undefined | unit 1 introduction

FTI

Unit 1

Introduction

Q1) Define trade. What are the classifications of trade?

A1) Trade refers to buying and selling or exchanging of goods or services for money. It also facilitates transfer of goods and services from producers to ultimate consumers through dealers, wholesalers and retailers.

The classification of trade is discussed below-

Trade is mainly classified into two types-

a) Internal trade: It refers to buying and selling or exchanging of good and services within the political or geographical territory. In other words, buyers and sellers from within the locality or state or country. It is again divided into two types-

1) Wholesale trade: It refers to the buying and selling of goods and services within the political boundary in bulk quantity. Such trade is taken place among the businessman.

2) Retail Trade: It refers to the buying and selling of goods and services within the political boundary in small quantity. Such transactions are taken place between retailers and final consumers.

b) International trade: International/foreign/cross border trade refers to buying and selling or exchanging of goods and services among the countries. It is of three types-

1) Import: It refers to purchase of goods and services from foreign country. It leads to outflow of foreign currency because payment is made in foreign currency.

2) Export: It refers to sale of goods and services to foreign country. It leads to inflow of foreign currency because payment is received in foreign currency.

3) Entrepot: It refers to import of goods/services and again export of the same after processing it to the semi-finished or finished goods.

Q2) What are the differences between internal trade and international trade?

A2) Some of the significant difference between internal trade and international trade are-

Basis of difference	Internal trade	International trade
Meaning	It takes place within the national boundary.	It takes place among different countries of the world.
2. Currency involves	It involves domestic currency.	It involves foreign currency only.
3. Foreign exchange reserve	It leads decrease in foreign exchange reserve due to outflow of foreign currency.	It leads to increase in foreign exchange reserve due to inflow of foreign currency.
4. Operating cost	It involves less operating cost.	It involves high operating cost.
5. Mode of payment	Payment is made in cash or cheque.	Payment is made through bills of exchange, letters of credit, telegraphic transfer etc.
6. Mode of transportation	Transportation is made through roadways, waterways and airways.	Transportation is made through waterways and airways.
7. Risk	It involves less degree of risk.	It involves high degree of risk.
8. Legal formalities	It involves less legal formalities.	It involves long procedure and other legal formalities.
9. Mobility of factors of production	The degree of mobility of factors of production is high within the country.	The degree of mobility of factors of production is less.
10. Tariff	Only domestic tariffs are imposed.	Tariffs of both the trading countries are applicable.

Q3) Write in brief absolute advantage theory of international trade.

A3) The absolute advantage theory of international trade was developed by the economist Adam Smith in his book ‘Wealth of Nation’. According to this theory a country can benefit from trade by producing and exporting those goods which they can produce more efficiently than others. A country should specialise in production of those goods which they produce more efficiently than other countries and export the same to get maximum trade benefit. For example- UK produces one unit of cloth by using 80 hours of labour and one unit of wine by using 100 hours of labour. On the other hand, Portugal produces one unit of cloth by using 120 hours of labour and one unit of wine by using 90 hours of labour.

Absolute advantage in production

Country	Cloth	Wine
UK	80	100
Portugal	120	90

In the above table, it is revealed that UK has absolute advantage in production of cloth because one unit of cloth production required only 80 hours of labour but one unit of wine production required more labour (100 hours of labour). Thus, UK will specialise in production of cloth and export it to get trade advantage. On the other hand, Portugal has absolute advantage in production of wine because a unit of wine production required only 90 hours of labour but a unit of cloth production required larger amount of labour (120 hours of labour). Thus, Portugal will specialise in production of wine and export the same to get absolute advantage from trade.

Assumptions of the theory

Two by two model (two countries and two commodities) is considered.

There is free trade between the countries.

There is no mobility in factors of production between the countries.

There is only one element of factors of production i.e. labour.

There is no transportation cost.

Q4) Discuss in brief comparative advantage theory of international trade.

A4) The theory of comparative advantage was developed by economist David Ricardo in 1817. This theory a country should specialise in production and export of those goods that they produce most efficiently and import those goods that they produce less efficiently than other country. Comparative advantage suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in. For example, Portugal and England each, producing two goods (cloth and wine) of identical quality. England required 100 hours of labour to produce one unit of cloth and 120 hours of labour to produce one unit of wine. On the other hand, Portugal required 90 hours of labour to produce one unit of cloth and 80 hours of labour to produce one unit of wine.

Comparative advantage in production

Country	Cloth	Wine
England	100	120
Portugal	90	80

In the above table it is revealed that Portugal able to produce both the commodities efficiently than England as Portugal required 90 hours of labour and 80 hours of labour for production of one unit cloth and one unit of wine respectively and England required 100 hours of labour and 120 hours of labour for production of a unit of cloth and a unit of wine respectively. The comparative advantage suggests that although Portugal can produce both the commodities more efficiently, it will concentrate on production of wine and export it to England and England will concentrate in production of cloth and export it to Portugal. It is because Portugal has comparative advantage in production of wine (required 80 hours of labour) than cloth (required 90 hours of labour) and England has comparative advantage in production of cloth (required 100 hours of labour) than wine (required 120 hours of labour).

Assumptions of the theory

It followed two by two model i.e., two countries and two commodities.

There is free trade between the countries.

The factor of production is labour only.

There is no transportation cost.

Production is subject to constant returns to scale.

Q5) Discuss in brief H-O theory of international trade

A5) Heckscher-ohlin theory of international trade also known as factor endowment theory developed by Swedish economist Eli Heckscher and Bertil Ohlinin. According to this theory every country of the world is endowed with different factors production, natural resources etc. due to its geographical locality. A country should specialise in export of the goods whose production requires the intensive use of the nation relatively abundant and cheap factors of production and import the commodity whose production requires use of nation’s scarce and expensive factors of production. The theory also stated that comparative advantage arises from differences in national factor endowment resources like land, labour and capital. The pattern of international trade is determined by the relative land, labour, and capital endowments of countries. A country will tend to have a relative cost advantage when producing goods that maximize the use of its relatively abundant factors of production (thus countries with cheap labour are best suited to export products that require significant amounts of labour).

Assumptions of the theory

It assumes two by two by two model i.e., two country, two commodity and two factors of production.

Both nations use same technology in production.

There is free trade.

There is free flow of factors of production.

Taste is same across the countries.

Q6) Discuss in brief product life cycle theory of international trade.

A6) The Product Life Cycle Theory was developed by Raymond Vernon. The theory suggests that early in a product's life-cycle all the parts and labour associated with that product come from the area where it was invented. Each manufactured goods has a definite life cycle that begins with its expansion and ends with its decline. The theory stated that a Product life cycle has three distinct stages:

a) New product: A firm in a developed or developing country will innovate or manufacture a fresh product for their customers and gradually expand in the market by increasing their sales through promotional efforts.

b) A maturing product: In this stage of the Product Life Cycle, the manufactured goods become popular and are bought by many customers. The innovating firm builds new factories to enlarge its competence and convince home and overseas demand for the products

c) Standardized product: in this stage, the market for manufactured goods stabilizes and the industries facing competition from new products, change in customer taste, technological change etc. the sales and profits gradually declines.

d) The decline stage: At some point, however, the market becomes saturated and the product is no longer sold and becomes unpopular.

Q7) Discuss in brief any one modern theory of international trade.

A7) The Product Life Cycle Theory was developed by Raymond Vernon. The theory suggests that early in a product's life-cycle all the parts and labour associated with that product come from the area where it was invented. Each manufactured goods has a definite life cycle that begins with its expansion and ends with its decline. The theory stated that a Product life cycle has three distinct stages:

d) The decline stage: At some point, however, the market becomes saturated and the product is no longer sold and becomes unpopular.

Fig: Product life cycle

Q8) State the advantages and disadvantages of international trade

A8) It takes place within the geographical boundaries of India, i.e. goods and services or exchanged for money are purchased and sold within local areas or from one state to another state or within the states of India.

In India transportation of goods are made through mode of transportation like railways, airways, roadways and waterways.

Here the payment for internal trade is made or received in Indian currency/cheque/draft etc.

Here internal trade is regulated by local rules and regulations and laws applicable in India.

Domestic tariffs of India are applicable on goods and services of internal trade.

The problems suffered by internal trade of India are-

Internal trade of India suffers from lack of strong manufacturing sector due to the issues like labour reforms, limited availability of power, low productivity, lack of technology etc.

Trade policy of India mainly focuses on promotion of export. Such policy is not sufficient to support the internal trade.

There is lack of market infrastructure for primary producers of agricultural sector.

The informal sector of India suffers from shortage of money supply after demonetisation leading that negatively influence on productivity of India. It leads to shortage of supply of goods in the economy.

The food grain trade of India is dominated by middleman leading to inflation in prices of essential food items.

Q9) Write a brief note on coastal trade and trade of Uttar Pradesh.

A9) Coastal trade

Coastal trade refers to shipping of goods or passengers by a registered ship/vessel a country from port to port along the coast of another country. It is governed by the law relating to coastal trade of each country. Coastal shipping is the transport of goods along the coast over relatively short distances, as opposed to intercontinental cross-ocean deep sea shipping. In recent years, coastal shipping has been increasingly recognised as a sustainable and efficient alternative to road transport. India has a long coastline of 5,560 Kms, having access to the sea on three sides with 11 major and 168 minor/intermediate ports. Coastal trade of India consist of petroleum, oil and lubricants, thermal coal and crude, food grains, cement, containerized cargo and finished products. The number of ships involved in coastal trade is around 700 vessels totally comprising of around 1 million gross registered tonnages. Some of the significant benefits of coastal trade are-

It is the cheapest mode of transport for bulky commodities.

It promotes coastal industries globally as different countries trade goods with each other through coasts.

It provides employment to large number of people for performing activities related to coastal trade.

It promotes tourism as it provides opportunities to travel by ship from one port to another port across the country or from one country to another country.

It is less capital intensive than roadways and airways because of less fuel consumption and environment friendly mode of transportation.

Coastal trade also have some limitations like-

It delays delivery of cargo because of time consuming transportation.

The routes and time tables of coastal trade is inflexible.

Tracking of cargo shipping progress is difficult to track.

The exporter/importer need to pay port duties and taxes for shipment of cargo.

Sometimes cargo may be lost or damaged causing damage to the parties.

Trade of Uttar Pradesh

Uttar Pradesh is the most populous state in India with a population of nearly 200 million people. Uttar Pradesh shares its borders with Nepal on the north, Uttarakhand and Himachal Pradesh on the northwest, Haryana, Delhi and Rajasthan on the west, Madhya Pradesh on the south, Chhattisgarh and Jharkhand on the southeast, and Bihar on the east. It is second largest economy of India and its important industries are Information technology, agro processing, tourism, mineral-based industries, textiles, handloom and handicrafts, food processing and sports goods. In 2017–18, Uttar Pradesh's gross state domestic product is ₹19.5 lakh crores. Its GDP is contributed by agricultural sector 24 per cent, industry sector 26 per cent and service sector 50 per cent. Being an agrarian state it contributes 30 per cent India’s wheat supply. It ranked 5th position of export within the country by contributing 4.5 per cent of India’s export. The State exports majorly made to the USA, EU, China UAE, UK and Vietnam. The export items and export potential items of the state are Animals and animal products, buffalo meat, leather and leather products, construction material, gems and jewellery and textiles and garments. Merchandise exports from Uttar Pradesh reached US$ 16.99 billion in 2019-20 and US$ 9.73 billion in April-November 2020.

Q10) What is “terms of trade”? What are the different types of terms of trade?

A10) Terms of trade of a country measures export prices in relation to its import prices. It measures how much imports of an economy can get for a unit of exported goods. It can be expressed as-

Terms of trade= (Index of export price/Index of import price) x 100

For example, if, over a given period, the index of export prices rises by 10% and the index of import prices rises by 5%, then

Terms of trade = (110/105) x100

= 104.8

Therefore, terms of trade have improved by 4.8 per cent.

Different types of terms of trade are-

Net barter/commodity terms of trade: The commodity or net barter terms of trade is the ratio between the price of a country’s export goods and import goods. Symbolically, it can be expressed as:

Tc = Px/Pm

Where, Tc= Commodity terms of trade

PX = Price of export

Pm = Price of import

2. Gross barter terms of trade: The gross barter terms of trade is the ratio between the quantities of a country’s imports and exports. Symbolically, Tg = Qm/Qx

Where, Tg= gross barter terms of trade

Qm= quantity of import

QX = quantity of export

The higher the ratio between quantities of imports and exports, the better the gross terms of trade.

3. Income terms of trade: The income terms of trade is determined by the product of net barter terms of trade and the quantity index of exports. It measures the purchasing power of exports. Symbolically, it can be expressed as-

TI = Tc x QX

Where, TI = Income terms of trade

TC = Commodity terms of trade

QX = Quantity terms of trade

4. Single factoral terms of trade: It is determined by multiplying the commodity terms of trade with the productivity index in the domestic export sector. It implies the ratio of the export price index and import price index adjusted for changes in the productivity of factors used in the production of export goods. Symbolically,

TS = TC . ZX

Where, TS =Single factoral terms of trade

ZX = export productivity index

TC = commodity terms of trade

5. Double factoral terms of trade: It refers to the change in factor productivity both in the domestic export industries and export industries of the foreign countries. Symbolically it is expressed as-

TD = TC . (ZX/ZM)

Where, TD = double factoral terms of trade

TC= commodity terms of trade

ZX = productivity index of domestic export

Zm= productivity index of export of foreign country

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