habits as to go to work abroad, there are a hundred who will move from district to district within a country. Even, though a relatively small migration is necessary to equalise the conditions in two countries neighbouring states may persist for generations is standards of life which are markedly different.
- (^) Obstacles of Mobility of Capital: Men who refuse to leave their own land may invest capital abroad, but a home investment is usually preferred to a foreign. A foreign loan must offer a much higher rate of interest than a home loan. Not only is there a real risk of loss of interest
- Preference : Preference for home and the prejudice against foreigners remain as one of the major factors that would explain as to why the rates of earning of the different of equal efficiency would not be equalized between different countries.
1.3 Gains from International Trade:-
In this section the various gains of international trade can be listed as
follows:
- International Specialisation: International trade enables to specialize in the production of those goods in which each country has special advantages. Each country or region is endowed with certain special facilities in the form of natural resources, capital and equipment and efficiency of human powder. Some countries are rich in minerals and in hydroelectric power. Some are blessed with extensive land but have very little population. Some others possess advanced techniques of manufacturing, a very efficient and hard working populations and plenty of capital equipment. In the absence of trade, every country will be forced to produce all types of goods, even those for which they have no facilities for production, International trade, on the other hand, will enable each country to specialize in the commodities in which it has absolute or comparative advantages. Thus, international trade brings about international specialisation and also all other advantages associated with such specialization.
- Increased Production and Higher Standard of Living: It is well known that specialization leads to the following:
- Best utilization of the available resources.
- Concentration on the production of those goods in which there are advantages.
- Saving of time and energy in production and perfecting of skills in production.
All these indicate one basis advantage viz., increased production. Increased production will also mean higher standard of living for people in both the countries. Thus, due to international trade there is a gain for both the countries.
- Availability of Scarce Materials: International trade is the only method by which a country can supplement its storage of resources or certain essential materials. There is no country in the world including the U.S.A and the U.K, which has all the resources it requires. At the same time, there are some countries like Indonesia, which have been blessed by nature with some rare materials like rubber and tin. International trade ensures equal access to raw materials for all countries.
- Equalisation of Prices between Countries: An important gain of international trade or the effect of it is the tendency of internationally traded goods to have the same price everywhere. A commodity is cheap or costly depending upon its supply. It will be cheap in a country where it is produced with excessive supply of some essential factors; it will be expensive in that country where it cannot be produced or where it can be produced only at a higher cost. Through international trade, supply is increased in the importing country and thereby the price is reduced. In this way there is a tendency for equalisation of prices of all internationally traded goods.
- Evolution of Modern Industrial Society: The modern industrial society is based on extensive specialization and large-scale production. Both are based on the size of the market. The larger and more extensive the market for the products, the greater is the degree of specialization and large-scale production. It is for this reason Adam smith started that the division of the
labour is limited by the extent of the market. It is through international trade that the markets for products have been expanded to cover the entire world. Hence it is perfectly true to say that the modern industrial society could not have been developed in the absence of international trade.
