Economics For Managers
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Chapter 19 : International Trade and Balance of Payments
Basis Of International Trade
Theory of Absolute Advantage
Theory of Comparative Advantage
Heckscher-Ohlin Theory Imitation-Gap Theory
International Product Life Cycle Theory
Barriers To International Trade
Tariffs
Non Tariff Barriers
Trends In International Trade
Closed Economy
Open Economy
Role of WTO
Economic Integration
Forms of Economic Integration
Balance Of Payment And Its Components
Causes And Types Of Disequilibrium In Bop
Measures To Correct Disequilibrium
Monetary Measures
Non Monetary Measures
Exchange Rate Policy
Historic Perspective of Foreign Exchange
Rate System
Types of Exchange Rate System
India's Balance Of Payment And Trade Policy
The Crisis of the Early 1990s
Trade Policy
Chapter Summary
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International trade plays a major role in the economic
development of a country. There are two schools of thought as regards trade. One
school favors free trade while the other advocates protectionism. According to
the theory of absolute advantage, if a country can produce a good cheaper than
other countries, it would have absolute advantage in the production of that
good. Countries should produce and export surpluses of goods in which it has
absolute advantage and buy whatever else they need from other countries.
According to the theory of comparative advantage, each country should produce a
good in which it has a comparative advantage. The Heckscher-Ohlin model states
that there are two types of products – labor intensive and capital intensive.
The labor-rich country is likely to produce labor-intensive goods, while the
country rich in capital is likely to produce capital-intensive goods. |
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The two countries will then trade in these goods
and reap the benefits of international trade. Imitation Gap theory
considers the possibility of trade between two countries having the
same factor endowments and consumer tastes. The International
Product Life-Cycle (IPLC) theory, explains various stages in the
life of a product and the resultant international trade. A closed
economy is an economy which has minimal interaction with other
economies in the world.
An open economy is an economy which interacts with other nations to
exchange goods, services, and investments. Trade between open
economies can be strengthened by economic integration.
To protect domestic industries from competition, government imposes
barriers. The barriers can be both tariff and non-tariff. Tariff
barriers include advalorem duties, specific duties and compound
duties. Non-tariff barriers include quotas, subsidies, licensing,
administered protection, and health and safety standards.
The world is becoming an integrated market place and trade equations
are changing rapidly. Realizing the importance of private capital
inflow for the development of a country, many countries are taking
numerous measures to attract foreign investors.
Balance of Payment (BoP) can be defined as a systematic record of
all economic transactions between the residents of the reporting
country and the residents of the rest of the world.
Disequilibrium in the BoP can be corrected with the help of both
monetary and non-monetary measures. Monetary measures include
deflation, exchange rate depreciation, devaluation and exchange
control. Non-monetary measures include tariffs (import duties),
import quotas and export promotion polices and programmes. Exchange
rate means the price of one currency in terms of another. Exchange
rates are either fixed by governments or determined by the market
forces. The two basic exchange rate regimes are the fixed exchange
rate and the floating/flexible exchange systems.
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