Importance of Foreign Trade
Foreign Trade is considered as an engine of growth. The opposite view is foreign trade results in economic inequality. Rich countries become richer and poor countries become poorer. Benefits foreign trade may be direct and indirect.
Direct Benefits: When a country specializes in production of few commodities due to international trade and division of labour cost of production is less. Export lead to increase in national income and growth of the nation. Production can be increased if the market widens. This lead to investment and will break the vicious cycle of poverty in less developed countries.
Basis of International Trade
International trade has been in existence since ancient times. It has grown enormously and at present nearly 15 % of the national produce enters foreign market and almost an equal percentage of domestic consumption is met by imported goods.
According to mercantilists, a nation’s wealth and prosperity depended on its stock of precious metals which in turn was a function of trade surplus.
To increase trade surplus a nation shall strive to increase exports and decrease imports. According to mercantilists trade is a zero-sum game i.e., one’s gain is the loss of another. But actually trade is a positive sum game.
1. Absolute cost theory
According to Adam Smith, the father of economics, the basis for International trade is absolute cost advantage. Trade between two countries would be mutually beneficial if the cost of producing a commodity in one country is lesser than the cost of producing the same commodity in another country. i.e., absolute cost advantage.
Example:
No. of units of labour
No. of units of cloth produced per unit of labour
USA
10
4
UK
3
7
US has absolute advantage in wheat production since it has cost absolute advantage compared to UK. Hence USA can produce wheat and import cloth from UK.
‘Vent for Surplus Theory’ PC
PP’-Terms of Trade Line
Importables
E D
PPC
P’
0 X1 X2 X
Exportables
Fig. 1. Adam Smith’s Theory
Before International Trade the production will be 0X1 quantity of primary commodities and X1E quantity of manufactured commodities. The production point is E which is inside the production possibility curve. With the opening up of economy for foreign trade, the production will be at the point D on the PPC curve. The resources are fully utilized. It is the tangency point of PPC and Terms of Trade line.
Adam smith has considered International trade is a vent for surplus and there are three kinds of gains due to International Trade.
Productivity gain
Absolute cost gain
Vent for surplus gain
2. Comparative cost theory (David Ricardo)
According to this theory differences in comparative cost of production of commodities between nations result in trade.
A country should specialize in the production of those goods in which it is more efficient and leave the production of other commodity to other country. Then two countries will produce more and they trade with each other.
Example: Comparative Cost Advantage.
Country
No. of units of labour per unit of cloth
No. of units of labour per unit of wine
Exchange ratio between wine and cloth
England
100
120
1 wine = 1.2 cloth
Portugal
90
80
1 wine = 0.88 cloth
In the above example Portugal has an absolute advantage in both the commodity. But comparison of the cost of production of wine it was found it has advantage in wine production than in England cost is less in Portugal (80/120 < 90/100). International trade results in
most efficient allocation of resources
price stabilization for both resources and products.
3. Opportunity cost theory (Gottfried Haberler, 1933)
The opportunity cost of a product is the amount of another product that must be given up in order to releases just enough resources to produce one additional unit of the first product.
According to this theory, a nation with a lower opportunity cost for a commodity has a comparative advantage in that commodity and comparative disadvantage in another commodity.
The differences in opportunity cost of production of commodities is the basis for international trade.
4. Factor – Endowment Theory
It was developed by Swedish Economist Eli Heckscher and his student Bertil Ohlin. Theory is referred as Heckscher-Ohlin theory. It consists of two theorems viz., H-O theorem and the Factor price equilisation theorem. First theorem examines the reasons for comparative cost differences. The nation uses intensively more abundant factor in the production of a commodity and hence it is advantageous for a country to produce that commodity, 2nd theorem examines the effect of International Trade on factor prices. Ti equalizes the factor prices between countries and thus serves as a substitute for international factor mobility.
H-O. Theory states that a country will specialize in the production and export of goods whose production requires a relatively large amount o the actor with which the country is relatively well endowed. Free international trade lead to equalization of factor prices internationally.
5. Complementary Trade Theories
Stolper – Samuelson Theorem – focused the effect on Tariffs and Trade on income distribution.
International Trade will increase the returns to the abundant factor and reduce the returns to the scarce factor. The demand for abundant factors raise and will result in increase in return. Whereas the demand for scarce resource declines and thus return will reduce. Labour abundant countries should concentrate on production of labour intensive commodities and promote the export of these commodities.
Equilibrium under Autarchy
Autarchy means absence of international trade. Under autarchy equilibrium is equilibrium is established at the point of tangency between domestic price line PaPa in fig and transformation cure (AA) and the highest commodity indifferences curve (IE)
Cloth
W A
E
Paa
A
C
I
I
Pa
E-equilibrium
Price line is flat
Wine
Fig. 2. Equilibrium under Autarchy (Portrugal)
The slope of PPC (the rate of transformation of cloth into wine through production) and slope of price line (the rate of transformation of cloth into wine through trade) is the same at the point E. E is the highest indifference curve the country could reach with the available resources. Hence the economy attains equilibrium at E.
C1
W A
I1
Poa
A1
I
E
I1
Cloth
Wine
Fig. 3. Equilibrium under Autarchy(England )
If these countries enter into trade with each other the price will be in between these two
Complementary theory
If a capital abundant country imposes a tariff on the import of labour intensive commodity the relative price of labour intensive commodity will rise leading to increase in the wages of labour. Because increase in price of labour intensive commodity lead to increase in profitability and increase in production of that commodity and a decline in production of capital intensive commodity. Capital use per labour is more. It increases the productivity and rise the wages.
This explains the effect of imposition of tariff on product prices, reallocation of resources and income distribution. This theory also explained the effect of tariff on factor prices.
Importance of Foreign Trade
Marketing of Agricultural commodities across the nation’s borders usually termed as external trade. External trade is done in the form of either exports or imports.
Exports provide the market support for the country’s surpluses and generate foreign exchange earnings which increases the country’s capacity to import other goods, but at the same time in the short run, they reduce the domestic availability of the commodities exported and consequently raise the domestic price level.
Imports, on the other hand, though reduce the foreign exchange reserves, augment the domestic availability of goods and if these pertain to the capital goods or inputs, expand or improve the production capacity but in the short run, they depress the domestic prices.
The effects of exports and imports of final goods on the domestic price level is such that, in the absence of any public intervention in the domestic market, the producers gain by exports and lose by imports. The level of exports and imports of a country are interrelated as the capacity of imports depends on its ability to export.
International trade or marketing essentially involves buyers and sellers of two different countries. Usually the currencies are different and convertibility is quite often not automatic. External trade has not been taking place freely because of national objectives (self reliance), natural resource endowments, policies and barriers like physical tariff, subsidies etc.,
Due to the introduction of liberalization of trade in India in 1990s and the impact of WTO (1995 1st Jan) export of agricultural commodities are encouraged by the nation. At present agricultural export was 0.6 percent of world export. India’s aim is to achieve at least one percent.
Controls, Quantity Restrictions(QRs) are increasingly relaxed. New tariffs are introduced.
Public Intervention in agricultural commodities is being reduced and international trade is being liberalised and hence it is important to study the import and export of agricultural commodities.
International Marketing
Most firms is general prefer domestic marketing since it is simpler and safer. Managers do not have to learn another language, deal with a different currency, face political and legal uncertainties or adapt the product to different customer needs and expectations.
The factors normally motivate into International Marketing are – less marketing opportunities at home. Growth of GNP slow down. Govt. become anti business, tax burden is high. Govt. favour export to earn foreign exchange and to reduce trade deficit fiscal deficit.
Demand for their products in other countries. Hence they want to go for international marketing. In 1979 U.S. export was 11% of U.S GNP. Multinational companies enter to world trade.
Principles
v Setting marketing objectives.
v Choosing target markets.
v Developing marketing positions and mixes.
v Carrying out market control.
These apply to both domestic and foreign markets.
International marketers need to understand foreign environments and institutions and be prepared to revise the most basic assumptions about had people respond to marketing stimuli.
Six Basic Decisions:
1) Appraising the International Marketing environment.
2) Deciding whether to go abroad.
3) Deciding which market to enter.
4) Deciding how to enter the market.
5) Deciding on the marketing program.
6) Deciding on the marketing organization.
International marketing environment includes the International Trade system.
Reference books:
1.M.L.Jhingan, “The Economics of Development and Planning” 426 – 438, 1991. Chapter ‘Role of Foreign Trade in Development’
2.Francis Cherunilam, “International Economics’ Tata McGraw Hill Publishing Company Limited, New Delhi, 2006 (Fourth Edition).
Foreign Trade is considered as an engine of growth. The opposite view is foreign trade results in economic inequality. Rich countries become richer and poor countries become poorer. Benefits foreign trade may be direct and indirect.
Direct Benefits: When a country specializes in production of few commodities due to international trade and division of labour cost of production is less. Export lead to increase in national income and growth of the nation. Production can be increased if the market widens. This lead to investment and will break the vicious cycle of poverty in less developed countries.
Basis of International Trade
International trade has been in existence since ancient times. It has grown enormously and at present nearly 15 % of the national produce enters foreign market and almost an equal percentage of domestic consumption is met by imported goods.
According to mercantilists, a nation’s wealth and prosperity depended on its stock of precious metals which in turn was a function of trade surplus.
To increase trade surplus a nation shall strive to increase exports and decrease imports. According to mercantilists trade is a zero-sum game i.e., one’s gain is the loss of another. But actually trade is a positive sum game.
1. Absolute cost theory
According to Adam Smith, the father of economics, the basis for International trade is absolute cost advantage. Trade between two countries would be mutually beneficial if the cost of producing a commodity in one country is lesser than the cost of producing the same commodity in another country. i.e., absolute cost advantage.
Example:
No. of units of labour
No. of units of cloth produced per unit of labour
USA
10
4
UK
3
7
US has absolute advantage in wheat production since it has cost absolute advantage compared to UK. Hence USA can produce wheat and import cloth from UK.
‘Vent for Surplus Theory’ PC
PP’-Terms of Trade Line
Importables
E D
PPC
P’
0 X1 X2 X
Exportables
Fig. 1. Adam Smith’s Theory
Before International Trade the production will be 0X1 quantity of primary commodities and X1E quantity of manufactured commodities. The production point is E which is inside the production possibility curve. With the opening up of economy for foreign trade, the production will be at the point D on the PPC curve. The resources are fully utilized. It is the tangency point of PPC and Terms of Trade line.
Adam smith has considered International trade is a vent for surplus and there are three kinds of gains due to International Trade.
Productivity gain
Absolute cost gain
Vent for surplus gain
2. Comparative cost theory (David Ricardo)
According to this theory differences in comparative cost of production of commodities between nations result in trade.
A country should specialize in the production of those goods in which it is more efficient and leave the production of other commodity to other country. Then two countries will produce more and they trade with each other.
Example: Comparative Cost Advantage.
Country
No. of units of labour per unit of cloth
No. of units of labour per unit of wine
Exchange ratio between wine and cloth
England
100
120
1 wine = 1.2 cloth
Portugal
90
80
1 wine = 0.88 cloth
In the above example Portugal has an absolute advantage in both the commodity. But comparison of the cost of production of wine it was found it has advantage in wine production than in England cost is less in Portugal (80/120 < 90/100). International trade results in
most efficient allocation of resources
price stabilization for both resources and products.
3. Opportunity cost theory (Gottfried Haberler, 1933)
The opportunity cost of a product is the amount of another product that must be given up in order to releases just enough resources to produce one additional unit of the first product.
According to this theory, a nation with a lower opportunity cost for a commodity has a comparative advantage in that commodity and comparative disadvantage in another commodity.
The differences in opportunity cost of production of commodities is the basis for international trade.
4. Factor – Endowment Theory
It was developed by Swedish Economist Eli Heckscher and his student Bertil Ohlin. Theory is referred as Heckscher-Ohlin theory. It consists of two theorems viz., H-O theorem and the Factor price equilisation theorem. First theorem examines the reasons for comparative cost differences. The nation uses intensively more abundant factor in the production of a commodity and hence it is advantageous for a country to produce that commodity, 2nd theorem examines the effect of International Trade on factor prices. Ti equalizes the factor prices between countries and thus serves as a substitute for international factor mobility.
H-O. Theory states that a country will specialize in the production and export of goods whose production requires a relatively large amount o the actor with which the country is relatively well endowed. Free international trade lead to equalization of factor prices internationally.
5. Complementary Trade Theories
Stolper – Samuelson Theorem – focused the effect on Tariffs and Trade on income distribution.
International Trade will increase the returns to the abundant factor and reduce the returns to the scarce factor. The demand for abundant factors raise and will result in increase in return. Whereas the demand for scarce resource declines and thus return will reduce. Labour abundant countries should concentrate on production of labour intensive commodities and promote the export of these commodities.
Equilibrium under Autarchy
Autarchy means absence of international trade. Under autarchy equilibrium is equilibrium is established at the point of tangency between domestic price line PaPa in fig and transformation cure (AA) and the highest commodity indifferences curve (IE)
Cloth
W A
E
Paa
A
C
I
I
Pa
E-equilibrium
Price line is flat
Wine
Fig. 2. Equilibrium under Autarchy (Portrugal)
The slope of PPC (the rate of transformation of cloth into wine through production) and slope of price line (the rate of transformation of cloth into wine through trade) is the same at the point E. E is the highest indifference curve the country could reach with the available resources. Hence the economy attains equilibrium at E.
C1
W A
I1
Poa
A1
I
E
I1
Cloth
Wine
Fig. 3. Equilibrium under Autarchy(England )
If these countries enter into trade with each other the price will be in between these two
Complementary theory
If a capital abundant country imposes a tariff on the import of labour intensive commodity the relative price of labour intensive commodity will rise leading to increase in the wages of labour. Because increase in price of labour intensive commodity lead to increase in profitability and increase in production of that commodity and a decline in production of capital intensive commodity. Capital use per labour is more. It increases the productivity and rise the wages.
This explains the effect of imposition of tariff on product prices, reallocation of resources and income distribution. This theory also explained the effect of tariff on factor prices.
Importance of Foreign Trade
Marketing of Agricultural commodities across the nation’s borders usually termed as external trade. External trade is done in the form of either exports or imports.
Exports provide the market support for the country’s surpluses and generate foreign exchange earnings which increases the country’s capacity to import other goods, but at the same time in the short run, they reduce the domestic availability of the commodities exported and consequently raise the domestic price level.
Imports, on the other hand, though reduce the foreign exchange reserves, augment the domestic availability of goods and if these pertain to the capital goods or inputs, expand or improve the production capacity but in the short run, they depress the domestic prices.
The effects of exports and imports of final goods on the domestic price level is such that, in the absence of any public intervention in the domestic market, the producers gain by exports and lose by imports. The level of exports and imports of a country are interrelated as the capacity of imports depends on its ability to export.
International trade or marketing essentially involves buyers and sellers of two different countries. Usually the currencies are different and convertibility is quite often not automatic. External trade has not been taking place freely because of national objectives (self reliance), natural resource endowments, policies and barriers like physical tariff, subsidies etc.,
Due to the introduction of liberalization of trade in India in 1990s and the impact of WTO (1995 1st Jan) export of agricultural commodities are encouraged by the nation. At present agricultural export was 0.6 percent of world export. India’s aim is to achieve at least one percent.
Controls, Quantity Restrictions(QRs) are increasingly relaxed. New tariffs are introduced.
Public Intervention in agricultural commodities is being reduced and international trade is being liberalised and hence it is important to study the import and export of agricultural commodities.
International Marketing
Most firms is general prefer domestic marketing since it is simpler and safer. Managers do not have to learn another language, deal with a different currency, face political and legal uncertainties or adapt the product to different customer needs and expectations.
The factors normally motivate into International Marketing are – less marketing opportunities at home. Growth of GNP slow down. Govt. become anti business, tax burden is high. Govt. favour export to earn foreign exchange and to reduce trade deficit fiscal deficit.
Demand for their products in other countries. Hence they want to go for international marketing. In 1979 U.S. export was 11% of U.S GNP. Multinational companies enter to world trade.
Principles
v Setting marketing objectives.
v Choosing target markets.
v Developing marketing positions and mixes.
v Carrying out market control.
These apply to both domestic and foreign markets.
International marketers need to understand foreign environments and institutions and be prepared to revise the most basic assumptions about had people respond to marketing stimuli.
Six Basic Decisions:
1) Appraising the International Marketing environment.
2) Deciding whether to go abroad.
3) Deciding which market to enter.
4) Deciding how to enter the market.
5) Deciding on the marketing program.
6) Deciding on the marketing organization.
International marketing environment includes the International Trade system.
Reference books:
1.M.L.Jhingan, “The Economics of Development and Planning” 426 – 438, 1991. Chapter ‘Role of Foreign Trade in Development’
2.Francis Cherunilam, “International Economics’ Tata McGraw Hill Publishing Company Limited, New Delhi, 2006 (Fourth Edition).
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