6 - 8 International Trade Pattern and Balance of Payments

International Trade Pattern and Balance of payments

World TradeIndia’s Foreign TradeBalance of Payments

Case – Developing Countries Trade Dependence and Export Growth Opportunities

Friday, April 7, 2023 1Dr. S. Jain

Dr. S. Jain 2

Learning Objectives

• To explain the significance of international trade

patterns

• To provide an overview of world trade

• To evaluate India’s international trade

• To outline the concept of terms of trade

• To explicate balance of payments

• To highlight key issues in India’s foreign trade

Friday, April 7, 2023

Dr. S. Jain 3

Significance of International Trade Patterns

Patterns of international trade facilitate in developing an overview about the types of products traded and the countries involved in trade. The shifts in trade patterns and their causes provide insights into the upheavals in the economic environment and trade policies of nations.

Macroeconomic factors in the trading countries as well as the overall world economic environment influence the international flow of goods and services. Thus, past international trade patterns reveal vital information about macro economic environment and its changes.


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World Trade: An Overview

The world merchandise exports grew from US$ 59 billion in

1948 to US$ 13.57 trillion in 2007, and imports grew from US$

62 billion to US$ 13.94 trillion during the same period.

The exports of services grew more rapidly compared to

merchandise exports from US$ 390.8 billion in 1980 to US$ 3.26

trillion in 2007 whereas during the same period, imports rose

from US$ 431.8 billion in 1980 to US$ 3.06 trillion in 2007.


Dr. S. JainFriday, April 7, 2023 5

Dr. S. JainFriday, April 7, 2023 6

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Composition of World Trade (2007)

Commercial Services19.4%

Merchandise80.6%


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Direction of World Trade

Direction of Trade: The statistical analysis of the set of a country’s trading partners and their significance in trade.

Direction of Exports: The set of countries where the goods are exported and their significance on a country’s exports.

Direction of Imports: The set of countries from where the goods are imported and their significance on a country’s imports.


Dr. S. Jain 9

Direction of World Exports

0

2000000

4000000

6000000

8000000

10000000

12000000

14000000

F.O

.B.

US

$ M

illi

on

19

80

19

90

20

00

20

03

20

04

20

05

20

06

20

07

Years

Developed Economies Developing Economies Economies in Transition


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Direction of World Merchandise Exports (2007)

North America13.7%

Asia28.0%

Europe42.5%

Africa3.1%

South and Central America

3.7%

Middle East5.3%

CIS3.7%


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Direction of World Merchandise Imports(2007)

Middle East3.3%

South and Central America

3.3%

CIS2.7% Africa

2.5%

North America19.4%

Asia25.3%

Europe43.4%


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Composition of World Merchandise Trade

Composition of Trade: The statistical analysis of a

country’s product groups in its international trade.

Composition of Exports: The analysis carried out for

product groups exported.

Composition of Imports: The analysis carried out for

product groups imported.


Dr. S. Jain 13

Patterns of World Merchandise Exports

0%

20%

40%

60%

80%

100%

Per

cent

age

1965

1970

1980

1995

2000

2002

2005

2006

Years

Food Items Agricultural raw materials Ores, metals and precious stones Fuels Manufactured goods


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Composition of World Merchandise Exports (2006)

Fuels17.2%

Textiles2.1%

Clothing3.0%

Automotive products9.8%

Agricultural Products9.2%

Other machinery14.0%

Other semi Manufactures7.7%

Pharmaceuticals3.0%

Office & telecom equipment14.1%

Ores & minerals1.9%

Iron & Steel3.6%

Non-ferrous metals3.0%

Scientific and controlling instruments

2.3%

Other chemicals9.1%


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World Commercial Services Trade

The world commercial services exports rose by 21 per cent to US$ 3.26 trillion in 2007. Since the commercial services data are derived from BoP statistics, it does not include the sales of majority-owned foreign affiliates abroad.

‘Other commercial services’ that include software, education, health financial services, etc, has been the fastest growing category at 12 per cent growth in the world exports of commercial services trade.


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South & Central America

2.8%

Africa2.6% Middle East

2.4%

CIS2.0%

North America16.4%

Asia22.9%

Europe51.0%

Direction of World Commercial Services Exports (2007)


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Direction of World Commercial Services Imports (2007)

South & Central America3.2%

Middle East4.1%

Africa3.2%

CIS2.9%

North America14.4%

Asia25.4%

Europe46.8%


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Composition of World Exports of Commercial Services (2007)

Other Commercial Services50.8%

Travel26.5%

Transport22.8%


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India’s Foreign Trade: An Overview

India’s foreign trade was largely determined by the strategic needs of the British colonial powers prior to its independence in 1947. Like other colonies, India too was a supplier of raw materials and agricultural commodities to Britain and other industrial countries and it used to import the manufactured goods from Britain. The dependence of colonial India on Britain for manufactured goods hindered the process of industrialization and obliterated the indigenous handicraft and cottage industries.


Friday, April 7, 2023 20Dr. S. Jain

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Composition of India's External Trade (2006-07)

Merchandise, 72.6%

Services, 27.4%


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Direction of India's Trade : Exports

0

20000

40000

60000

80000

100000

120000

140000

US$

(M

illio

n)

1987

-88

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2004

-05

2005

-06

2006

-07*

Years

OECD countries OPEC Eastern Europe Developing countries Others / unspecified


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Direction of India's Trade : Imports

0.0

20000.0

40000.0

60000.0

80000.0

100000.0

120000.0

140000.0

160000.0

180000.0

200000.0

US

$ M

illio

n

1987

-88

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2004

-05

2005

-06

2006

-07*

Years

OECD countries OPEC Eastern Europe Developing countries Others / unspecified


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Composition of India's Export

15.2

2.5

80.7

0.1

1.5

13.52.6

78.0

4.21.7

13.5

2.9

76.1

4.82.7

12.8

3.8

76.6

4.92.0

10.55.5

74.3

8.51.2

10.25.2

72.0

11.51.1

10.34.8

68.6

15.01.3

9.34.0

67.4

17.9

1.4

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Per

cent

age

1999

-200

0

2000

-01

2001

-02

2002

-03

2004

-05

2005

-06

2006

-07

2007

-08*

Years

Agriculture &allied products Ores & Minerals Manufactured Goods Crude & Petroleum Products Others & Unclassified items


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Composition of India's Imports

5.8

27.4

2.80.9

12.0

32.8

18.3

3.7

33.2

1.50.9

11.0

29.8

19.9

4.5

29.5

1.30.9

11.4

30.3

22.1

4.6

30.7

1.00.7

12.1

28.2

22.7

3.5

29.6

1.10.7

13.0

48.3

3.8

2.5

32.1

1.30.6

15.8

43.7

4.0

2.9

33.2

1.60.6

15.4

43.8

2.5

2.2

33.6

1.90.6

13.2

40.4

8.1

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20

30

40

50

60

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01

-02

20

02

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20

04

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20

05

-06

20

06

-07

20

07

-08

*

Years

Food and allied products Fuel Fertilizers Paper board, manufactures & newsprint Capital goods Others Unclassified items


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India’s Services Trade

The services sector in India has grown remarkably and account

for over 55 per cent of India’s GDP making it the most

significant component of the country’s economy. India’s

services exports have significantly grown from a meager US$

295 million in 1970–71 to US$ 76.2 billion in 2006–07 with a

growth of 32.1 per cent over the previous year.


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Composition of India’s Service Exports (2007-08)**

Miscellaneous*, 28.1

Travel, 12.9

Transportation, 10.8

Insurance, 1.8

G.N.I.E., 0.4

Software, 46.0

** Provisional, * Excluding Software Services

G.N.I.E- Government Not Included Elsewhere


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Gains from International Trade

Trade indices are widely-used instruments to measure

the benefits derived by a nation from international trade.

These facilitate in assessing the impact of trade volume

and / or unit value realization on a country’s gains from

trade.


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Terms of Trade

The terms of trade is a measure of relative changes in export and import prices of a nation. It reflects the quantity of imports that a given quantity of exports can buy.

The terms of trade refers to ratio of the price of its export commodity to the price of its import commodity.

In case of a hypothetical assumption of a two-nation world, the export of a country equals its trade partner’s imports wherein the terms of trade of a country are equal to the inverse of the terms of trade of its trade partner.


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Types of Terms of Trade

Net terms of trade: It implies unit value index of exports expressed as a percentage of unit value index of imports.

Net value terms of trade:

(N) = Unit value index of exports (Px) Unit value index of imports (Pm)

X 100


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Gross terms of trade: It implies volume index of imports expressed as a percentage of volume index of exports

Gross terms of trade = Volume index of imports (Qm) Volume index of exports (Qx)

X 100


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Income terms of trade: It implies the product of net terms of trade and volume index of exports expressed as a percentage. It reflects a nation’s capacity to import.

Income Terms of Trade (I) =

Net terms of trade (Px/Pm)*volume index of exports( Qx) *100


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• Single factorial terms of trade: Net barter terms of

trade adjusted for changes in productivity of exports

• Double factorial terms of trade: Net barter terms of

trade adjusted for changes both in productivity of

exports and imports


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YearYear Terms of TradeTerms of Trade

Developed Developed

EconomiesEconomiesDeveloping Developing

EconomiesEconomies

19801980 9797 117117

19901990 103103 101101

19951995 105105 102102

20012001 101101 9898

20032003 103103 9898

20052005 102102 105105

20062006 100100 107107

Trade Indices : Developed vs. Developing Economies (Base Year 2000=100)


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Reasons for Deterioration in Terms of Trade for Developing Countries

•International demand for export of manufactured goods by developed countries tends to increase at a much faster rate compared to demand for agricultural commodities and primary goods due to their higher income elasticity of demand.

•Any productivity gain in manufactured goods by developed countries is generally passed on to its workers in the form of higher wages and income. Whereas, any such gains in productivity of agricultural commodities and primary products by developing countries are reflected in price decline. This leads to a consistent deterioration in the collective terms of trade of developing countries.


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India’s Terms of Trade

India’s Unit Value Index for imports rose from 35.3 in 1970–71 to 608 in 2006–07 compared to corresponding rise in Unit Value Index of exports from 45 to 863 during the period.

It implies that the rise in the value of imports grew much more than the quantity of goods imported which added to India’s financial burden.

Factors responsible for this include relative inelasticity of India’s import demands for petroleum products, foodgrains, fertilizers, oilseeds, and capital goods constrained India in making any substantial cuts on imports.


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YearsYears Terms of tradeTerms of trade

GrossGross NetNet Income Income

1970-711970-71 113.9113.9 127.4127.4 75.275.2

1978-791978-79 100.0100.0 100.0100.0 100.0100.0

1980-811980-81 127.6127.6 80.880.8 87.387.3

1990-911990-91 122.5122.5 109.3109.3 212.2212.2

2000-012000-01 122.1122.1 128.1128.1 732.0732.0

2003-042003-04 126.9126.9 123.4123.4 943.5943.5

2004-052004-05 124.0124.0 110.0110.0 991.0991.0

2005-062005-06 164.0164.0 135.0135.0 1357.01357.0

2006-072006-07 176.0176.0 142.0142.0 1653.01653.0

Trade Indices of India’s Foreign Trade

(Base: 1978-79=100)


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Balance of Payments (BoP)

The summary of all its economic transactions that have taken place between the country’s residents and the residents of other countries during a specified time period.

It is used as an indicator of a country’s political and economic stability. A consistently positive BoP reflects more foreign investment and money coming into the country and not much of its currency being exported. On the other hand, adverse or negative BoP indicates more outflows of money compared to inflows.


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Balance of TradeThe difference between the value of exports and imports is termed as Balance of Trade.

India had negative balance of trade over the years except during two financial years, i.e,. a positive trade balance of US$ 134 million 1972–73 and US$ 77 million in 1996–97.

There has been a steep rise in trade deficit from US$ 5.98 billion in 2000–01 to US$ 80.39 billion in 2007–08 mainly due to the steep rise in its unit value prices of India’s import products, especially the petroleum products and fertilizers besides domestic demand


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India’s Trade Balance

-70000

-60000

-50000

-40000

-30000

-20000

-10000

0

10000

Years

US

$ (

Mil

lio

n)


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Constraints in India’s Exports Growth

• Adoption of ‘import substitution’ rather than ‘export promotion’ strategy

• Overprotection to Indian industry from external competition

• High import barriers

• High import tariff

• Inadequate infrastructure

• Complexity of trade procedures


Documents

6 - 8 International Trade Pattern and Balance of Payments