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Laissez-Faire versus Interventionist Approaches to Exports & Imports ‡ Barter ‡ Interventionist:
± Mercantilism ± Neomercantilism

‡ Free-trade theories:
± Absolute advantage ± Comparative advantage

DR.MANOHAR PANDIT

Theories of Trade Patterns
‡ Explaining trade patterns:
± Country size ± Factor proportions ± Country similarity

‡ Trade competitiveness:
± Product life cycle theory ± Porter diamond

DR.MANOHAR PANDIT

but its purpose is to achieve some social or political objective DR.Mercantilist Theory y Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports) y Neomercantilist policy also seeks a favorable balance of trade.MANOHAR PANDIT .

MANOHAR PANDIT .Gold ‡ Dependence on Raw Material Rather Than Manufactured Goods ‡ ‡ ‡ ‡ DR.Mercantilist Theory MERCANTILISM Trade Theory Formed During 1500 to 1800 AD Countries to Have More Exports Than Imports Country s Wealth Depends On Its Holdings of Treasure .

Mercantilist Theory ‡ MERCANTILISM ‡ Government Established Monopolies Over Country s Trade ‡ Restricted Imports ‡ Mercantilism Helped Colonial Powers. Colonies ere Not Manufactures and Imported Value Added Goods ‡ This Was Cause of American Revolution DR.MANOHAR PANDIT .

TRADE THEORIES THEORY OF ABSOLUTE ADVANTAGE Adam Smith in 1776 developed theory of absolute advantage Highlighting that country s wealth is based on its available goods and services Some countries produce goods more efficiently than other countries This is good for free trade If consumer gets choice of cheaper product. why buy expensive domestic product? DR.MANOHAR PANDIT .

efficient production Marketplace would determine what country should produce.MANOHAR PANDIT . Is the advantage natural or acquired? DR. more skills ‡ Long production runs.TRADE THEORIES THEORY OF ABSOLUTE ADVANTAGE If trade was unrestricted then each country will produce only those goods where they have competitive advantage Specialisation increase country s efficiency ‡ Labour more skilled by repeating same task ‡ No changeover time.

natural resources and human resources availability Most countries import natural resources from other countries whose resources are plentiful USA cannot grow tea and Sri Lanka cannot grow wheat Variation among countries in natural advantages helps in international trade DR.MANOHAR PANDIT .TRADE THEORIES Natural advantage Climate.

MANOHAR . substitutes PANDIT DR.TRADE THEORIES Acquired advantage Countries that produce manufactured goods and services competitively have acquired advantage Most of the world trade is of manufactured goods and services Japan exports steel Denmark exports silverware Technology changes alter relative positions of the countries due to new usage.

TRADE THEORIES COMPARATIVE ADVANTAGE DAVID RICORDO Countries With Absolute Advantage Should Give up Less Efficient Output To Produce More Efficient Output Cost Comparision Labour Cost of Production in Hours 1 unit of Wine 1 unit of Cloth 80 90 120 100 Opportunity Cost Wine Cloth 80/90=8/9 90/80=9/8 120/100=12/10 100/120=10/12 Portugal England Portugal England Country has Comparative Advantage if Opportunity Cost is lower to produce at home than in foreign country DR.MANOHAR PANDIT .

Portugal to import cloth and export Wine Saving of labour hours can help country to produce more.89 units of Cloth for 1 unit of Wine. England should give up production of Wine and use labour for production of Cloth DR.MANOHAR PANDIT .Cost of 1 unit of Wine = 1.2 units of Cloth Port .TRADE THEORIES COMPARATIVE ADVANTAGE Eng .2 units of Cloth.Cost of 1 unit of Wine = 0. England to export cloth and import Wine Portugal will gain to Import more than 0.89 units of Cloth England will gain to Import 1 unit of Wine at less than 1.

Theory of Comparative Advantage ‡ Through specialization and free trade total global output can increase even if one country has an absolute advantage in the production of all products DR.MANOHAR PANDIT .

MANOHAR PANDIT .5 Production with Specialisation Cocoa Ghana South Korea Total Production 20.5 1.0 Rice 0.0 Rice 5.0 2.0 14.0 Increase in Consumption as a result of specialisation and trade Ghana South Korea 4.0 20.0 6.0 DR.0 Rice 20 10 Consumption after Ghana trades 6 tons of Cocoa for 6 tons of rice from South Korea Ghana South Korea Total Production 14.0 4.Gain from the Trade Resources required to produce 1 ton of Cocoa and Rice Cocoa Ghana South Korea 10 40 Production and Consumption without Trade Cocoa Ghana South Korea Total Production 10.0 0.0 20.0 15.0 20.0 6.0 3.5 12.0 10.

Theories of Specialization ‡ Both absolute and comparative advantage theories are based on specialization ‡ Assumptions policymakers question: ± full employment ± economic efficiency ± division of gains ± transport costs ± services ± production networks ± mobility DR.MANOHAR PANDIT .

MANOHAR PANDIT .Factor Endowment (Hecksher-Ohlin) Theory A nation will export the goods whose production requires intensive use of the nation s relatively abundant and cheap factors and import the goods whose production requires intensive use of its scarce and expensive factors. DR.

Trade Pattern Theories ‡ How much a country will depend on trade if it follows a free trade policy ‡ What types of products countries will export and import ‡ With which partners countries will primarily trade DR.MANOHAR PANDIT .

raising the transport costs of foreign trade DR.Theory Of Country Size ‡ Countries with large land areas are apt to have varied climates and variety of natural resources ‡ They are generally more self-sufficient than smaller countries are due to size of economy and production scale ‡ Large countries production and market centers are more likely to be located at a greater distance from other countries.MANOHAR PANDIT .

Factor-Proportions Theory ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Country Classifications Factor Conditions / Production Factors Physical Resources Human Recourses Knowledge Resources Capital Resources Infrastructure Demand Conditions Composition of Home Demand Size and Growth Pattern of Home Demand Internationalisation of Demand DR.MANOHAR PANDIT .

Afghanistan ‡ Technological Complexities Mechanisation of Wheat Farm In Canada and Cheap Farm Labour in India DR.Factor-Proportions Theory ‡ A country s relative endowments of land.MANOHAR PANDIT . labor. and capital will determine the relative costs of these factors ‡ Factor costs will determine which goods the country can produce most efficiently ‡ Land Labour Relationship Hon Kong Can Have Garment Factories But Cannot Produce Yarn / Cotton ‡ Labour Capital Relationship Low Investment Cheap Labour Carpets from Iran.

and by the distance between them .Country-similarity Theory ‡ Most trade today occurs among high-income countries because they share similar market segments and because they produce and consume so much more than emerging economies .Location Similarity. Cultural Similarity ‡ Independence Interdependence Dependence DR.Economic similarity ‡ Much of the pattern of two-way trading partners may be explained by cultural similarity between the countries. political and economic agreements.MANOHAR PANDIT .

Competitive Factors and Production Technology ‡ Companies will manufacture products first in the countries in which they were researched and developed.Product Life Cycle (PLC) Theory ‡ All Phases of PLC Affects Production Location. production will shift to foreign locations. almost always developed countries ‡ Over the product s life cycle. especially to developing economies as the product reaches the stages of maturity and decline DR.MANOHAR PANDIT . Market Location.

MANOHAR PANDIT .TRADE THEORIES IPLC THEORY Advance Nations Becomes Victim of Its Own Innovation Stage 0 Local Innovation Stage 1 Overseas Innovation Stage 2 Maturity Stage 3 Worldwide Imitation Stage 4 Reversal DR.

MANOHAR PANDIT Machinery .TRADE THEORIES PLC THEORY Validity of PLC Leather Goods Wholesale Banking Apparel Transportation Equipment Electronic and Electronic Primary Metals Instruments Non-electrical DR.

TRADE THEORIES PLC THEORY Export 2 Adv Nations LDCs 3 0 1 Time Import USA DR.MANOHAR PANDIT .

The Porter Diamond
‡ Four conditions as important for competitive superiority: ± demand conditions ± factor conditions ± related and supporting industries ± firm strategy, structure, and rivalry

DR.MANOHAR PANDIT

Limitations of the Porter Diamond Theory
‡ Production factors and finished goods are only partially mobile internationally ‡ The cost and feasibility of transferring production factors rather than exporting finished goods internationally will determine which alternative is better

DR.MANOHAR PANDIT

The Relationship between Trade and Factor Mobility ‡ Capital and labor move internationally to gain more income and flee adverse political situations ‡ Although international mobility of production factors may be a substitute for trade, the mobility may stimulate trade through sales of components, equipment, and complementary products
DR.MANOHAR PANDIT

MANOHAR PANDIT .REGIONAL TRADE BLOCKS DR.

MANOHAR PANDIT REGIONAL INTEGRATION Agreement between the countries in a geographical region to reduce and ultimately remove all tariff and non-tariff barriers to the free flow of goods. services and factors of production between each other WTO members to notify WTO about participation 1948 -1994 124 notifications to GATT After 1995 130 notifications to WTO Till date 170 are in force Planned 300 agreements if materialised .REGIONAL TRADE BLOCKS DR.

Fiscal and Trade policies ‡ High cost producers replaced by low cost producers from the region Trade creation ‡ High cost producers are replaced by low cost producers from outside region Trade diversion .REGIONAL TRADE BLOCKS DR.MANOHAR PANDIT REGIONAL INTEGRATION Impediments to Integrations ‡ Shift of manufacturing in NAFTA from Canada and US to Mexico ‡ Loss of control over Monetary.

Subsidies Among Member Countries ‡ Member Countries Can Decide Own Policies for Non-member Countries ‡ Variable Tariffs By Each Member Country On Same Products Imported From Non-member Countries .REGIONAL TRADE BLOCKS DR. Tariff.MANOHAR PANDIT REGIONAL INTEGRATION Free Trade Area ‡ No Barriers To Trade of Goods and Services Among Member Countries ‡ No Discrimination of Quota.

REGIONAL TRADE BLOCKS DR.MANOHAR PANDIT REGIONAL INTEGRATION Customs Union ‡ Step Towards Economic and Political Integration ‡ No Barriers To Trade of Goods and Services Among Member Countries ‡ Common External Trade Policy Among Member Countries ‡ Administrative Mechanism To Oversee Trade Relations With Non-members .

MANOHAR PANDIT REGIONAL INTEGRATION Common Market ‡ Similar To Customs Union ‡ No Barriers To Trade of Goods and Services Among Common and Same External Trade Policy ‡ Free Movement of Factors Like Labour and Capital ‡ No Restrictions on Immigration and Capital Movements .REGIONAL TRADE BLOCKS DR.

MANOHAR PANDIT REGIONAL INTEGRATION Economic Unions ‡ Closer Economic Integration and Cooperation Than Common Market ‡ No Barriers To Trade of Goods and Services Among Members and Same External Trade Policy and Free Movement of Factors Like Labour and Capital ‡ Common Currency. Hormonisation of Tax Rates and Common Fiscal & Monetary Policy. A Step Towards Political Union .REGIONAL TRADE BLOCKS DR.

MANOHAR PANDIT NAFTA ‡ January 1994 ‡ USA. Canada.REGIONAL TRADE BLOCKS DR. Mexico ‡ Worlds Largest Free Trade Area ‡ Increased Trade and Investments ‡ Tariff and Non-tariff Elimination ‡ Will Include South American Countries .

000 Products for Trade Between Member Countries ‡ Pact to Benefit Over 380 million Consumers ‡ Implementation Over a Period of 15 Years .MANOHAR PANDIT NAFTA ‡ Pact to Eliminate Barriers for 10.REGIONAL TRADE BLOCKS DR.

REGIONAL TRADE BLOCKS DR. Fastest Growing Country ‡ Proximity to Latin America and Member of NAFTA .MANOHAR PANDIT NAFTA India and NAFTA Countries ‡ USA Largest Business Partner of India ‡ India Preferred Destination for Auto Parts ‡ Canada Imports Electronics and Software ‡ Mexico Focused Destination.

REGIONAL TRADE BLOCKS DR.MANOHAR PANDIT NAFTA NAFTA & WTO ‡ Regionalisation May Harm WTO ‡ Regionalisation Has Helped Mexico ‡ There are No Indications That Regionalisation is Harmful For Economic Growth ‡ NAFTA is Complementary To WTO .

business regulations.REGIONAL TRADE BLOCKS DR. services. professional qualifications and other barriers to open frontiers ‡ The free movement of some services is delayed . people and money ‡ More than 200 laws have been agreed since 1986 covering tax policy.MANOHAR PANDIT EUROPEAN UNION ‡ 1 January 1993 ‡ The single market ‡ the free movement of goods.

US Share 11. US Share 32.2% ‡ Block of 25 Countries.REGIONAL TRADE BLOCKS DR.1% ‡ $3300 b Merchandise and $712 b Services in 2004 .6% Share to Global GDP.1% Share to Merchandise Global Exports. Japan Share 12.5%. Population over 500 m ‡ 31.MANOHAR PANDIT EUROPEAN UNION Power Center in Global Economy effective ‡ Second Largest Economy ‡ 26.

REGIONAL TRADE BLOCKS DR.MANOHAR PANDIT EUROPEAN UNION Power Center in Global Economy ‡ Major Player in Capital Markets Lending and Investments ‡ Most Important Source of FDI in the World ‡ 48 Out of 100 Largest Assets Are In EU ‡ 70% Global M&A Are of EU MNCs ‡ Major Banking Activities in the East .

MANOHAR PANDIT EUROPEAN UNION Background ‡ Headquarters in Brussels ‡ Established on Nov 1.REGIONAL TRADE BLOCKS DR. 1993 ‡ Started As European Coal & Steel Community in 1951 ‡ Became European Community in 1967 ‡ 12 Members Signed Treaty of EU ‡ In 2007 27 Member Countries .

MANOHAR PANDIT EUROPEAN UNION Present scenario ‡ 24. independent officials ‡ Establishment of Euro 01.01.1999 / 2002 ‡ 16 out of 27 members have Euro .000 employees ‡ One commissioner from each country ‡ Council of EU takes care interest of member states ‡ Court of Justice single judge from each country.REGIONAL TRADE BLOCKS DR.

voice of the Member States Herman Van Rompuy.Three key players DR.MANOHAR PANDIT The European Parliament . President of the European Council The European Commission . President of of the European Parliament The council of Ministers .promoting the common interest José Manuel Barroso. President of the European Commission .voice of the people Jerzy Buzek.

MANOHAR PANDIT EUROPEAN UNION India and EU ‡ India recognised EU in 1962 ‡ EU is Largest Trading Partner and Source of FDI ‡ India is EU s 17th Largest Supplier and 20th Largest Export Destination. a Barrier for Indian Exporters .REGIONAL TRADE BLOCKS DR. in Value Terms ‡ High Import Duty in India ‡ High Standards.

Environment. Tourism.REGIONAL TRADE BLOCKS DR. Agriculture. at Guaranteed Price ‡ Administrative Agreement on Textile Trade Management of Quotas and Reduction in Tariff ‡ Cooperation Agreement Agreement on Trade. Economic Cooperation.MANOHAR PANDIT EUROPEAN UNION India and EU Bilateral Agreements ‡ Agreement on Sugarcane Exports to EU. IPR .

REGIONAL TRADE BLOCKS DR. Agriculture and Natural Resources Allows Access to Indian Researchers to EU s Programme of Research and Technologigy Development ‡ Customs Cooperation Agreement Simplify Customs Procedures as per Intl. Standards .MANOHAR PANDIT EUROPEAN UNION India and EU Bilateral Agreements ‡ Science and Technology Agreement Covers Health.

REGIONAL TRADE BLOCKS DR.MANOHAR PANDIT ASEAN Formation ‡ August 8. Signed at Bangkok ‡ Signatories Thailand Indonesia Malaysia Singapore Philippines . 1967.

Social Progress and Cultural Development ‡ Spirit of Equality and Partnership for Prosperity in The Region ‡ Promote Peace and Stability.MANOHAR PANDIT ASEAN Objectives ‡ Accelerate Economic Growth. Respect to Other Nations as per Charter of UN .REGIONAL TRADE BLOCKS DR.

Sovereignty. Territorial Integrity and National Identity of All Nations ‡ The Right of Every State to Lead Its National Existence Free From External Interference.REGIONAL TRADE BLOCKS DR. Equality.MANOHAR PANDIT ASEAN Fundamental Principles The Treaty of Amity and Cooperation in SE Asia Signed on February 24. Subversion or Coercion . 1976 ‡ Mutual Respect for the Independence.

REGIONAL TRADE BLOCKS DR.MANOHAR PANDIT ASEAN Fundamental Principles ‡ Non-interference in The Internal Affairs of Other Member Nations ‡ Peaceful Settlements of Difference or Disputes ‡ Renunciation of The Use of Threats or Force ‡ Effective Cooperation Between Themselves .

REGIONAL TRADE BLOCKS DR. 2003 ‡ Agreement to Create Indo ASEAN Free Trade Area By 2011 ‡ Agreement to Counter Terrorism ‡ India Becoming Signatory To ASEAN Treaty of Amity and Cooperation .MANOHAR PANDIT ASEAN Agreements With India ‡ Signed on October 8.

REGIONAL TRADE BLOCKS DR. Natural Resources .MANOHAR PANDIT ASEAN Trade Opportunities in ASEAN Countries ‡ Tourism ‡ Open Sky Policy ‡ Indian Film Industry ‡ BPO ‡ Other Areas Like Auto Parts.

MANOHAR PANDIT ANDEAN COMMUNITY Agreement signed in 1969 ‡ Bolivia. Ecuador. Venezuela replaced Chile.REGIONAL TRADE BLOCKS DR. Peru signed Andean Pact ‡ Collapsed in 1980 ‡ Political and Economic problems cause for failure ‡ 1990 renamed Andean Community. Colombia. Chile. now it is a custom union .

REGIONAL TRADE BLOCKS DR.MANOHAR PANDIT MERCOSUR Originated in 1988 ‡ Argentina and Brazil ‡ Moderate reduction in tariff increased business by 80% over 1980 ‡ Paraguay and Uruguay joined in 1990 ‡ Population of over 200 m ‡ Roadblock in 1998 as member countries had recession .

and Nicaragua ‡ War between Honduras and El Salvador over soccer match ‡ Some progress with US initiative after 2003 for common market . Guatemala.MANOHAR PANDIT CENTRAL AMERICAN COMMON MARKET Originated in early 1960 s ‡ Failed attempt ‡ Costa Rica. El Salvador.REGIONAL TRADE BLOCKS DR. Honduras.

MANOHAR PANDIT CARICOM Established in 1973 ‡ English speaking community of Caribbean countries ‡ Planned operation of customs union in 1991 ‡ Failed repeatedly on creation of economic integration .REGIONAL TRADE BLOCKS DR.

000 page document signed on Jan 1st. administration & operation of Plurilateral Trade Agreements .INTERNATIONAL BUSINESS WTO 22. 1995 by 128 countries WTO Single Institutional frame work encompassing GATT and results of UR 5 Specific Functions Facilitate implementation. administration & operation. and further the objectives of Multilateral Trade Agreement and Provide framework for implementation.

INTERNATIONAL BUSINESS WTO Provide forum for negotiations among members concerning their multilateral trade relations Administer understanding on Rules and Procedures governing settlements of disputes Administer trade review mechanism Cooperate with IMF and other bodies for achieving greater coherence in Global Economic Policy making .

Services.INTERNATIONAL BUSINESS WTO 4 Main Functions Supervise on regular basis operations related to declarations related to Goods. Services Council and TRIPS Council as subsidiary bodies . TRIPS Act as dispute settlement body To serve as Trade Review Mechanism Establish Goods Council.

INTERNATIONAL BUSINESS WTO Three Basic Issues Taken up by UR Reducing specific trade barriers and improving Strengthening GATT principles TRIPs (Trade Related Intellectual Property Rights) TRIMs (Trade Related Investment Measures) market access .

1945 ITO.03.    . IMF Unstable currencies & inadequate monetary reserves could not develop & function world markets 01.1947 IMF Functioning 29 Signatories to startwith. World Bank. 184 by 2002 end startwith.INTERNATIONAL BUSINESS IMF  Bretton Woods Conference.

INTERNATIONAL BUSINESS IMF .Major Objectives  To Promote International Monetary Cooperation  To Facilitate Expansion and Balanced Growth of International Trade  To Promote Exchange Rate Stability  To Establish Multilateral System of payment  To Make Its Resources Available to Its Members Who Are Experiencing Balance of Payment Difficulties .

INTERNATIONAL BUSINESS IMF Bretton Woods Agreement Established Fixed Exchange Rates for Each Member Country  USD 35 = Gold 1 Oz. raised to 2.25% In 1971  US had 70% of World s Gold Reserve in 1947  Redemption of Dollar in Gold . par Value was same whether Gold or USD was used  Variation of 1% allowed.

Trade Balance and Other Economic Indicators Quota is Pool of Money IMF can Lend to Member Countries. Monetary Reserves.Quota Quota Depends Upon National Income.INTERNATIONAL BUSINESS IMF     Member Countries Contribute to IMF . Basis of How Much Country Can Borrow as Allocation of SDR Quota determines Voting Rights .

6%.INTERNATIONAL BUSINESS IMF  Total SDR .Germany 6. France and UK 5.11%. Japan 6.5%.05% each  Board of Governors is Final Authority  Day to Day Business with 24 Executive Directors .213 million  Largest Quota USA 17.

JPY (15%). GBP (11%) by end 2002  SDR designed to take over Gold  Several Countries Have SDR Base for Value for Their Currencies .INTERNATIONAL BUSINESS IMF SDR  Created in 1969  SDR 213 = $ 280 billion  SDR is weighted average of USD (45%). Euro (29%).

Euro. based on market exchange rates. Japanese yen. .INTERNATIONAL BUSINESS IMF The currency value of the SDR is determined by summing the values in U. of a basket of major currencies (the U. dollars.S. dollar. and pound sterling).S. The SDR currency value is calculated daily (except on IMF holiday or whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five years.

632000 1.6320 1.006 0. September 03.$1.515269 U.139062 0.526481 0.51000 0.217726 -0.28410 84.156 0.379 0.S.4100 18.0903 1.00 = SDR SDR1 = US$ 0.INTERNATIONAL BUSINESS IMF Friday.00000 0.51527 4 . 2010 Currency Currency amount under Rule O-1 Exchange rate 1 USD eq % change in Ex rate against USD from previous calculation Euro Japanese Yen Pound Sterling USD 0.659949 2 1.54000 0.4000 1.

GBP (11%) by end 2002  SDR designed to take over Gold  Several Countries Have SDR Base for Value for Their Currencies . Euro (29%). JPY (15%).INTERNATIONAL BUSINESS IMF SDR  Created in 1969  SDR 213 = $ 280 billion  SDR is weighted average of USD (45%).

INTERNATIONAL BUSINESS    WORLD BANK Lending Money to the governments of developing countries to finance development projects in education. health and infrastructure Providing assistance to governments for developmental projects to the poorest developing countries Lending directly to private sector to help strengthen the private sector in developing countries with long-term longloans equity investments and other financial assistance .

to create an nonenvironment in developing countries to attract foreign investments Promoting increased flow of international investments by providing facilities for conciliation and arbitration between governments and foreign investors Advise. Research. Publication Contributed for trade since WW2 WW2 .INTERNATIONAL BUSINESS     WORLD BANK Providing investors with investment guarantees against non-commercial risks.