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The document discusses international trade, outlining its advantages such as optimal resource use and economic cooperation, as well as disadvantages including economic dependence and potential harm to local industries. It covers key theories of international trade, including Adam Smith’s Absolute Advantage and Ricardo’s Comparative Advantage, as well as the Balance of Payments and its components. Additionally, it examines trade policies like free trade and protectionism, detailing their respective advantages and disadvantages.

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11 views

Module 5 to Upload

The document discusses international trade, outlining its advantages such as optimal resource use and economic cooperation, as well as disadvantages including economic dependence and potential harm to local industries. It covers key theories of international trade, including Adam Smith’s Absolute Advantage and Ricardo’s Comparative Advantage, as well as the Balance of Payments and its components. Additionally, it examines trade policies like free trade and protectionism, detailing their respective advantages and disadvantages.

Uploaded by

Giri Kumar G
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Module – 5
International Trade
International
Trade

International trade is the exchange of goods


and services between countries.
International trade is an exchange involving
a good or service conducted between at
least two different countries.
Advantages of International
Trade
Optimal use of natural resources
Availability of all types of goods
Advantages of large-scale production
Stability in prices
Exchange of technical know-how and
establishment of new industries
Development of the means of transport and
communication
Ability to face natural calamities
International co-operation and
understanding
Disadvantages of International
Trade

Impediment in the Development of Home


Industries
Economic Dependence
Political Dependence
Import of Harmful Goods
Storage of Goods
Theories of International Trade
Adam Smith’s Theory of Absolute Advantage
The concept of absolute advantage was developed by
Adam Smith in The Wealth of Nations
Statement of Theory
Countries should specialize in producing the goods
and services in which they have absolute advantage
and engage in free trade with other countries to sell
their goods.
A country’s resources would therefore be utilized in
the best possible way—in the production of goods
and services in which the country has a productivity
advantage compared with other countries—and
national wealth would be maximized.
Comparative advantage Theory: David
Ricardo
According to Ricardo even in the case of a
country for which there is no absolute
advantage for both the commodities, it can
still gain from the international trade.
In this situation, the country should
specialize in the production and export of
the commodity in which its absolute
disadvantage is smaller and import the
commodity in which the its absolute
disadvantage is greater.
The Heckscher – Ohlin Theorem (H-O)
or Factor Endowment Theory
The theory was originally developed y Eli Heckscher in 1919.
Later in 1935 it was refined by Bertil Ohlin. Hence it is
known as Heckscher – Ohlin Theorem.
Heckscher – Ohlin Theorem states that a country will
produce and export that commodity whose production
requires the intensive use of nation’s relatively abundant
and cheap factor and import the commodity whose
production requires the intense use of relatively scare and
expensive factor.
In other words, relatively labor abundant country will
export the relatively labor-intensive commodity and import
the relatively capital – intensive commodity.
Balance of Payments (BoP)

Summary
Balance of Payments Overview
BOP records transactions between a country and the
rest of the world over a specific period.
It includes transactions by individuals, companies, and
government bodies.
Key components are exports, imports, financial assets,
and transfer payments like foreign aid.
There are three components of
balance of payment viz current
account, capital account, and financial
account (The official reserve account )
Current Account
The current account is used to monitor
the inflow and outflow of goods and
services between countries.
Capital Account
All capital transactions between the
countries are monitored through the capital
account. Capital transactions include the
purchase and sale of assets (non-financial)
like land and properties.
The official reserve account
The flow of funds from and to foreign
countries through various investments in real
estates, business ventures, foreign direct
investments etc is monitored through the
financial account.
Balance of Payments Deficit

A disequilibrium in the balance of


payment means its condition of Surplus
Or deficit
A Surplus in the BOP occurs when Total
Receipts exceeds Total Payments. Thus,
BOP= CREDIT>DEBIT
A Deficit in the BOP occurs when Total
Payments exceeds Total Receipts. Thus,
BOP= CREDIT<DEBIT
Causes of Disequilibrium/ Deficit In
The Bop

Cyclical fluctuations
Short fall in the exports
Economic Development
Natural Calamites
International Capital Movements
Measures To Correct Disequilibrium
in the BOP

Monetary Policy
Regulates money supply and credit in the economy.
Central Bank adjusts money supply to influence prices.
Fiscal Policy
Governs government income and expenditure.
Income is sourced from taxes and non-tax avenues.
Government adjusts expenditure based on economic
conditions.
Exchange Rate Depreciation
Reduces domestic currency value to correct BoP disequilibrium.
Makes imports costlier and exports cheaper, leading to inflation.
Devaluation
Involves lowering the official currency's exchange value.
Results in cheaper exports and costly imports, reducing the BoP
deficit.
Export Promotion
To control export promotions the country may adopt measures to
stimulate exports like:
 Export duties may be reduced to boost exports.
 Cash assistance, subsidies can be given to exporters to increase
exports.
 Goods meant for exports can be exempted from all types of taxes.
Trade policy
Trade policy can be defined as goals, rules,
standards, and regulations that are involved
in the trade between countries. The major 2
policies that the countries follow with
respect to international trade are
1. Free Trade (Free trade means free and
unfettered trade between countries)
2. Protectionism (Purposeful policy by a nation
to control imports while promoting exports.)
Advantages of Free
Trade
Increased economic growth
More dynamic business
climate
Improves Quality
Technology transfer
Expertise
More choice of goods
Foreign direct investment
Disadvantages of Free
Trade
Threat to domestic industries
Destruction of native cultures
Degradation of natural
resources
Poor working conditions
Trade Protectionism Overview
Trade protectionism shields domestic industries
from international competition.
It may boost local production temporarily but
can weaken long-term global competitiveness.
Involves regulating imports and encouraging
exports to prioritize the national economy.
Advantages of
Protectionism
Infant Industry Argument
Protect the Consumer
National Security
Higher GDP
Lower imports
More jobs
More growth opportunities
Disadvantages of
Protectionism
Economic Loss
Increase in prices (due to lack of
competition)
Economic isolation
Stagnation of technological advancements
Less Choice
Limited choices for consumers
Tariff and Non-Tariff Barriers.
Tariff
When two countries trade in the goods, a
certain amount is charged as a fee by the
country, in which goods are entered, so as to
provide revenue to the government as well
as raise the price of foreign goods, so that
the domestic companies can easily compete
with the foreign items.
This fee is in the form of tax or duty, which is
called a tariff barrier.
The tariff is paid to the customs authority of the country in
which goods are sent. It includes:
 Export Duties
 Import Duties
 Transit Duties
 Specific Duties
#ad-valorem duties
Non-Tariff
Barriers
Non-tariff barriers refer to non-tax
measures used by the country’s
government to restrict imports from
foreign countries.
It covers those restrictions which lead to
prohibition, formalities or conditions,
making the import of goods difficult and
decrease market opportunities for foreign
items.
Summary
Government Restrictions on Import
Encompass laws, policies, and practices to restrict
imports.
Include trade-distorting practices such as import
quotas, VERs, and import licensing.
Other measures: technical regulations, price
control, and foreign exchange regulations.
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