Question 1. What Is International Trade?
International trade is the exchange of capital, goods, and services across international borders or territories. … In most countries, such trade represents a significant share of gross domestic product (GDP).
Question 2. What Is The Definition Of Global Trade?
Global trade, also known as international trade, is simply the import and export of goods and services across international boundaries. Goods and services that enter into a country for sale are called imports.
Question 3. What Is The Theory Of International Trade?
International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries.
Question 4. Who Benefits From Trade?
Free trade means that countries can import and export goods without any tariff barriers or other non-tariff barriers to trade. Essentially, free trade enables lower prices for consumers, increased exports, benefits from economies of scale and a greater choice of goods.
Question 5. How Important Is Intuition When Trading?
Intuition is one element among several others which make a person a successful trader . Its presence increases the chances of one’s success manifold but presence of other elements, which may include professional knowledge, marketing / sales tricks, presence in the right market, purchase & sale at a right time, know how of related commercial rules / norms. is deeply connected with intuition.
Question 6. Why International Trade Is So Important?
Because of International Trade the trading partners gets goods cheaper than otherwise. Because every country produce those goods in the production of which it has to occur less comparative cost.
Question 7. What Are The Characteristics Of International Trade?
- Territorial specialization: International trade takes place basically due to geographical specialisation. Every country specialises in the production of goods and services in which it has a specific advantage.For example, India has specific advantage in the production of jute and tea. Therefore, India exports these commodities to U.K. India imports steel from U.K. which U.K. can produce at a lower cost than India.
- International competition: Producers from many countries complete with another to sell their products. Therefore, there is intense competition in international trade. Here the quality, design, packing, price, advertisement, etc., all play a significant role in deciding the winner in the market.
- Separation of sellers from buyers: In international trade sellers and buyers belong to different countries. They may have no chance of ever meeting one another. Therefore, they have to depend upon middlemen for transactions.
- Long chain of middlemen: The procedure of international trade is very long and complex. It is very difficult for buyers and sellers to perform all the formalities themselves. They require the services of expert middlemen such as, indent houses, forwarding agents, clearing agents, foreign exchange banks, etc.
- Mutually acceptable currency: The currencies of importing and exporting countries generally are different. Therefore, it is necessary to find out a mutually acceptable currency. Generally, dollar and pound sterling are selected. These currencies are known as hard currencies because they are acceptable all over the world.
- International rules and regulations: Businessmen engaged in international trade require knowledge of international laws and trade restrictions.
- Government control: The government of every country exercises control over imports and exports for national interest.
- Several documents: A large number of documents are required in international trade.
Question 8. What Are The Problems Or Difficulties In International Trade?
International trade is characterised by the following special problems or difficulties.
- Distance: Due to long distance between different countries, it is difficult to establish quick and close trade contacts between traders. Buyers and sellers rarely meet one another and personal contact is rarely possible. There is a great time lag between placement of order and receipt of goods from foreign countries. Distance creates higher costs of transportation and greater risks.
- Different languages: Different languages are spoken and written in different countries. Price lists and catalogues are prepared in foreign languages. Advertisements and correspondence also are to be done in foreign languages.A trader wishing to buy or sell goods abroad must know the foreign language or employ somebody who knows that language.
- Difficulty in transportation and communication: Dispatch and receipt of goods takes a longer time and involves considerable expenses. During the war and natural calamities, transportation of goods becomes even more difficult. Similarly, the costs of sending or receiving information are very high.
- Risk in transit: Foreign trade involves much greater risk than home trade. Goods have to be transported over long distances and they are exposed to perils of the sea. Many of these risks can be covered through marine insurance but increases the cost of goods.
- Lack of information about foreign businessmen: In the absence of direct and close relationship between buyers and sellers, special steps are necessary to verify the creditworthiness of foreign buyers. It is difficult to obtain reliable information concerning the financial position and business standing of the foreign traders. Therefore, credit risk is high.
- Import and export restrictions: Every country charges customs duties on imports to protect its home industries. Similarly, tariff rates are put on exports of raw materials. Importers and exporters have to face tariff restrictions.They are required to fulfil several customs formalities and rules. Foreign trade policy, procedures, rules and regulations differ from country to country and keep on changing from time to time.
- Documentation: Both exporters and importers have to prepare several documents which involve expenditure of time and money.
- Study of foreign markets: Every foreign market has its own characteristics. It has requirements, customs, weights and measures, marketing methods, etc., of its own. An extensive study of foreign markets is essential for success in foreign trade. It is very difficult to collect accurate and up to date information about foreign markets.
- Problems in payments: Every country has its own currency and the rate at which one currency can be exchanged for another (called exchange rate) keeps on fluctuating change in exchange rate create additional risk.Remittance of money for payments in foreign trade involves much time and expense. Due to wide time gap between dispatch of goods and receipt of payment, there is greater risk of bad debts.
- Frequent market changes: It is difficult to anticipate changes in demand and supply conditions abroad. Prices in international markets may change frequently. Such changes are due to entry of new competitors, changes in buyers’ preferences, changes in import duties and freight rates, fluctuations in exchange rates, etc.
- Investment for longer period: There is longer time gap between supply of goods and receipt of payment. Therefore, the exporter’s capital remains locked up over a longer period.
- Intense competition: Traders who want to sell goods abroad have to face severe competition from different countries. Considerable market research is necessary to ensure suitability of product in foreign markets. Heavy expenditure on advertising and sales promotion may be necessary.
Question 9. Is There A Need For A Separate Theory Of International Trade?
On this question, there are two views: (i) the classical view and (ii) Ohlin’s view.
Classical View :
Classical economists believed that there was a fundamental difference between home trade and foreign trade. They pointed out that, labour and capital move freely within a country but not between different countries.
Thus, international immobility of factors was the basic criterion accepted by the classical economists for the emergence of international trade. Moreover, different national policies, different political units, different monetary systems, and artificial barriers like tariffs and exchange controls involved in international trade distinguish it from domestic trade.
Ohlin’s View :
Bertil Ohlin, the Swedish economist, however, challenged the traditionally accepted notion on international trade by advocating that there is no need for a separate theory of international trade. In his view “international trade is but a special case of inter-local or inter-regional trade.”
He opines, that, the Marshallian theory of value can be easily extended to the phenomenon of international trade by developing the “space” thesis instead of the “time” hypothesis in the Marshallian Price Theory. “Space element is vital for the international trade and should be given full consideration in the theory of pricing, through its extension from one to a number of more or less closely related markets. Such an extension can be based upon one market analysis.”
Question 10. What Is The Meaning Of Unctad?
UNCTAD is the principal organ of the United Nations General Assembly dealing with trade, investment, and development issues.
Question 11. What Are The Objectives And Functions Of Unctad ?
Some of the most important objectives and functions of UNCTAD are given below:-
Objectives : The objective of UNCTAD :
- To reduce and eventually eliminate the trade gap between the developed and developing Countries.
- To accelerate the rate of economic growth of the developing world.
Functions: The main Functions of the UNCTAD are:
- To promote international trade between developed and developing countries with a view to accelerate economic development.
- To formulate principles and policies on international trade and related problems of economic development.
- To make proposals for putting its principles and policies into effect, (iv) To negotiate trade agreements.
- To review and facilitate the coordination of activities of the other U.N. institutions in the field of international trade.
- To function as a centre for a harmonious trade and related documents in development policies of governments.
Activities: The important activities of UNCTAD include
- research and support of negotiations for commodity agreements;
- technical elaboration of new trade schemes;
- various promotional activities designed to help developing countries in the areas of trade and capital flows.
Question 12. What Are The Factors Determine Size Of Gain Of International Trade?
- Nature of Terms of Trade
- Difference in Cost Ratios
- Productive Efficiency of the Country
- Relative Elasticity of Demand
- Factor Endowments and Technological Conditions
Question 13. What Are The Distinct Features Of International Transactions?
There are several reasons – practical as well as pedagogic – for evolving a separate theory of international trade and consequent development of a distinctive branch of economics called “International Economics” dealing with issues and problems of the international economy.
International trade follows different laws of behaviour from those of domestic trade. Therefore, a separate theory is inevitable. These reasons, in a way, tend to point out the distinguishing attributes of international transactions. Following are the distincg features:
Immobility of Factors : The degree of immobility of factors like labour and capital is generally greater between countries than within a country. Immigration laws, citizenship requirement, etc., often restrict the international mobility of labour.
Heterogeneous Markets : In the international economy, world markets lack homogeneity on account of differences in language, preferences, customs, weights and measures, etc. The behaviour of international buyers in each case would, therefore, be different. For instance, the Indians have right-hand driven cars while Americans have left-hand driven cars. Hence, the markets for automobiles are effectively separated. Thus, one peculiarity of international trade is that, it involves heterogeneous national markets.
Different National Groups : An obvious difference between home trade and foreign trade is that trade within a country is trade among the same group of people, whereas, trade between countries runs between differently cohered groups. The socio-economic environment differs greatly between nations, while it is more or less uniform within countries. Friedrich List, therefore, put that: “Domestic trade is among us, international trade is between us and them.”
Different Political Units : International trade is a phenomenon which occurs between politically different units, while domestic trade occurs within the same political unit. The government in each country is keen about the welfare of its own nationals against that of the people of other countries. Hence, in international trade policy, each government tries to see its own interest at the cost of the other country. As a matter of fact national sovereignty exerts its great influence on the character of economic activity and trade.
Different National Policies and Government Intervention : National rules, laws and policies relating to trade, commerce, industry, taxation, etc., are more or less uniform within a country, but differ widely between countries. Tariff policy, import quota system, subsidies and other controls adopted by a government interfere with the course of normal trade between it and other countries. Thus, state interference causes different problems in international trade while the value theory in its pure form, which assumes-laissez-faire policy, cannot be applied in toto to the international trade theory.
Different Currencies : Perhaps the principal difference between domestic and international trade is that, the latter involves the use of different types of currencies. That is why there is the problem of exchange rates and foreign exchange. It is a fact that different countries follow different foreign exchange policies. Thus, one has to study not only the factors which determine the value of each country’s monetary unit, but also the fact of divergent practices and exchange resorted to.
Specific Problems : International economic relations give rise to certain specific problems of a peculiar nature, e.g., international liquidity, international monetary co-operation, evolution of international organisations like the European Common Market, etc. Such problems can never arise in regional economics. These are to be studied separately and solved by “international economics” against the background of world movements at large.
Question 14. What Are The Disadvantages Of Free Trade ?
Despite many advantages, free trade policy has never been completely adopted by all the countries of the world. Particularly after the World War II, the policy was abandoned even by those who had previously adopted it. The following arguments are given against free trade policy.
Unrealistic Policy: Free trade policy is based on the assumption of laissez-faire or government non-intervention. Its success also requires the pre-condition of perfect competition. However, such conditions are unrealistic and do not exist in the actual world.
Non-Cooperation of Countries: Free trade policy works smoothly if all the countries cooperate with each other and follow this policy. If some countries decide to gain more by imposing import restrictions, the system of free trade cannot work.
Economic Dependence: Free trade increases the economic dependence on other countries for certain essential products such as food, raw materials, etc. Such dependence proves harmful particularly during wartime.
Political Slavery: Free trade leads to economic dependence and economic dependence leads to political slavery. For political freedom, economic independence is necessary. This requires abandonment of free trade.
Unbalanced Development: Free trade and the resultant international specialisation lead to unbalanced development of national economy. Under this system, only those sectors are developed in which the country has a comparative advantage. Other sectors remain undeveloped. This results in lop-sided development.
Dumping: Free trade may lead to cutthroat competition and dumping. Under dumping, goods arc sold at very cheap rates and even below their cost of production in order to capture the foreign markets.
Harmful Products: Under free trade, injurious and harmful products may be produced and traded. Trade restrictions are necessary to check the import of such products.
International Monopolies: Free trade may lead to international monopolies. It encourages the establishment of multinational corporations. These corporations tend to acquire monopoly position and thus harm the interest of the local people.
Reduction in Welfare of Certain Groups: While free trade tends to maximize world production of goods and services, it may simultaneously hurt the welfare of certain group in every country. Under free trade, the output of those commodities in which the country has comparative advantage tend to increase to meet the export demand, and the output of goods in which the country has comparative disadvantage contracts due to pressure from import competition. Thus, the real income of the groups engaged in the export industries will rise and real income of those engaged in the import competing industries will fall.
Harmful to Less Developed Countries: Free trade is harmful for the less developed countries for the following reasons:
- Competition under free trade is unfair and unhealthy. The less developed countries find it difficult to compete with the economically advanced countries.
- Under free trade, gains of trade are unequally distributed depending upon the level of development of different countries. The terms of trade are favourable for the developed countries, and unfavourable for the poor countries.
- Less developed countries generally experience unfavourable balance of payments. The problem of un-favourable balance of payments cannot be solved under free trade policy.
- Free trade policy adopted by the British government in India led to the destruction of Indian cottage and small scale industries.
- The less developed countries cannot protect their infant industries under the policy of free trade.
- Free trade may endanger economic and political independence of the backward nations.
Question 15. What Are The Advantages Of Flexible Exchange Rates ?
Advantage of Flexible Exchange Rates : Flexible exchange rate system is claimed to have the following advantages
Independent Monetary Policy: Under flexible exchange rate system, a country is free to adopt an independent policy to conduct properly the domestic economic affairs. The monetary policy of a country is not limited or affected by the economic conditions of other countries.
Shock Absorber: A fluctuating exchange rate system protects the domestic economy from the shocks produced by the disturbances generated in other countries. Thus, it acts as a shock absorber and saves the internal economy from the disturbing effects from abroad.
Promotes Economic Development: The flexible exchange rate system promotes economic development and helps to achieve full employment in the country. The exchange rates can be changed in accordance with the requirements of the monetary policy of the country to achieve the planned national objectives.
Solutions to Balance of Payment Problems: The system of flexible exchange rates automatically removes the disequilibrium in the balance of payments. When, there is deficit in the balance of payments, the external value of a country’s currency falls. As a result, exports are encouraged, and imports are discouraged thereby, establishing equilibrium in the balance of payment.
Promotes International Trade: The system of flexible exchange rates does not permit exchange control and promotes free trade. Restrictions on international trade are removed and there is free movement of capital and money between countries.
Increase in International Liquidity:The system of flexible exchange rates eliminates the need for official foreign exchange reserves, if the individual governments do not employ stabilization funds to influence the rate. Thus, the problem of international liquidity is automatically solved. In fact, the present shortage of international liquidity is due to pegging the exchange rates and the intervention of the IMF authorities to prevent fluctuations in the rates beyond a narrow limit.
Market Forces at Work: Under the flexible exchange rate system, the foreign exchange rates are determined by the market forces of demand and supply. Market is cleared off automatically through changes in exchange rates and the possibility of scarcity or surplus of any currency does not exist.
International Trade not Promoted by Fixed Rates: The argument that fixed exchange rates promotes international trade is not supported by historical facts of inter-war or post-war period. On the other hand under the flexible exchange rate system, the trend of the rate of exchange is generally assessed through the forward market, and the traders are protected from financial losses arising from fluctuating exchange rates. This helps in promoting international trade.
International Investment not Promoted by Fixed Rates:The argument that long-term international investments are encouraged under fixed exchange rate system is not valid. Both the lenders and borrowers cannot expect the exchange rate to remain stable over a very long-period.
Fixed Rates not Necessary for currency Area: This stable exchange rates are not necessary for any system of currency areas. The sterling block functioned smoothly during the thirties in spite of the fluctuating rates of the member countries.
Speculation not Prevented by Fixed Rates:The main weakness of the stable exchange rate system is that in spite of the strict exchange control, currency speculation is encouraged. This destroys the stability in the exchange value of the home currency and makes devaluation of the currency inevitable. For instance, the pound had to be devalued in 1949 mainly because of such speculation.
Question 16. What Are The Disadvantages Of Flexible Exchange Rates?
Disadvantage of Flexible Exchange Rates : The following are the main drawbacks of the system of flexible exchange rates
Low Elasticities: The elasticities in the international markets are too low for exchange rate, variations to operate successfully in bringing about automatic equilibrating adjustments. When import and export elasticities are very low, the exchange market becomes unstable. Hence, the depreciation of the weak currency would simply tend to worsen the balance of payments deficit further.
Unstable conditions: Flexible exchange rates create conditions of instability and uncertainty which, in turn, tend to reduce the volume of international trade and foreign investment. Long-term foreign investments arc greatly reduced because of higher risks involved.
Adverse Effect on Economic Structure: The system of flexible exchange rates has serious repercussion on the economic structure of the economy. Fluctuating exchange rates cause changes in the price of imported and exported goods which, in turn, destabilise the economy of the country.
Unnecessary Capital Movements: The system of fluctuating exchange rates leads to unnecessary international capital movements. By encouraging speculative activities, such a system causes large-scale capital outflows and inflows, thus, seriously disturbing the economy of the country.
Depression Effects of Capital Movements: Speculative capital movements caused by fluctuating exchange rates may lead to the problem of extremely high liquidity preference. In a situation of high liquidity preference, people tend to hoard currency, interest rates rise, investment falls and there is large-scale unemployment in the economy.
Inflationary Effect: Flexible exchange rate system involves greater possibility of inflationary effect of exchange depreciation on domestic price level of a country. Inflationary rise in prices leads to further depreciation of the external value of the currency.
Factor Immobility: The immobility of various factors of production deprives the flexible exchange rate system of its advantages arising from the adoption of monetary and other policies for maintaining internal stability. Such policies produce desirable effects on production and employment only when supply of factors of production is elastic.
Failure of Flexible Rate System: Experience of the flexible exchange rate system adopted between the two world wars has shown that it was a flop.
Question 17. What Are The Criteria Of Measuring Gains From International Trade?
Gains accrue to all the participating countries in international trade. As noted by Jacob Viner, the classical economists usually adopted the following alternative criteria of measuring the gain from trade accruing to an individual country:
- Reduction in the Cost of Production.
- Enhancement of the Real Income.
- The nature of Terms of Trade.
In short, an index of cost reduction or improvement in the marginal physical product of labour can be used as a criterion for measuring the gain from international trade.
Thus, the gain from trade may be measured as under: G = Ca – Cb
G stands for the gain;
Ca stands for per unit cost of production after trade;
Cb stands for per unit cost of production before trade.
If G is negative, it suggests cost economy to that extent.
Similary, the other method may be given as under:
G = MP Pa – MPPb
MP Pa refers to the marginal physical product of labour after trade.
MPPb refers to the marginal physical product of labour before trade.
The positive magnitude of Gi thus, implies a gain to that extent.
A second criterion, the real income criterion follows from the first that to the extent the real income or the net national product of the country increases on account of international trade, may be regarded as the gain from international trade. Thus:
G = Ya-Yb
Ya stands for the national income after trade.
Yb stands for the national income before trade.
The last criterion, the terms of trade index, of measuring gain is, however, the most celebrated one. Terms of trade refer to the ratio of export price (Px) to import price (Pm) of a country –
Question 18. What Are The Factors That Influence The Terms Of Trade?
Terms of trade are influenced by a number of factors. Important among them are given below:
Elasticity of Demand: The elasticity of demand for exports and imports of a country influence its terms of trade. If the demand for a country’s exports is less elastic as compared to her imports, the terms of trade will tend to be favourable because the exports can command higher price than imports. On the other hand, if the demand for imports is less elastic than that for exports, the terms of trade will be unfavourable.
Elasticity of Supply: The nature of elasticity of supply also significantly influence the country’s terms of trade. If the supply of a country’s exports is more elastic than the imports, the terms of trade will tend to be favourable.
Nature of Goods: If a country is producing and exporting only primary goods, and importing manufactured goods, the terms of trade will be unfavourable.
Economic Development: The economic development has two types of effects: (a) The demand effect: It refers to the increase in demand for imports as a result of increase in income associated with economic development, (b) The supply effect: It refers to the increase in supply of import substitutes or import competing goods. The net effect of economic development depends upon the extent of these two effects.
Rate of Exchange:Changes in the rate of exchange of a country’s currency also affect its terms of trade. If a country’s currency appreciates, its terms of trade will improve because a rise in the value of the currency causes an increase in the export prices and decrease in the import prices.
Tariff Policy: Tariffs and quotas also influence the terms of trade. These measures, if not retaliated by other countries, improve a country’s terms of trade by restricting imports.
Size of Population: An overpopulated country will have larger demand for imports. As a result, the terms of trade will tend to be unfavourable in this case relative to the under populated or optimally populated country.
Size of Country: A larger country will tend to have less favourable terms of trade as compared to a smaller country. This is because the smaller country can reap the gains of economies of scale enjoyed by the larger one in the international trade.
Degree of Competition: If a country enjoys monopoly power in case of its exports and there are many alternative sources of supply of its imports, then it will have favourable terms of trade.
Question 19. What Is The Role Of Wto In International Trade?
- WTO’s aim is to liberalise international trade.
- WTO establishes rules regarding international trade and sees that these rules are obeyed.
- 153 countries of the world are currently members of the WTO.
- It is seen that the developed countries have unfairly retained trade barriers. On the other hand, WTO rules have forced developing countries to remove trade barriers.
Question 20. What Are The Objectives Of Wto?
Important objectives of WTO are mentioned below:
- To implement the new world trade system as visualised in the Agreement;
- To promote World Trade in a manner that benefits every country;
- To ensure that developing countries secure a better balance in the sharing of the advantages resulting from the expansion of international trade corresponding to their developmental needs;
- To demolish all hurdles to an open world trading system and usher in international economic renaissance because the world trade is an effective instrument to foster economic growth;
- To enhance competitiveness among all trading partners so as to benefit consumers and help in global integration;
- To increase the level of production and productivity with a view to ensuring level of employment in the world;
- To expand and utilize world resources to the best;
- To improve the level of living for the global population and speed up economic development of the member nations.
Question 21. What Are The Functions Of Wto ?
Some of the important functions and objectives of WTO are : The former GATT was not really an organisation; it was merely a legal arrangement. On the other hand, the WTO is a new international organisation set up as a permanent body. It is designed to play the role of a watchdog in the spheres of trade in goods, trade in services, foreign investment, intellectual property rights, etc. Article III has set out the following five functions of WTO;
- The WTO shall facilitate the implementation, administration and operation and further the objectives of this Agreement and of the Multilateral Trade Agreements, and shall also provide the frame work for the implementation, administration and operation of the plurilateral Trade Agreements.
- The WTO shall provide the forum for negotiations among its members concerning their multilateral trade relations in matters dealt with under the Agreement in the Annexes to this Agreement.
- The WTO shall administer the Understanding on Rules and Procedures Governing the Settlement of Disputes.
- The WTO shall administer Trade Policy Review Mechanism.
- With a view to achieving greater coherence in global economic policy making, the WTO shall cooperate, as appropriate, with the international Monetary Fund (IMF) and with the International Bank for Reconstruction and Development (IBRD) and its affiliated agencies.
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