Trade, Exchange and Interdependence

Submitted By-
Shambhavi Vatsa
Uid- SF0120074
2nd semester, 1st year

FACULTY-IN-CHARGE: Ms. NISHIBRATA HAZARIKA

DATE OF SUBMISSION: 7-04-2021

ECONOMIC SYSTEM
An economic system is a means by which societies or governments organize and
distribute available resources, services, and goods across a geographic region or
country.1 It includes a wide range of organisations, bodies, decision-making
processes, agencies, and consumption habits that make up a community's
economic structure, controlling various production factors such as property,
capital, labour, and physical resources.
This system is divided into four categories- first, traditional system, which is
based on goods, services and work and follows certain established trends. Second,
command system which has a centralized authority controlling a significant
segment of economic structure. Third, market system which is regulated by
market forces of demand and supply. Fourth, mixed or dual system which is the
combination of command and market system and it is the norm followed globally.
Thus, it can be said that it is a system which help other nations in understanding
the economic structure or order of a country and thereby in establishing
connections with them. This binds the economy of all nations and thus gives an
idea of functioning of the world economy, which includes all economic activities
conducted both between and within nations, including production, consumption,
economic management, work in general and most importantly ‘Exchange of
financial values’ and ‘Trade of goods and services’2. This leads to economic
interdependence among countries thereby stimulating at the cause of one another.

TRADE
In simple terms, trade can be defined as an exchange of something for something
else.3 It can be one good for another, goods for services, or goods for money or
money for service. Generally, one trades for the thing which they have in excess
for the things they do not have enough of.
What is the need for trading of goods when one can produce things for oneself?
The answer to this question is simple that at micro level, no person can produce
everything that they or their family use or that is required for in the country. They
do not grow all their own food, sew their own clothes, build their own house and

1
CFI, https://corporatefinanceinstitute.com/resources/knowledge/economics/economic-system/ ,(last visited-
2nd April,2021)

2
Macmillan Dictionary, https://www.macmillandictionary.com/dictionary/british/world-
economy#:~:text=DEFINITIONS1-,1,Synonyms%20and%20related%20words, (last visited- 2nd April.2021)
3
INVESTOPIDIA, https://www.investopedia.com/terms/t/trade.asp ,(last visited-2april,2021)
provide themselves personally with health care and education.4 Rather they focus
on a particular job, specializes in it and use the wages earned from it to purchase
the goods and services of their desire. This results in trade within an economy or
intra trade.
Same applies and at macro level also, i.e., no country can produce all the products
it needs and thus, eventuating in what is called, International trade or inter-nation
trade. For example, United states consumes far more sugar than it produces
domestically and hence it imports sugar from rest of the world including eastern
Europe, where they have specialised in refining sugar from sugar beads, growing
far more sugar than they can consume. On the other hand, eastern European
countries consumes far more automobiles than it produces and hence they import
it from other countries, including United States. This not only helps in increasing
the competition in the market but also leads to more competitive prices and hence
brings cheaper products home to the consumer. Various reasons as to why trade
is important is as follows:
• It makes people better off when their preferences differ- for example e-Bay
created value of the product just by better matching of consumers and
sellers. By transferring goods from people who value it low amount to
people who value it highly, thereby creating a net gain;
• Increase’s productivity through specialization and division of labour-
specialization leads to increase of knowledge and that leads to increase in
productivity and without trade, specialization is not possible. No person
would specialise in any field until they know that they can sell their service
in their area of specialisation in return for other items.

EXCHANGE
In simple terms, exchange means to give in return for something received.5 It can
be defined as process where goods or services are transferred from the provider
to the receiver, for a return of relative value, in a manner that advances the
economic interest of both the parties.
Exchange takes place due to the need and desire to consume for a product one
does not have. Earlier, it followed the barter system, where one person exchanged
a good in place of another, with other persons. But since the inception of money,
the central role in the market economies is occupied by it, for it serves as a

4
Sharemylesson, https://sharemylesson.com/teaching-resource/trade-exchange-and-interdependence-
272240 , (last visited-2april,2021)
5
The Free Dictionary, https://www.thefreedictionary.com/exchanging ,(last visited- 2nd april,2021)
medium of exchange and most importantly, it serves as a measure and standard
of value. In today’s time, almost all the exchange takes place in monetary form.
Even Adam Smith, the father of economics, and his contemporaries believed that
economies evolved from pre-historic bartering systems to money-driven and
eventually credit-based economies. Now-a-days, most of the exchange takes
place through online transfer of money for any goods or services purchased.
However, the international exchange is done on the basis of the exchange rate,
which is nothing but the rate at which one currency is exchanged for another. It
is determined in the foreign exchange market where national currencies are
bought and sold.
The core function of an exchange is to ensure fair and orderly trading and the
efficient dissemination of price information for any securities trading on that
exchange.6 It also provides companies, governments, and other groups a platform
from where they can sell securities to the public who are interested or are willing
to invest.

INTERDEPENDENCE
In general term, interdependence means the state of dependence on each-other or
mutual dependence.7 It refers to a relation between two or more people, region,
nations or other entities in which each is dependent on the other for necessary
goods and services. However, ‘Economic Interdependence’ underscores the
assumption that all the country that choose to interact economically with each
other are benefitting and are therefore dependent on each other.8
Interdependence of economies of countries grew because of the globalisation,
which is a process of international integration that increases the exchange of
products, services, capital, etc. at global level.9 Specialization and Division of
labour have further increased the Economic Interdependence. When all parties
are specialized in the fulfilment of some requirements, then they are mutually
dependent on others for the fulfilment of unmet requirements. However, what is

6
INVESTOPEDIA,
https://www.investopedia.com/terms/e/exchange.asp#:~:text=The%20core%20function%20of%20an,securitie
s%20to%20the%20investing%20public. (last visited – 2nd April,2021)
7
https://www.merriam-webster.com/dictionary/interdependence ,(last visited- 2nd April,2021)
8
Edward Carr Frank, The Effect of Economic Interdependence on Foreign Relation: Implication for Linkage
Diplomacy, page no.- 27, (August,1980),
https://www.rand.org/content/dam/rand/pubs/notes/2009/N1568.pdf
9
Marius-Răzvan Surugiua and Camelia Surugiub, International Trade, Globalization and Economic
Interdependence between European Countries: Implications for Businesses and Marketing Framework, page
no. -132, (2015), https://core.ac.uk/download/pdf/82694989.pdf
important is that the participants in any economic system must belong to a trading
network to obtain the products they cannot produce efficiently for themselves and
any change in such a network affects the demand for various products as all are
interlinked.
On one hand, with economic interdependence comes economic growth which
allow specialist industries to thrive. This in turn leads to increase in number of
jobs and salaries/wages and thereby brings overall improvement to wealth and
lifestyle. On the other hand, the divide between rich and poor states still exists
and some countries find it difficult to hold onto their best skilled workers, who
are attracted by higher wages elsewhere. And most importantly the threat of
future wars, due to frustration from economic loss of one country resulting from
the activities of some other countries, cannot be ignored.
The severity of interdependence between countries can be seen from the recent
issues like the trade war between US and China. A September 2019 study by
Moody’s Analytics found that the trade war had already cost the U.S. economy
nearly 300,000 jobs and an estimated 0.3% of real GDP.10 Other studies put the
cost to U.S. GDP at about 0.7%.11 A 2019 report from Bloomberg Economics
estimated that the trade war would cost the U.S. economy $316 billion by the end
of 2020.12 While, more recent research from the Federal Reserve Bank of New
York and Columbia University found that U.S. companies lost at least $1.7
trillion in the price of their stocks as a result of U.S. tariffs imposed on imports
from China.13
Another issue, i.e., Suez Canal and Crisis,2021 in which the Suez Canal (which
carries over 12% of the world trade by volume)14 was blocked by a cargo ship
named ‘Ever Given’ for a week. This led to over $9 Billion trade loss per day,
according to data from Lloyd’s list, which is equivalent to $400 million worth of
trade per hour or $6.7 million per minute.15

10
Moddy Analytics, Trade War Chicken: The Tariffs and the Damage Done, (September,2019),
https://www.moodysanalytics.com/-/media/article/2019/trade-war-chicken.pdf
11
Shawn Donnan and Reade Pickert, Trump’s China Buying Spree Unlikely to Cover Trade War’s Costs,
Bloomberg, (December 18,2019), https://www.bloomberg.com/news/articles/2019-12-18/trump-s-china-
buying-spree-unlikely-to-cover-trade-war-s-costs
12
Id.
13
Mary Amiti, Sang Hoon Kong, and David E. Weinstein , The Investment Cost of the U.S.-China Trade War,
(May 28,2020), https://libertystreeteconomics.newyorkfed.org/2020/05/the-investment-cost-of-the-us-china-
trade-war.html
14
“Quixplained: The Suez Canal crisis, and its impact on global trade”, The Indian Express, April 2, 2021,
https://indianexpress.com/article/explained/suez-canal-blockade-quixplained-7255344/
15
Das Koustav, How much did Suez Canal blockage cost world trade”, INDIA TODAY, March 30,2021,
https://www.indiatoday.in/business/story/explained-how-much-did-suez-canal-blockage-cost-world-trade-
1785062-2021-03-30
Keeping an eye on the benefits of the interdependence, what must not be unseen
is the problems or danger that it poses. At the same time, strategies should be
developed to deal with them. Thus, it can be seen that specialization and exchange
reduce self-sufficiency and thereby increases interdependence. This means that
decisions or events in one part of the world or in one sector of the economy affects
the decisions and events in other parts of the world or other sectors of economy.
In this way the local and the global economy forms an interlinked network of
trade, exchange and interdependence tying all the economies closer to one
another.