Globalisation and the

Indian Economy
International Economics: Its Importance and Current Issues
Globalization of the World Economy
 Living in a globalized world- very few things are purely of
any country, India or any other

 Food items, clothing, manufactured items- almost

everything consumed has a foreign component

 As tourists or students we need USD, Euros, Japanese Yen,

Pound, etc.

 The world of news is full of strife over trade

controversies- whether within or outside the WTO
framework
Aspects of Globalisation
 Union of the Eurozone and its fallout for the world- disruptions like
Brexit or Catalonian Independence for the future of EU

 The World Recession of 2007-08 which affected the entire world-

dangers of financial crisis

 Problems arising out of legal and illegal migration across borders

 International capital movements, operations of multinational

corporations

 Collapse of certain countries like Argentina

International Trade and a Nation’s
Standard of Living (1)
 Geographically huge countries such as the US which are rich in human
and natural resources can be self-sufficient and produce most
products they need

 Small, industrial countries such as Switzerland and Austria which have

few, specialized resources and produce and export a smaller range of
products and import all the rest

 Large industrial countries such as Germany, France, England, Italy and

Canada also rely on international trade

 For small countries exports become a source of employment as well

foreign exchange earnings
Trade and A Nation’s Standard of Living

 In general economic interdependence among nations has been

increasing over the years

 There has been a more rapid growth of world trade than of world GDP

 The only exception to world trade rising faster than world GDP were
in 2001 and 2009

 In 2001 it was because of economic recession in the US and the 9/11

attack on WTC

 In 2009 it was because of the deep recession of 2007-09

Trend in World Exports
World Trade
International Flow of Goods and Services

 The Gravity model postulates that bilateral trade between

two countries is proportional or at least positively related
to the product of the two countries’ GDPs

 It also postulates that it is smaller the greater the

distance between the two countries

 So USA would trade more with Mexico and Canada than

with China, Japan and Germany
International Flow of Labour
 International flow of labour is another way in which
economic integration takes place in the world

 There are close to 244 million people in the world today

who live in a country other than that of their origin

 People primarily migrate for economic reasons but some

also migrate to escape religious and political oppression

 Most nations impose restrictions on immigration to reduce

inflow of low-skilled people and encourage flow of highly
skilled and technical people
International Flow of Capital
 In general capital flows more freely across nations than
people as there are lesser restrictions on flow of capital
than of labour

 Financial or portfolio capital move to countries with

higher rates of interest and FDI to countries where
expected return on profits are higher

 Since the 1980s the US has become a large net borrower

from rest of the world

 More than $ 5 trillion of foreign currencies are exchanged

each day around the world
International Economic Theories and
Policies
 International Economic Theory assumes a 2X2X2 model , no trade
restrictions to begin with, perfect internal mobility of factors but no
international mobility, perfect competition in labour and factor
markets and no transportation costs

 Theory examines the basis for and gains from trade, reasons for and
effects of trade restrictions, policies directed at regulating flows of
international payments and receipts, different international monetary
systems, etc.

 Though most theory in international economics is an application of

micro and macroeconomic principles the subject has developed
theories of its own- the theory of the second best, for example
Subject Matter of International
Economics
 International Trade Theory: analyses the basis and gains from trade
 International Trade Policy: examines the reasons for and the effects
of trade restrictions

 Balance of Payments: measures a nation’s total receipts and

payments vis-à-vis the rest of the world
 Foreign Exchange Markets: provide the institutional framework for
exchange of currencies
 Open Economy Macroeconomics: deals with mechanisms of
adjustment in balance –of- payments disequilibrium and relationship
between the internal and external sectors of the economy
Current International Economic
Problems and Challenges (1)
 Slow growth and high unemployment in advanced economies after
the Great Recession of 2007-09: Despite the recession being over in
2010 the advanced nations were still grappling with slow growth and
high unemployment and it was not until 2013 and 2014 that EU and US
started recovering

 Trade protectionism in advanced countries: despite their

commitment to globalization and free trade flows, because of
onslaught of competitiveness challenges from countries like India and
China, trade protectionism is rising

 Excessive fluctuations and misalignment in exchange rates: these

can disrupt patterns of international trade and specialisation
Current International Economic
Problems (2)
 Structural Imbalances in advanced economies and insufficient
restructuring in transition economies: US is living beyond its means,
Europe faces inflexible labour markets and Japan inefficiencies in its
distribution system, etc.

 Deep poverty in many developing countries: those in Sub Saharan

Africa face deep poverty, unmanageable international debts,
economic stagnation

 Resource scarcity, Environmental Degradation, Climate Change and

Unsustainable Development- caused by demand-supply mismatch led
to sharp rises in prices of food, fuel and raw materials threatening
sustainable development