INTERNATIONAL TRADE

Presented By:VIVEK GAUR SUSHIL SHARMA DHARMESH SHARMAMBA PART- I SECTION-BNIS ACADEMY AJMER

What is International Trade ?International Trade may be defined as Trade carried on across the National Boundaries.

According to Hess and Cateora - International trade is the performance of business activities that direct the flow of goods and services to consumers or users in more than one nation.Thus , International Trade is the process of focusing on the resources of the globe and objectives of the organizations on global business opportunities and threats.

EVOLUTION

Since times immemorial.Unexpected expansion after world war II.The post 1990s has given greater fillip to international trade.The MNCs which were producing the products in their home countries and marketing them in various foreign countries before 1980s, started locating their plants and other manufacturing facilities in foreign/host countries.

Difference between Internal trade andInternational Trade: Difference in Jurisdiction. Difference in Production condition. Difference in National Resources and Geographical Conditions. Restrictions on Import and Exports. Differences in Monetary System. Differences in Market Condition.

Basis of Foreign TradeThe basis of International Trade is the difference in the resource endowment of the nation.

The important feature of distribution of the world resources is Irregularity or Imbalance.Possibly no country can claim self-sufficiency in its resource requirement or a perfectly balance supply of resources.

For example, while India has a large supply of Human Power, it lacks capital and technology , minerals and other raw materials. While ARAB countries are rich in oil , they are deficient in oil technology and man power.

WHY GO INTERNATIONAL?

To achieve higher Rate of Profits.Expanding the production Capacities beyond the Demand of the Domestic Country.Serve Competition in the Home Country.Limited Home Market.Political Stability vs. Political Instability.Availability of Technology and Managerial Competence.High Cost of Transportation.Nearness to Raw Materials.Availability of Quality Human Resources at Low Cost.To Increase Market Share.

Theories Of INTERNATIONAL TRADEAdam Smiths Theory of Absolute Differences in Cost.RICARDIAN Theory of Comparative Advantage.HECKSCHER-OHLIN Theory Of Trade.

Adam Smiths Theory of Absolute Differences in CostIn 1776, Adam Smith proposed the Theory of Absolute Advantage. If a country can produce a good cheaper than other countries, it would have absolute advantage in the production of that good. According to this theory, countries should produce and export surpluses of goods in which it has absolute advantage and buy whatever else they need from other countries. Adam Smith believed that this would lead to specialization and the resultant increase in productivity.

For example , let us suppose that India produces both rice and jute. She will have to sacrifice 2 quintals of rice for 1 quintal of jute. If India specializes in rice production, she can get 1.67 quintals of jute from Bangladesh in exchange of one quintal of rice. Similarly, in their domestic trade, people in Bangladesh get only 0.4 quintals of rice in exchange for 1 quintal of jute whereas they can import 0.67 quintal of rice against 1 quintal of jute.These gains to both the countries will be available only if India specializes in rice production and Bangladesh in jute production and there is trade between them.Per Quintal Labour Cost(man-hour)

COUNTRYRICEJUTEIndia3060Bangladesh5020

RICARDIAN Theory of Comparative AdvantageIn 1817, David Ricardo, an English economist, came out with the Theory of Comparative Advantage. Ricardo believed that two countries would trade to increase their national welfare provided each has a comparative advantage in the production of one good over the other. In other words, two countries would trade even when one country has absolute advantage in all products or another country does not have absolute advantage in any products. According to this theory, each country should produce that good, in which it has a comparative advantage. A country will be better off by concentrating on the production of goods in which it has the lower relative labour costs, or higher relative labour productivity.

Per Quintal Labour Cost(man-hour)(i) In India : 1 Qtl. Of rice =30 60 =0.5 Qtl. Of Jute 1 Qtl. Of jute =60 30 = 2 Qtls. Of Rice(ii) In Bangladesh : 1 Qtl. Of rice =5080 =0.625 Qtl. Of jute 1 Qtl. Of jute = 80 50 =1.6 Qtls. Of rice

COUNTRYRICEJUTEIndia3060Bangladesh5080

HECKSCHER-OHLIN Theory Of Trade.According to this theory, there are two types of products labor intensive and capital intensive. Two countries operating at the same level of efficiency can, and do, benefit from trade due to the differences in their factor endowments. The labor-rich country is likely to produce labor-intensive goods, while the country rich in capital is likely to produce capital-intensive goods. The two countries will then trade in these goods and reap the benefits of international trade.

BARRIERS TO INTERNATIONAL TRADESometimes, in order to protect domestic industries from foreign competitors, governments put up barriers to the international trade. These barriers may be in the form of tariff and non-tariff barriers. TariffsA tariff is a blatant way of making imports expensive. Tariffs take three common forms: Ad valorem duties, specific duties and compound duties. An ad valorem duty is collected as a percentage of the value of the product. A specific duty is a fixed amount of money per unit of good traded regardless of the value of the individual unit. Compound duties are those which combine both specific and ad valorem duties. When a tariff is introduced on the import of a good for which there are no domestic producers, it can be termed a pure revenue tariff. A prohibitive tariff is one that is so high that it effectively stops all imports.

QuotasQuotas are the most popular form of non tariff barriers (NTBs). Import quotas are aimed at reducing the quantity of imports in order to protect the interests of domestic producers or to conserve foreign exchange. Export quotas are meant to protect the economy from the excessive exports of specified goods. Sometimes export quotas are imposed as a result of agreement between trading nations. Quotas that completely eliminate trade in certain products are called embargoes.SubsidiesSubsidies are provided to domestic producers to make their products globally competitive. Increased foreign exchange earnings and the subsequent tax revenues are favourable for the government. But the subsidies are given out of taxes on individuals. Non-tariff barriers are rules, laws, or regulations, which can block or delay an import. The most common non-tariff barriers are quotas, subsidies, licensing requirements , etc.Non Tariff Barriers

LicensingLicensing requires importers and exporters to obtain licenses from the authorities to import or export certain goods. CorruptionCorruption has become an international phenomenon. The higher rate bribes and kickbacks discourage the foreign investors to expand their operations.Entry Requirements:Domestic government impose entry requirement s to multinationals. For example, an MNC can enter Ethiopia only through a joint venture with a domestic company.

ECONOMIC INTEGRATIONAn important phenomenon that took place as trade among nations grew, was that of countries of the same region coming together to form close trading ties.

Depending on the degree of co-operation among members trading blocs may be divided as follows:1). Free Trade Area : If a group of countries agree to abolish all trade restrictions and barriers among or charge low rates of tariffs in carrying out international trade, such group is called as Free Trade Area .2). Customs Union:

In a customs union, there are no internal trade barriers among the member nations. These nations adopt a uniform commercial policiy of barriers for non-member countries.

3). Economic Union: The members of an economic union have well-coordinated economic policies. There is a unified Central Bank and a common currency. The fiscal as well as monetary policies are well co-ordinated, some of them being decided upon by the Central Bank. Member countries even have the same policies on agriculture, industry, research, welfare and regional development. Countries forming an economic union have to give up a lot of economic and social freedom in favor of the central decision-making authority of union.

International trade plays a major role in deciding the economic and financial strength of a country. Countries can exploit their natural resources and gain competitive advantage through trade. They can export anything they have in surplus and at the same time import what they lack. International trade enables a country to obtain the benefits of specialization. It results in an increase in the rate of economic growth of both the countries involved in trade as both can use resources more productively. Conclusion