Unit – 1
Introduction
International economics deals with the economic activities of varied countries and their consequences.
In other words, international economics could be a field concerned with economic interactions of nations and effect of international issues on the world economic activity.
It studies economic and political issues associated with international trade and finance.
International trade involves the exchange of products or services and other factors of production, like labor and capital, across international borders.
On the opposite hand, international finance studies the flow of financial assets or investment across borders. International trade and finance became possible across nations only thanks to the emergence of globalization.
Globalization are often defined as an integration of economics everywhere the world. It involves an exchange of technological, economic, and political factors across nations because of advancement in communication, transportation, and infrastructure systems.
With the arrival of globalization, there's a rapid increase in the free flow of products and services, capital, labor and finance between nations. the results of globalization are often negative or positive.
For example, globalization has led to extend employed opportunities and standardization of international economic laws and policies. additionally , it's also resulted in reduction in trade barriers, like tariffs and quotas.
However, globalization has marked a rise in international competition, which ends up in decrease within the market share of organizations. Therefore, the repercussions of globalization are important for organizations, regardless of whether they are indulged in international trade or not.
Apart from this, it describes the functioning of various international economic institutions, like World Trade Organization (WTO), International monetary fund (IMF), and United Nations Conference on Trade and Development (UNCTAD).
International economics refers to a study of international forces that influence the domestic conditions of an economy and shape the economic relationship between countries. In other words, it studies the economic interdependence between countries and its effects on economy.
The scope of international economics is wide because it includes various concepts, like globalization, gains from trade, pattern of trade, balance of payments, and FDI. aside from this, international economics describes production, trade, and investment between countries.
International economics has emerged together of the foremost essential concepts for countries. Over the years, the sector of international economics has developed drastically with various theoretical, empirical, and descriptive contributions.
Generally, the economic activities between nations differ from activities within nations. for instance , the factors of production are less mobile between countries thanks to various restrictions imposed by governments.
The impact of varied government restrictions on production, trade, consumption, and distribution of income are covered in the study of internal economics. Thus, it's important to review the international economics as a special field of economics.
International economics is split into two parts, namely, theoretical and descriptive.
These two parts are discussed as follows:
(a) Theoretical International Economics:
Deals with the reason of international economic transactions as they happen in the institutional environment
Theoretical international economics is further grouped into two categories, which are as follows:
(i) Pure Theory of International Economics:
The pure theory of international economics deals with trade patterns, impact of trade on production, rate of consumption, and income distribution. aside from this, it also involves the study of effects of trade on prices of products and services and rate of economic growth.
(ii) Monetary Theory of International Economics:
The monetary theory of international economics cares with issues associated with balance of payments and international monetary system. It studies causes of disequilibrium between payments and international monetary system and international liquidity.
(b) Descriptive International Economics:
Deals with institutional environment during which international transactions happen between countries Descriptive international economics also studies issues associated with international flow of products and services and financial and other resources. additionally , it covers the study of varied international economic institutions, like IMF, WTO, world bank, and UNCTAD.
Among aforementioned concepts, like globalization, gains from trade, pattern of trade, balance of payments, and FDI, globalization forms the main part to be learned in international economics.
International trade takes place on account of the many reasons such as:
1. Human wants and countries’ resources don't totally coincide. Hence, there tends to be interdependence on a large scale.
2. Factor endowments in several countries differ.
3. Technological advancement of various countries differs. Thus, some countries are better placed in one quite production and a few others superior in another kind of production.
4. Labor and entrepreneurial skills differ in several countries.
5. Factors of production are highly immobile between countries.
In short, international trade is that the outcome of territorial division of labor and specialization in the countries of the world.
Salient Features of International Trade:
The following are the distinguishing features of international trade:
(1) Immobility of Factors:
The degree of immobility of things like labor and capital is usually greater between countries than within a country. Immigration laws, citizenship, qualifications, etc. often restrict the international mobility of labor.
International capital flows are prohibited or severely limited by different governments. Consequently, the economic significance of such mobility of things tends to equality within but not between countries. as an example , wages could also be equal in Mumbai and Pune but not in Bombay and London.
According to Harrod, it thus follows that domestic trade consists largely of exchange of products between producers who enjoy similar standards of life, whereas international trade consists of exchange of products between producers enjoying widely differing standards. Evidently, the principles which determine the course and nature of internal and international trade are bound to vary in some respects at least.
In this context, it's going to be pointed out that the worth of a commodity in the country where it's produced tends to equal its cost of production.
The reason is that if in an industry the price is more than its cost, resources will flow into it from other industries, output will increase and the price will fall until it's adequate to the cost of production. Conversely, resources will effuse of the industry, output will decline, the price will go up and ultimately equal the cost of production.
But, as among different countries, resources are comparatively immobile; hence, there's no automatic influence equalizing price and costs. Therefore, there could also be permanent difference between the costs of production of a commodity.
In one country and the price obtained in a different country for it. as an example , the price of tea in India must, in the long run, be adequate to its cost of production in India. But in the U.K., the price of Indian tea could also be permanently above its cost of production in India. in this way, international trade differs from home trade.
(2) Heterogeneous Markets:
In the international economy, world markets lack homogeneity on account of differences in climate, language, preferences, habit, customs, weights and measures, etc. The behaviour of international buyers in each case would, therefore, vary.
(3) Different National Groups:
International trade takes place between differently cohered groups. The socio-economic environment differs greatly among different nations.
(4) Different Political Units:
International trade may be a phenomenon which occurs amongst different political units.
(5) Different National Policies and Government Intervention:
Economic and political policies differ from one country to a different. Policies concerning trade, commerce, export and import, taxation, etc., also differ widely among countries though they're more or less uniform within the country. Tariff policy, import quota system, subsidies and other controls adopted by governments interfere with the course of normal trade between one country and another.
(6) Different Currencies:
Another notable feature of international trade is that it involves the utilization of various sorts of currencies. So, each country has its own policy in reference to exchange rates and exchange.
For the sake of brevity, features of international trade are mentioned in Chart 1.
The following are the main gains claimed to be emerging from international trade:
(1) Optimum Allocation:
International specialization and geographical division of labor results in the optimum allocation of world’s resources, making it possible to make the most efficient use of them
(2) Gains of Specialization:
Each trading country gains when the total output increases as a results of division of labor and specialization. These gains are in the sort of more aggregate production, larger number of sorts and greater diversity of qualities of products that become available for consumption in each country as results of international trade.
(3) Enhanced Wealth:
Increase in the exchangeable value of possessions, means of enjoyment and wealth of every trading country.
(4) Larger Output:
Enlargement of world’s aggregate output
(5) Welfare Contour:
Increase in the world’s prosperity and economic welfare of every trading nation.
(6) Cultural Values:
Cultural exchange and ties among different countries develop once they enter into mutual trading.
(7) Better International Politics:
International trade relations help in harmonizing international political relations.
(8) Coping with Scarcity:
A country can easily solve its problem of scarcity of raw materials or food through imports.
(9) Advantageous Competition:
Competition from foreign goods in the domestic market tends to induce home producers to become more efficient to boost and maintain the standard of their products.
(10) Larger size of Market:
Because of foreign trade, when a country’s size of market expands, domestic producers can operate a larger scale of production which ends up in further economies of scale and thus can promote development. Synchronizedapplication of investment to several industries simultaneously becomes possible. This helps industrialization of the country alongside balanced growth.
When a rustic places undue reliance on foreign trade, there's a likelihood of the subsequent disadvantages:
1. Exhaustion of Resources:
When a country has larger and continuous exports, her essential raw materials and minerals may get exhausted, unless new resources are tapped or developed (e.g., the near-exhausting oil resources of the oil-producing countries)
2. Blow to Infant Industry:
Foreign competition may adversely affect new and developing infant industries at home.
3. Dumping:
Dumping tactics resorted to by advanced countries may harm the event of poor countries.
4. Diversification of Savings:
A high propensity to import may cause reduction in the domestic savings of a country. this might adversely affect her rate of capital formation and the process of growth.
5. Declining Domestic Employment:
Under foreign trade, when a country tends to specialize in a few products, job opportunities available to people are curtailed.
6. over Interdependence:
Foreign trade discourages self-sufficiency and self-reliance in an economy. When countries tend to be interdependent, their economic independence is jeopardized. As an example, for these reasons, there's no free trade within the world. Each country puts some restrictions on its foreign trade under its commercial and political policies.
Characteristically, there are marked differences between internal and international trade as stated below:
1. Specific Terms:
Exports and Imports
Internal trade is that the exchange of domestic output within the political boundaries of a nation, while international trade is that the trade between two or more nations. Thus, unlike internal trade, the terms “export” and “import” are used in foreign trade. To export means to sell goods to a far off country. To import goods means to buy goods from a foreign country.
2. Heterogeneous Group:
An obvious difference between home trade and foreign trade is that trade within a country is trade among an equivalent group of individuals, whereas trade between countries takes place between differently cohered groups. The socio-economic environment differs greatly between nations, while it's more or less uniform within a country. Frederick List, therefore, put that: “Domestic trade is among us, international trade is between us and them.”
3. Political Differences:
International trade occurs between different political units, while domestic trade occurs within a similar 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 ascertain its own interest at the cost of the opposite country.
4. Different Rules:
National rules, laws and policies concerning 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 of theory, in its pure form, which is laissez faire, can't be applied in to the international trade theory.
5. Different Currencies:
Perhaps the principal difference between domestic and international trade is that the latter involves the utilization of different sorts of currencies and each country follows different foreign exchange policies. That’s why there's the problem of exchange rates and exchange. Thus, one has to study not only the factors which determine the value of every country’s monetary unit, but also the divergent practices and kinds of exchange resorted to.
6. Heterogeneous World Markets:
In a way, home trade features a homogeneous market. In foreign trade, however, the world markets lack homogeneity on account of differences in climate, language, preferences, habits, customs, weights and measures etc.
The behavior of international buyers in each case would, therefore, be different. as an example , Indians have right-hand drive 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.
7. Factor Immobility:
Another major difference between internal and international trade is that the degree of immobility of factors of production like labor and capital which is usually greater between countries than within the country. Immigration laws, citizenship qualifications, etc., often restrict international mobility of labor. International capital flows are prohibited or severely limited by different governments.
The following points highlight the four main roles of International trade in Economic development of a country.
1. Slow Pace of Primary Commodities:
The foremost difficulty that comes in the path of foreign trade is that the growth of primary commodities which forms principal exports of developing countries has been very slow as compared to world trade.
In 1955, primary commodities accounted for 50% of the total exports which in 1977 came down to 35% and again to 28% in 1990 and so on. The causes responsible for this are the increasing tendency of market economies to protect their agriculture, inadequate increase in demand for primary commodities, development of synthetic substitutes etc.
2.Less Share in World Trade:
It has been noticed that exports of developing economies have been slow to develop. Consequently, the share of developing economies in the total world trade has maintained a downward trend.
Its share which was 31 percent in 1950 came down to 13.9 percent in 1960 and again 5% in 1990. This decline is caused by factors like emergence of trade blocks, restrictive commercial policies and growth of monopolies etc. These trends reflect the fact that developing economies have to face foreign trade as a barrier in the way of development.
3. Worse Terms of Trade:
In developed markets, the low demand for primary products has led the problem of balance of payment on worse trend in developing economies. Whereas prices of manufactured goods have been on the upward trend in the world market, the prices of primary products are gradually declining.
In this regard, UN report advocated that in the past developing countries could get a tractor by exporting two tones of sugar, now the time is that they have to export seven tones of sugar to get the same tractor. According to another estimate 1 to 3 percent of the GNP was lost by the developing countries due to decreasing prices of non-oil raw materials during 1990s.
4. Restrictive Trade Policies:
Restrictive trade policies adopted by industrial countries affect prospects for developing country exports of manufacturers. This is due to the fact that for developing countries markets in industrial countries have become increasingly more important.
For instance, in 1965, industrial countries took 41 percent of developing country exports of manufacturers; by 1990 this had grown to -75%. In 1990 only 3% of world trade in manufacturers was between developing countries.
In short, we may conclude that developing economies face several difficulties in their path of foreign trade. The various multinational initiatives having been mounted to tackle these problems have left them largely resolved. Therefore, in given circumstances, the developing economies have to evolve a suitable trade policy mix that may create export outlets and as well may assure supplies of essential imports.
