1.International trade.

International trade is defined as the exchange of goods, capital and services between countries across
their international borders. The prime reason for any country to engage in International Trade is
because there is a need or want of goods or services. It is true that in most countries, International
trade represents a big share of the gross domestic product (GDP). Although international trade has
been there throughout a large part of our history, the world has started to acknowledge and
appreciate its economic, political and social importance only in the past few centuries. It is important
to note that carrying out a trade at the international level is a much more complex process vis-a-vis
the domestic trade. When there is an exchange of goods, capital or services between two or more
nations, there are a number of factors like government policies, currency, judicial system and markets
that get involved. As such, it is important for us to appreciate the benefits that international trade can
bring to the respective economies.

Advantages-Optimal use of the natural resources of a country – The international trade between two
or more nations helps all of them to make the best possible use of their natural resources. Every
country can focus on the production of goods and services using these resources and sell them to
other nations to earn foreign exchange and shore up their economy. It also helps to avoid the wastage
of crucial resources and use them to improve the overall economic standing of the country.

Availability of different types of goods and services – One of the major benefits of international trade
is that it enables a country to obtain goods and services that it is unable to make on their own due to
lack of resources or higher costs of production. They can get these goods from outside the country at
relatively lower costs.

Specialisation in the production of certain goods and services – Some nations are endowed with
certain advantages like natural resources, workforce, technology and capital. These resources allow
them to engage in the production of certain kinds of goods and services at relatively cheaper costs
and sell it to other nations who need them. They can engage in large scale production to cater to the
needs of home domestic as consumption as well as serve the international markets. They can also
dispose of goods and services which they possess in large quantities to other countries and improve
their foreign exchange reserves in return.

Stability in prices of products and services – It is one of the major benefits of international trade. It
helps to iron out the benefits and put a stop to the wild fluctuations that can arise due to the non-
availability of these products.

Exchange of technical expertise – International Trade allows countries with a lack of knowledge in
terms of production, manufacturing and technology to access it from other nations. Underdeveloped
countries can take the help of the developed ones to establish and develop industries apart from
increasing their economic prosperity.

2.Comparative Cost Advantage Theory

The Comparative Cost Advantage Theory of Trade was developed by British political

economist, David Ricardo in his book “ The Principles of Political Economy and Taxation”

published in 1817.
According to Comparative Advantage Theory, a country has a comparative advantage if

it can produce a good at a lower opportunity cost than another country. A lower opportunity cost

means it has to forego less of other goods in order to produce it.

Assumptions of the Theory

The theory of comparative cost advantage is based on several assumptions:

(a) Trade takes place between two countries only, say England and Portugal.

(b) They are trading with only two commodities, say, Cloth and Wine.

(c) The cost of production of these two goods in both the countries is expressed in terms of

labour only.

(d) The production of these two goods in both the countries taken place at constant costs.

(e) There is no transport cost, or the transport cost, if any, is so small a part of product prices that it is
ignored.

3.Absolute cost advantage

Absolute advantage is the ability of an individual, company, region, or country to produce a greater
quantity of a good or service with the same quantity of inputs per unit of time, or to produce the
same quantity of a good or service per unit of time using a lesser quantity of inputs, than its
competitors.

Absolute advantage can be accomplished by creating the good or service at a lower absolute cost per
unit using a smaller number of inputs, or by a more efficient process.

Absolute advantage is when a producer can provide a good or service in greater quantity for the same
cost, or the same quantity at a lower cost, than its competitors.

A concept developed by Adam Smith, absolute advantage can be the basis for large gains from trade
between producers of different goods with different absolute advantages.

By specialization, division of labor, and trade, producers with different absolute advantages can
always gain more than producing and consuming in isolation.

Absolute advantage can be contrasted with comparative advantage, which is the ability to produce
goods and services at a lower opportunity cost.

4.WTO

WTO – World Trade Organisation, was established in 1995 as the heir organisation to the GATT
(General Agreement on Trade and Tariff). GATT was founded in 1948 with 23 nations as the global
(international) trade organisation to serve all multilateral trade agreements by giving fair chances to
all nations in the international exchange for trading prospects. WTO is required to build a rule-based
trading government in which countries cannot place unreasonable constraints on trade.
In addition, its mission is to increase stock and trade of services, to assure maximum utilisation of
world resources and to preserve the environment. The WTO deals include trade in commodities as
well as services to promote international trade (bilateral and multilateral) through the elimination of
the tax as well as non-tariff obstacles and implementing greater marketplace access to all member
nations.

As an influential member of WTO, India is at the lead of building fair global laws, statutes and shields
and supporting the concerns of the developing system. India has fulfilled its promises towards the
liberalisation of trade, made in the WTO, by eliminating quantitative limitations on imports and
decreasing tariff charges.

Objectives-

To set and execute rules for international trade.

To present a panel for negotiating and controlling additional trade liberalization.

To solve trade conflicts.

To improve the clarity of decision-making methods.

5. Functions of WTO

To set and execute rules for international trade

To present a panel for negotiating and controlling additional trade liberalization

To solve trade conflicts

To improve the clarity of decision-making methods

It establishes a rule-based trading regime, in which nations cannot place arbitrary restrictions on
trade.

It frames fair global rules, regulations

It safeguards and advocates the interests of the developing world.

It is also responsible to increase production and trade of services.

It ensures optimum utilisation of world resources.

IMF

The IMF, or the International Monetary Fund, came into existence in 1945 with the objective of
establishing a healthy and orderly monetary system. It aimed at facilitating a system of international
payments and taking care of the adjustments in exchange rates among national currencies. It is one of
the three international institutions—the other two being the World Bank and the International Trade
Organization—that were created for facilitating and monitoring the economic development of the
world .

6.Objectives of the IMF

(a) To aid the balanced growth of international trade and market, thereby promoting the growth of
employment and income

(b) To promote international monetary cooperation among the member countries

(c) To facilitate the orderly exchange of goods between the member countries

(d) To facilitate international payments with respect to the exchange transactions between the
member countries

Functions of the IMF

(a) Providing short-term credit to member countries

(b) Maintaining stability in the exchange rate of the member countries

(c) Fixing and altering the value of a country’s currency whenever required, to facilitate the
adjustment of exchange rate of member countries

(d) Collecting the currencies of member countries so as to allow them to borrow the currency of other
nations

(e) Lending foreign currency to member nations and facilitating international payments with respect
to the exchange transactions between member countries.

7 .GATT

General Agreement on Tariffs and Trade (GATT) was an international trade agreement signed in 1947.
23 nations were signatories of this trade agreement. GATT came into effect on January 1, 1948. The
purpose of GATT was to liberalise trade by reducing tariffs and reducing quotas among member
countries. The member nations had to remove all the trade discriminations. The 7 rounds of
negotiations from 1947 to 1993 reduced average tariffs on industrial goods from 40% to 5%. The steps
taken at GATT led to economic globalization.

8.Protection policy

Protectionism is the practice of following protectionist trade policies. A protectionist trade policy
allows the government of a country to promote domestic producers, and thereby boost the domestic
production of goods and services by imposing tariffs or otherwise limiting foreign goods and services
in the marketplace.

Protectionist policies also allow the government to protect developing domestic industries from
established foreign competitors.

1. Tariffs

The taxes or duties imposed on imports are known as tariffs. Tariffs increase the price of imported
goods in the domestic market, which, consequently, reduces the demand for them.

Consider the following example, which analyzes the UK market for US-made shoes. Due to the
imposition of tariffs, the price for the product increases from GBP100 (P1) to GBP120 (P2). The
demand for US-made shoes in the UK market decreases (from Q2 to Q4).
2. Quotas

Quotas are restrictions on the volume of imports for a particular good or service over a period of time.
Quotas are known as a “non-tariff trade barrier.” A constraint on the supply causes an increase in the
prices of imported goods, reducing the demand in the domestic market.

3. Subsidies

Subsidies are negative taxes or tax credits that are given to domestic producers by the government.
They create a discrepancy between the price faced by consumers and the price faced by producers.

4. Standardization

The government of a country may require all foreign products to adhere to certain guidelines. For
instance, the UK Government may demand that all imported shoes include a certain proportion of
leather. Standardization measures tend to reduce foreign products in the market.

9.Free trade

A Free Trade Agreement (FTA) is an agreement between two or more countries to reduce trade
barriers in imports and exports among them.

These agreements deal with the determination of the tariffs and duties that are imposed by the
countries on imports and to reduce trade barriers and thereby strengthen the bilateral or multilateral
trade relations.

With FTA, goods and services can be exchanged across international borders with limited or no
government tariffs, quotas, or subsidies.

A free-trade policy may simply be the absence of any trade restrictions.

The idea of FTA is the opposite of the concept of trade protectionism or economic isolationism.

In the current world, free trade policy is often implemented through a formal and mutual agreement
of the nations involved.

10.Labour mobiltiy.

Labor or worker mobility is the geographical and occupational movement of workers.[1] Impediments
to mobility are easily divided into two distinct classes with one being personal and the other being
systemic. Personal impediments include physical location, and physical and mental ability. The
systemic impediments include educational opportunities as well as various laws and political
contrivances and even barriers and hurdles arising from historical happenstance.

Increasing and maintaining a high level of labor mobility allows a more efficient allocation of
resources and greater productivity.

11.FDI

Generally, FDI is when a foreign entity acquires ownership or controlling stake in the shares of a
company in one country, or establishes businesses there.
It is different from foreign portfolio investment where the foreign entity merely buys equity shares of
a company.

In FDI, the foreign entity has a say in the day-to-day operations of the company.

FDI is not just the inflow of money, but also the inflow of technology, knowledge, skills and
expertise/know-how.

It is a major source of non-debt financial resources for the economic development of a country.

FDI generally takes place in an economy which has the prospect of growth and also a skilled
workforce.

FDI has developed radically as a major form of international capital transfer since the last many years.

12.MNC

Multinational corporations are those companies who incorporate themselves in their own (work)
country but operate their business in many other countries through a network of their branches,
subsidiaries etc. For e.g.: Coca-Cola, Sony, L.G., Samsung. The main features of MNCs are :

(a) Giant Size: The assets and sales of MNCs are quite large. These companies operate on large scale.
Their operations are so huge that sometimes their sales turnover exceeds the Gross Nationalised
Product of an underdeveloped country. MNCs enjoy a high creditworthiness.

(b) International Operates: MNCs operate in more than one country. It has its own branch, factories
offices and so on.

(c) Professional Management: A MNC enjoys professional experts, specialised people and keeps
updating the knowledge and skill of their employee by imparting them training from time to time. It
employs professional to handle the advance in technology.

(d) Centralised Control: The branches of MNC spread in different countries are controlled and
managed from headquarters located in the home country. All the branches operate within the policy
framework formed by headquarters.

(e) Sophisticated Technology: MNCs make use of latest technology to supply world class products.
They employ capital intensive technology and innovative techniques of production.