Foreign Trade Policy

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OBJECTIVES To give broader understanding of the foreign trade and it’s policy. This unit given students an understanding of the aspects that how the various theories explain the development of foreign trade between the nations.

The main objectives of this unit are: • To analysis similarities and differences between internal and international trade. • • • To provide an overview of various theories in foreign trade. To evaluate the terms of trade between the nations. To analysis the concept of Balance of Payment and Adjustment Mechanism in Balance of Payment.

STRUCTURE 1. 1.1 1.2 Introduction Meaning of International Trade Similarities and Differences between Internal and International Trade 1.3 1.4 1.5 1.6 1.7 1.8 1.9 Gains from International Trade Adam Smith’s Theory of Absolute Differences in Cost David Ricardo’s Theory of Comparative Cost Haberler’s Theory of Opportunity Cost in International Trade Heckscher-Ohlin Theory or Modern Theory of International Trade Terms of Trade International Trade in Services 1

1.10 1.11 1.12 1.13 1.14 1.15

Meanings of Balance of Payment Structure of Balance of Payment Balance of Payments Disequilibrium Adjustment Mechanism in balance of Payments Account Summary Self-Assessment Questions

1. Introduction:The international trade has been growing faster than world output indicates that the international market is expanding faster than the domestic markets. There are indeed many Indian firms too whose foreign business is gro wing faster than the domestic business. Business, in fact, is increasingly becoming international or global in its competitive environment, orientation, content and strategic intent. This is manifested/ necessitated/ facilitated by the following facts: (a) The Competitive business Environment (b)Globalisation of management (c) The universal liberlisation Policy by member countries.

Table - 1 Growth of World Merchandise Exports Year 1950 1960 1970 1980 1990 2000 2002 Value of merchandise exports (in billions of US $) 55 113 280 1846 3311 6350 6272


Table-1 shows the growth of world merchandise exports. The table indicates that during 1950-60, the value of world exports more than double. In the next decade it increased nearly 2 ½ times. During the 1970s, the value of the world exports increased by about 5 ½ times. Worldwide inflation, particularly the successive hikes in oil prices, significantly contributed to this unprecedented sharp increase in the value of world exports. During 1980-90, the value of world exports increased by 80 per cent. Between 1990 and 2000, it increased by over 90 per cent. In fact, exports of developing countries have been increasing faster than those of the developed. Historically, trade growth consistently outpaced overall economic growth for at least 250 years, except for a comparatively brief period from 1913 to 1950 characterised by heavy protectionism which was almost a by-product of the two World Wars. Between 1720 and 1913, trade growth was about one-anda-half times the GDP growth. Slow GDP growth between 1913 and 1950 - the period with the lowest average economic growth rate since 1820 – was accompanied by even slower trade growth, as war and protectionism undermined international trade. This period was also plagued by the great depression.

The Second half of the twentieth century has seen trade expand substantially faster than output. In the last two decades of the twentieth century, world trade has grown twice as fast as world real GDP (6 per cent versus 3 per cent).

That trade has been growing faster than world output means that a growing proportion of the national output is traded internationally. The foreign trade-GDP ratio (i.e., the value of the exports expressed as a percentage of the 3

value of GDP) generally rises with economic development. This ratio has been generally high for the economically advanced countries when compared with that of the less developed...
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