Amity Business School

Amity Business School

MBA 2013, 3rd Semester

INTERNATIONAL ECONOMICS AND POLICY

Amanpreet Kang

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References
1. International Economics, Francis Cherunilam (4th Edition), Mc Graw Hill 2. International Economics, BO Sodersten and Geoffrey Reed (3rd Edition), Macmillan 3. International Economics, Paul Krugman and Maurice Obstfeld (6th Edition), Pearson Education 4. Economics, Samuelson & Nordhaus (18th Edition), Tata Mc Graw Hill

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Devaluation
Deliberate reduction in value of national currency in terms of other currencies. Seeks to bring out switching of expenditure from foreign to domestic goods Countries with BoP issues Limitations: Unfavorable if other countries follow suit Domestic prices have to remain the same for devaluation to be successful Success depends on price elasticity of demand for exports and imports Unsuccessful if inadequate exportable surplus Success depends on extent of absorption
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Devaluation
J-Curve Effect Time path of the response to trade flows to devaluation Will result in initial deterioration of trade balance followed by subsequent improvement If empirically tested there will be a J shaped curve showing initial deterioration and subsequent improvement Invoicing currency exports in case invoiced domestic currency will earn lower foreign exchange; imports if invoiced in foreign currency will become even more expensive. Hence there will be deterioration till the time such contracts get exhausted Lag in getting results include: Recognition, decision, delivery, replacement, production
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Devaluation
Assumption change in exchange rate brings about proportionate change in prices. But the change may be less than proportionate, hence weakening the influence on volume of trade The extent to which changing currency values lead to changes in import and export prices is known as currency pass-through relationship. Buyers have incentive/ leverage to alter purchases only to the extent that prices of these goods change in terms of their domestic currency Empirically partial pass through with significant time lags

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Devaluation
Devaluation of 1966 Bretton Woods System consent of IMF needed if devaluation more than 10% had to be done. Was allowed by IMF if country faced BoP deficit India faced deficit as high as 60% (exports were 60% of imports) India devalued the currency 36.5% Forced by IMF to avail further assistance Problems faced: draught in 65-67 and hence reduced exportable surplus and increase in agri imports, was with Pakistan, China Devaluation of 1991 Downward adjustment of 18% in external value of rupee affected in 2 steps i.e. on July 1 and 3 in 1991 Because India was seeking loan to finance BoP deficit

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Dumping and Antidumping

Dumping selling a good in foreign market at a price lower than the domestic market or at a price lower than the price that prevails in foreign market Economics involved harm caused if the good is sold in domestic market as it leads to price reduction because of excess supply Antidumping defined by world trade rule making body. Laws by WTO Antidumping measures may be taken after an investigation by the investigating authority of the importing country has led to a determination of dumping.

Dumping takes place when a product is introduced into the market of an importing country at less than its normal value (price of the good under normal trading conditions in the home country).

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Dumping and Antidumping

Antidumping investigations - into dumping and injury are conducted by the investigating authority of the importing country in accordance with the provisions of WTOs Antidumping Code (followed by WTO now).

Antidumping duties - Duties levied on certain goods originating from (a) specific trading partner/s to offset the dumping margin.
Duty rates are generally enterprise-specific.

Antidumping price undertakings - Undertakings may be offered by exporters to avoid the imposition of antidumping duties.
They may be accepted by the investigating authority of the importing country if the exporter is prepared to revise his prices or ceases to export at dumped prices so that the injurious effect of the dumping is eliminated.
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Major Developments in the World Economy

Free trade, trade restrictions, free trade First wave, second wave, third wave of globalization and trade Agricultural, industrial, telecommunications/ technological revolution

Distribution of power politico-economic considerations

Shift from market economies to centrally planned economic systems to democracy and market mechanisms Added complexity as nations are not ready (primarily as they are not equal in terms of economic growth and distribution of wealth)

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Retreat

Wave 1 30%

Wave 2

Wave 3 10

Foreign capital stock/ developing country GDP (left axis) Merchandise exports/ world GDP (left axis) Immigrants to the U.S. by decade, millions (right axis)

20% 5 10%

0%

1870

1914

1950

1980

2000

Source: WTO 10

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First, Second & Third wave of globalization

First Wave Took place b/w 1870 and 1914 Was triggered by
Reduction in trade barriers Falling costs in transportation

Second Wave Took place b/w 1950 and 1980 Focus was on
Integration among industrialized countries through trade relations, for growth and stability

Third Wave Began in early 80s and gained momentum in late 90s Driven by
Technological advances in computing, communications and transportation

Characterized by
Massive human migration As per an estimate almost 60mn people migrated from Europe to the New World i.e. America & Australia

Characterized by
GATT came into force and WTO followed Developing countries were isolated and OECD economies surged with high growth rates.

Characterized by
Rise of the developing countries Internationalization of business corporations
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Transformation of Russia, China and East Europe

Economic systems based on resource ownership and resource allocation Russia: from communist to democracy, change in economic systems, economic and military superpower to growth economy Political, economic, social/ cultural, technological changes East Europe: countries of erstwhile USSR, transition economies, high growth rates as well as huge FDI inflows Political, economic, social/ cultural, technological changes China: Economic size, creditor to US, manufacturer for the world, criticism because of human rights, intellectual property, copyright violations
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Macroeconomic Issues
Real (goods economy) vs. financial economy (services economy) Increased importance of services in the world economy as a whole Effect of advances in technology on economies tertiarization of economies World markets linked and hence contagious effect

Poverty and poverty gap (15%, increase in % poor in developed countries)

Unemployment (labour employed, contribution to GDP) Factor movement specifically capital and effect of moving services Changing role of the developing countries, increasing burden of the developed Environment considerations and ease of doing business.
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Asian Crisis
Period in Asia before crisis Causes: Overdependence on short term foreign funds Unsustainable current account deficits Over inflated asset prices Poor regulation of the economy Fixed exchange rate regime Initial trigger: Changed investor sentiment Speculation Contagion Effect: real economy, interest rates, equity markets and competitive currency devaluations

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Debt Problems
Debt Cycle young debtor, mature debtor, young creditor to mature creditor The links between trade and debt Prudent borrowing essential for many development needs, but export capacity plays a critical role as debt must be repaid with foreign exchange.

Many developing nations engaged in: Debt renegotiation International cooperation to resolve systemic problems of debt crisis International regulatory environment, in particular WTO provisions relating to balance-of-payments issues.
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Income Distribution
NIEO Effect of privatization and globalization on income distribution LPG has it led to increase or decrease in poverty?

Poverty and income distribution

Most developing nations are facing problems related to income distribution and inclusiveness of growth

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Cartels
These are interventionist measures by the governments/ trade bodies - influences demand and supply conditions of commodities and hence price

A cartel is a monopolistic type of organisation established for the purpose of restricting the output of member firms in order to keep up the price of their output.
May involve establishing a central selling organisation. Member firms are independent entities but agree to restrict their output.
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Cartels
There may be output and investment quotas to make price control effective. Common in oligopoly market structure (relatively small number of firms) Firms try to keep out potential competitors and reduce the degree of competition between them. Are illegal in many countries. Seek to exploit customers by restricting output and investments to maintain prices at high level.
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Cartels
In India, cartels are controlled by MRTP Act, 1969. International cartels are agreements between producers located in several countries or between governments of different countries to restrict production. International cartels are sponsored or sanctioned by governments of respective nations. OPEC (Organisation of Petroleum Exporting Countries) & IATA (International Air Transport Association)

Cartels are unilateral agreements by producers to cooperate.

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