SCHOOL OF COMMERCE

SOC, DAVV INDORE

Subject- International Trade & Economic Development of a

Country
MBA X SEM
2019-2020

Submitted To Submitted By

Dr. Bhoomi Sitlani Ankush Sagore

Roll no. 1510
 International Trade & Economic Development of a Country

INTRODUCTION

International trade refers to the trade across national boundaries. The

growing volumes of international trade and lowering of trade barriers have
triggered debate and analysis on the impact of international trade on economic
growth of countries. Historical validation has revealed that internationally active
countries tend to be more productive than countries which only produce for
the domestic market. (Atoyebi et al, 2012). The relationship between
international trade and economic growth of a country can be either positive or
negative, what determines the nature of the relationship is the economic
frameworks put in place to manage the trade. Predominantly in our world
today, there is hardly a country that can survive on its own without engaging in
trade relationships with other countries. The classical and neo-classical
economists have placed much credence of international trade as an engine of
economic growth. (Yemi, 2014). The explicit goals of the economic reform
strategy in India after 1991 with respect to the external sector were to create a
major shift in the momentum of export growth and to attract very large
inflows of foreign capital in the form of export oriented FDI. (Jayati, 2006). It is on
this note that the study intends to examine the relationship between
international trade and economic growth of India.

Trade Economy
India is noted to have had
a great tradition of foreign
trade dating back to the
Roman Empire which is said
to have feared the drain of its
wealth to India in the form of
the wealth-of-wealth, namely,
gold, and the English had
turned a perceivably brilliant
trade
economy of the Nation into
a poor dependent one (Nehru,
Jawaharlal. 1945). For, the
English were also faced with
the same bitter prospects as
the Romans. The story of
deterioration of India’s
foreign trade, during the
British regime, is a long
story of
colonialization of the Indian
economy and its trade, as a
result of which the Nation had
to
open its foreign trade account
with a minus balance at the
time of Independence, which
continues even today in an
aggravated form. Interestingly,
not much prospects were
foreseen for the export trade of
the country in the first planning
exercise carried out by the
Congress party in 1936 under
Pandit Jawaharlal Nehru, in
view of the first claims of
domestic consumption over
the export needs (Nehru,
Jawaharlal.1945) , which
conflict yet
seems to continue by and
large for exports, which stand
for trade development
(Agrawal,
Raj.2008), for which the
internal muscle of the economy
needs to be developed, and in
this
respect it is to be seen whether
the ‘faster and more inclusive’
growth of the Eleventh Five
Year Plan has made any
difference to the development
of trade. Prima facie, the
economic
crisis which had hit the US, EU,
Japan and others (2007) is
bound to hit India’s export trade
and create a larger trade
disequilibrium.
Trade Economy
 India is noted to have had
a great tradition of foreign
trade dating back to the
Roman Empire which is said
to have feared the drain of its
wealth to India in the form of
the wealth-of-wealth, namely,
gold, and the English had
turned a perceivably brilliant
trade
economy of the Nation into
a poor dependent one (Nehru,
Jawaharlal. 1945). For, the
English were also faced with
the same bitter prospects as
the Romans. The story of
deterioration of India’s
foreign trade, during the
British regime, is a long
story of
colonialization of the Indian
economy and its trade, as a
result of which the Nation had
to
open its foreign trade account
with a minus balance at the
time of Independence, which
continues even today in an
aggravated form. Interestingly,
not much prospects were
foreseen for the export trade of
the country in the first planning
exercise carried out by the
Congress party in 1936 under
Pandit Jawaharlal Nehru, in
view of the first claims of
domestic consumption over
the export needs (Nehru,
Jawaharlal.1945) , which
conflict yet
seems to continue by and
large for exports, which stand
for trade development
(Agrawal,
Raj.2008), for which the
internal muscle of the economy
needs to be developed, and in
this
respect it is to be seen whether
the ‘faster and more inclusive’
growth of the Eleventh Five
Year Plan has made any
difference to the development
of trade. Prima facie, the
economic
crisis which had hit the US, EU,
Japan and others (2007) is
bound to hit India’s export trade
and create a larger trade
disequilibrium.
Trade Economy
India is noted to have had
a great tradition of foreign
trade dating back to the
Roman Empire which is said
to have feared the drain of its
wealth to India in the form of
the wealth-of-wealth, namely,
gold, and the English had
turned a perceivably brilliant
trade
economy of the Nation into
a poor dependent one (Nehru,
Jawaharlal. 1945). For, the
English were also faced with
the same bitter prospects as
the Romans. The story of
deterioration of India’s
foreign trade, during the
British regime, is a long
story of
colonialization of the Indian
economy and its trade, as a
result of which the Nation had
to
open its foreign trade account
with a minus balance at the
time of Independence, which
continues even today in an
aggravated form. Interestingly,
not much prospects were
foreseen for the export trade of
the country in the first planning
exercise carried out by the
Congress party in 1936 under
Pandit Jawaharlal Nehru, in
view of the first claims of
domestic consumption over
the export needs (Nehru,
Jawaharlal.1945) , which
conflict yet
seems to continue by and
large for exports, which stand
for trade development
(Agrawal,
Raj.2008), for which the
internal muscle of the economy
needs to be developed, and in
this
respect it is to be seen whether
the ‘faster and more inclusive’
growth of the Eleventh Five
Year Plan has made any
difference to the development
of trade. Prima facie, the
economic
crisis which had hit the US, EU,
Japan and others (2007) is
bound to hit India’s export trade
and create a larger trade
disequilibrium.
Trade Economy
India is noted to have had
a great tradition of foreign
trade dating back to the
Roman Empire which is said
to have feared the drain of its
wealth to India in the form of
the wealth-of-wealth, namely,
gold, and the English had
turned a perceivably brilliant
trade
economy of the Nation into
a poor dependent one (Nehru,
Jawaharlal. 1945). For, the
English were also faced with
the same bitter prospects as
the Romans. The story of
deterioration of India’s
foreign trade, during the
British regime, is a long
story of
colonialization of the Indian
economy and its trade, as a
result of which the Nation had
to
open its foreign trade account
with a minus balance at the
time of Independence, which
continues even today in an
aggravated form. Interestingly,
not much prospects were
foreseen for the export trade of
the country in the first planning
exercise carried out by the
Congress party in 1936 under
Pandit Jawaharlal Nehru, in
view of the first claims of
domestic consumption over
the export needs (Nehru,
Jawaharlal.1945) , which
conflict yet
seems to continue by and
large for exports, which stand
for trade development
(Agrawal,
Raj.2008), for which the
internal muscle of the economy
needs to be developed, and in
this
respect it is to be seen whether
the ‘faster and more inclusive’
growth of the Eleventh Five
Year Plan has made any
difference to the development
of trade. Prima facie, the
economic
crisis which had hit the US, EU,
Japan and others (2007) is
bound to hit India’s export trade
and create a larger trade
disequilibrium.
Trade Economy
 India is noted to have had
a great tradition of foreign
trade dating back to the
Roman Empire which is said
to have feared the drain of its
wealth to India in the form of
the wealth-of-wealth, namely,
gold, and the English had
turned a perceivably brilliant
trade
economy of the Nation into
a poor dependent one (Nehru,
Jawaharlal. 1945). For, the
English were also faced with
the same bitter prospects as
the Romans. The story of
deterioration of India’s
foreign trade, during the
British regime, is a long
story of
colonialization of the Indian
economy and its trade, as a
result of which the Nation had
to
open its foreign trade account
with a minus balance at the
time of Independence, which
continues even today in an
aggravated form. Interestingly,
not much prospects were
foreseen for the export trade of
the country in the first planning
exercise carried out by the
Congress party in 1936 under
Pandit Jawaharlal Nehru, in
view of the first claims of
domestic consumption over
the export needs (Nehru,
Jawaharlal.1945) , which
conflict yet
seems to continue by and
large for exports, which stand
for trade development
(Agrawal,
Raj.2008), for which the
internal muscle of the economy
needs to be developed, and in
this
respect it is to be seen whether
the ‘faster and more inclusive’
growth of the Eleventh Five
Year Plan has made any
difference to the development
of trade. Prima facie, the
economic
crisis which had hit the US, EU,
Japan and others (2007) is
bound to hit India’s export trade
and create a larger trade
disequilibrium.
Trade Economy
India is noted to have had
a great tradition of foreign
trade dating back to the
Roman Empire which is said
to have feared the drain of its
wealth to India in the form of
the wealth-of-wealth, namely,
gold, and the English had
turned a perceivably brilliant
trade
economy of the Nation into
a poor dependent one (Nehru,
Jawaharlal. 1945). For, the
English were also faced with
the same bitter prospects as
the Romans. The story of
deterioration of India’s
foreign trade, during the
British regime, is a long
story of
colonialization of the Indian
economy and its trade, as a
result of which the Nation had
to
open its foreign trade account
with a minus balance at the
time of Independence, which
continues even today in an
aggravated form. Interestingly,
not much prospects were
foreseen for the export trade of
the country in the first planning
exercise carried out by the
Congress party in 1936 under
Pandit Jawaharlal Nehru, in
view of the first claims of
domestic consumption over
the export needs (Nehru,
Jawaharlal.1945) , which
conflict yet
seems to continue by and
large for exports, which stand
for trade development
(Agrawal,
Raj.2008), for which the
internal muscle of the economy
needs to be developed, and in
this
respect it is to be seen whether
the ‘faster and more inclusive’
growth of the Eleventh Five
Year Plan has made any
difference to the development
of trade. Prima facie, the
economic
crisis which had hit the US, EU,
Japan and others (2007) is
bound to hit India’s export trade
and create a larger trade
disequilibrium
OBJECTIVE
The objectives of the study are to:

1. Examine the impact of international trade on economic growth of India.

2. To determine the relationship between the components of

international trade and
economic growth of India.

3. To identify the causal relationship between the components of

international trade and economic growth of India.
Beneficial Effect.

Benefits for International Specialization:

International trade enables a country to enjoy the advantages of international
specialization according to comparative costs.

Every country specializes and exports those commodities which it can produce
cheaper in exchange for what others can provide at a lower cost.

When a country specializes according to its comparative advantage, it gains an

increase in real income and consequent rise in the standard of living of its people
J.S. Mill emphasized this aspect of international trade and maintained that trade
according to comparative advantage, results in a ‘more efficient employment of
productive forces of the world’ and this may be considered as the ‘direct
economical advantage of foreign trade’.

Therefore, international trade by enabling better and more efficient utilization of

the resources of a country increases its real national income and hence has a
growth-promoting effect.

Widening of Market and Raising Productivity:

It is argued that the productivity gains arising out of extension of market is a
consequence of foreign trade. Improvements in productivity result from greater
division of labour, a higher degree of mechanisation and greater possibility of
innovation.

It is said that foreign trade, by widening the extent of the market and the scope of
the division of labour, permits a greater use of machinery, stimulates innovations,
overcomes technical indivisibilities, raises the productivity of labour, and generally
enables the trading country to enjoy increasing returns and economic
development. J. S. Mill has categorised them as indirect dynamic benefits arising
out of foreign trade.

Thus foreign trade, by extending the size of the market, exercises a dynamic
influence on the economy. In turn, it helps to raise the production at higher trade.
As a result, country enjoys the benefits of external and internal economies of
scale.
Helpful for High Growth Potential:
Foreign trade can also help in the development of a country enabling it to
exchange domestic goods saving low growth potential for foreign goods with high
growth potential.

Prof. J.R. Hicks emphasising this growth promoting aspect of international trade
observes that trade offers an opportunity for the exchange of goods with less
growth potential for goods with more growth potential, thereby quickening the
progress that results from a given effort on the saving sides.

It provides an opportunity for importing capital goods and materials required for
development purposes. The import of machinery, transport equipment, vehicles,
power generation equipment, road building machinery, medicines, chemicals and
other goods with high growth potential provides greater benefits to the
developing countries.

Educative Effect of Trade:

It is maintained that international trade can serve as a vehicle for the
dissemination of technological knowledge. A deficiency of knowledge can be a
biggest handicap in the development of a country and this deficiency can be
effectively removed through contact with more advanced economies i.e. by
making possible through foreign trade.

The technical know-how and skills is an indispensable source of technological

progress, and the importation of ideas in general is a potent stimulus to
development.

According to J. S. Mill, trade benefits the less developed country through ‘the
introduction of foreign arts, which raise the returns derivable from additional
capital to a rate corresponding to the low strength of the desire of accumulation’.
Thus, foreign trade can have an educative influence on the people of developing
countries and can thus help in bringing about technological and industrial
revolution.

 Capital Formation:
It is said that foreign trade helps to increase capital formation. The capacity to
save increases as real income rises through the more efficient resource allocation
associated with international trade. Foreign trade also provides stimulus for
investment and thus it tends to raise the rate of capital formation.

This stimulus comes from the possibility of realising increasing returns in wider
markets that foreign trade provides. Moreover, by allowing economies of large
scale production, the access to foreign markets makes it profitable to adopt more
advanced techniques of production.

Thus international trade, by creating conditions for increased capital formation in

underdeveloped countries, can help in their economic development.

The following points highlight the four main roles of International

trade in Economic development of a country.

Role # 1. Slow Pace of Primary Commodities:

The foremost difficulty that comes in the path of foreign trade is that the growth
of primary commodities which forms principal exports of developing countries
has been very slow as compared to world trade.

In 1955, primary commodities accounted for 50% of the total exports which in
1977 came down to 35% and again to 28% in 1990 and so on. The causes
responsible for this are the increasing tendency of market economies to protect
their agriculture, inadequate increase in demand for primary commodities,
development of synthetic substitutes etc.
Role # 2. Less Share in World Trade:

It has been noticed that exports of developing economies have been slow to
develop. Consequently, the share of developing economies in the total world
trade has maintained a downward trend.

Its share which was 31 percent in 1950 came down to 13.9 percent in 1960 and
again 5% in 1990. This decline is caused by factors like emergence of trade blocks,
restrictive commercial policies and growth of monopolies etc. These trends reflect
the fact that developing economies have to face foreign trade as a barrier in the
way of development.

Role # 3. Worse Terms of Trade:

In developed markets, the low demand for primary products has led the problem
of balance of payment on worse trend in developing economies. Whereas prices
of manufactured goods have been on the upward trend in the world market, the
prices of primary products are gradually declining.

In this regard, UN report advocated that in the past developing countries could
got a tractor by exporting two tones of sugar, now the time is that they have to
export seven tones of sugar to get the same tractor. According to another
estimate 1 to 3 percent of the GNP was lost by the developing countries due to
decreasing prices of non-oil raw materials during 1990s.

Role # 4. Restrictive Trade Policies:

Restrictive trade policies adopted by industrial countries affect prospects for
developing country exports of manufacturers. This is due to the fact that for
developing countries markets in industrial countries have become increasingly
more important.

For instance, in 1965, industrial countries took 41 percent of developing country

exports of manufacturers, by 1990 this had grown to -75%. In 1990 only 3% of
world trade in manufacturers was between developing countries.

In short, we may conclude that developing economies face several difficulties in

their path of foreign trade. The various multinational initiatives having been
mounted to tackle these problems have left them largely resolved. Therefore, in
given circumstances, the developing economies have to evolve a suitable trade
policy mix that may create export outlets and as well may assure supplies of
essential imports.

LITERATURE REVIEW

Zahool et al. (2012) examined the relationship between international trade and
economic growth using the OLS technique; their result shows an increase in
import of raw materials, production, employment and output is boosted up as a
result of international trade. They thus concluded that international trade plays
an important role to enrich the economic growth of a country.

Azees et al. (2014) opined that international trade has a significant and
positive impact on economic growth. Their result shows a positive
relationship between imports, exports and openness on the economy.

Atoyebi et al. (2010) is of the view that that there exist a positive
relationship between international trade and economic growth, in that both
international trade volume and trade structure towards high technology
exports result in positively effect on the economy.
UNCTAD (2013) in their report on international trade and how it affects the poor
in India stated
that; international trade although increases the income and employment of the
economy, but the gains have not trickled down to the poor.

Giaruzazmi (2011) carried out a study of the Impact of Trade Liberalization

on Economic posits that although the effect differs from country to country,
but on the average, trade liberalization has improved the countries’ GDP per
capita in the medium term, but the ratio of exports, imports and trade over
GDP did not improve after trade liberalization.

Performance of Members of OIC which liberalized their economies since

1970’s. his findings
Shreesh and Kishore (2012) examined the impact of international liberalization
on the Indian international trade and openness of the economy increased the
overall level of output, leading to a faster economic growth.

economy, using the Solow’s model as a basis of analysis. Their findings point
to the fact that
Jayati, G (2006) in her paper titled Trade Liberalization and Economic
restructuring posited that Trade Liberalization in India were strategized with a
view to creating major shift in the momentum of export growth, and to attract
large inflows of foreign capital, but these objectives
were not achieved. Rather, it reduced manufacturing investment due to greater
threat of import
penetration.

METHODOLOGY

The study employed the Augmented Dickey Fuller (ADF) Test for unit root and
Autoregressive Distributive Lag Model (ARDL) Cointegration approach which
entails the Wald Test, Long run OLS estimation test, Error Correction and Short
run relationship estimation test, as well as the Short run Causality test. The data
on the variables were sourced from The Handbook of Statistics on the Indian
Economy and World Bank Database. The data was collected for a period of 1980
to 2012.

MODEL SPECIFICATION

GDP = f ( EX, IM, EXR, DI, INF)

Where: GDP – Real Gross Domestic Product.
IMP- Imports (Imports to GDP ratio).
EX- Exports (Exports to GDP ratio).
DI- Domestic Investment (Gross Domestic Capital Formation as a Ratio of GDP)
INF- Inflation.
EXR- Exchange Rate.
Hence the equation can be written as:
GDP= α + β1EX + β2IMP + β3EXR +β4INF + β5DI + U.

GDP= α + β1EX + β2IMP + β3EXR +β4INF + β5DI + U

CONCLUSION AND RECOMMENDATIONS

From the study, our findings conforms to economic theories such as the
Classical and Neo-classical theories that sees international trade as an engine of
economic growth. The study is also in line with empirical literatures of Azees et al.
(2014), Zahoor et al (2012) and Atoyebi et al. (2012). Policy recommendation to
the government includes the enhancement of international trade
participation by India. This can be achieved through creating the enabling
atmosphere for trade promotion as well as increased participation of India in
the world market. In particular, government should enhance the production
of more exportable commodities by giving the producers tax incentives and
providing them with subsidies when necessary. The government should also
lower export tariffs so as to encourage more exports because export is found to
have a positive effect on economic growth of India.
The government should also discourage the importation except that of capital
goods that can be used in production not consumption. The government can do
this by imposing strict restrictions such as quotas and increase in import tariffs
because importation has a negative effect on the economic growth of India. Also,
the government should put in measures to lower down exchange rate as this has
a negative effect on economic growth. On a final note, government should
encourage domestic investment through enhancement of gross capital
formation because it boosts the economic growth of India.

Trade Economy
India is noted to have had
a great tradition of foreign
trade dating back to the
Roman Empire which is said
to have feared the drain of its
wealth to India in the form of
the wealth-of-wealth, namely,
gold, and the English had
turned a perceivably brilliant
trade
economy of the Nation into
a poor dependent one (Nehru,
Jawaharlal. 1945). For, the
English were also faced with
the sam

Trade Economy
India is noted to have had
a great tradition of foreign
trade dating back to the
Roman Empire which is said
to have feared the drain of its
wealth to India in the form of
the wealth-of-wealth, namely,
gold, and the English had
turned a perceivably brilliant
trade
economy of the Nation into
a poor dependent one (Nehru,
Jawaharlal. 1945). For, the
English were also faced with
the sam