IEP~Session 11 | Dumping (Pricing Policy) | Devaluation

Amity Business School

Amity Business School
MBA 2013, 3rd Semester


Amanpreet Kang


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

Amity Business School 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 3 .

Hence there will be deterioration till the time such contracts get exhausted Lag in getting results include: – Recognition. decision. delivery.Amity Business School 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. production 4 . replacement.

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.Amity Business School Devaluation • Assumption – change in exchange rate brings about proportionate change in prices. But the change may be less than proportionate. 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 • • • 5 .

e. • 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. was with Pakistan.5% • Forced by IMF to avail further assistance • Problems faced: draught in 65-67 and hence reduced exportable surplus and increase in agri imports.Amity Business School Devaluation Devaluation of 1966 • Bretton Woods System – consent of IMF needed if devaluation more than 10% had to be done. on July 1 and 3 in 1991 • Because India was seeking loan to finance BoP deficit 6 . China Devaluation of 1991 • Downward adjustment of 18% in external value of rupee affected in 2 steps i.

7 . • 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). 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.Amity Business School 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.

Amity Business School Dumping and Antidumping • Antidumping investigations .Undertakings may be offered by exporters to avoid the imposition of antidumping duties. • Antidumping duties .Duties levied on certain goods originating from (a) specific trading partner/s to offset the dumping margin. 8 .into dumping and injury are conducted by the investigating authority of the importing country in accordance with the provisions of WTO’s Antidumping Code (followed by WTO now). • Antidumping price undertakings . – Duty rates are generally enterprise-specific. – 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.

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) 9 .Amity Business School Major Developments in the World Economy • • • Free trade. second wave. third wave of globalization and trade Agricultural. free trade First wave. trade restrictions.

S. by decade. millions (right axis) 20% 5 10% 0% 1870 1914 1950 1980 2000 0 Source: WTO 10 .Amity Business School 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.

America & Australia • Characterized by – GATT came into force and WTO followed – Developing countries were isolated and OECD economies surged with high growth rates.e.Amity Business School First. communications and transportation • Characterized by – Massive human migration – As per an estimate almost 60mn people migrated from Europe to the New World i. • Characterized by – Rise of the developing countries – Internationalization of business corporations 11 . for growth and stability • • Third Wave Began in early 80’s and gained momentum in late 90’s Driven by – Technological advances in computing. 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.

social/ cultural. intellectual property. criticism because of human rights. economic and military superpower to growth economy • Political. creditor to US. economic. manufacturer for the world. high growth rates as well as huge FDI inflows • Political.Amity Business School Transformation of Russia. China and East Europe Economic systems – based on resource ownership and resource allocation Russia: from communist to democracy. social/ cultural. copyright violations 12 . transition economies. change in economic systems. technological changes China: • Economic size. economic. technological changes East Europe: countries of erstwhile USSR.

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%. 13 .Amity Business School Macroeconomic Issues Real (goods economy) vs. 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.

equity markets and competitive currency devaluations 14 .Amity Business School 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.

15 . mature debtor. Many developing nations engaged in: • Debt renegotiation • International cooperation to resolve systemic problems of debt crisis • International regulatory environment.Amity Business School Debt Problems Debt Cycle – young debtor. in particular WTO provisions relating to balance-of-payments issues. 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.

Amity Business School 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 16 .

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. Member firms are independent entities but agree to restrict their output.Amity Business School Cartels • These are interventionist measures by the governments/ trade bodies . 17 • • . May involve establishing a central selling organisation.

18 • • • . 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. Seek to exploit customers by restricting output and investments to maintain prices at high level. Are illegal in many countries.Amity Business School Cartels • There may be output and investment quotas to make price control effective.

Amity Business School Cartels • • In India. OPEC (Organisation of Petroleum Exporting Countries) & IATA (International Air Transport Association) • • • Cartels are unilateral agreements by producers to cooperate. 19 . 1969. cartels are controlled by MRTP Act. International cartels are sponsored or sanctioned by governments of respective nations. International cartels are agreements between producers located in several countries or between governments of different countries to restrict production.

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