UNIT 1
International Economics
The international economics is a distinct branch of general economics which deals with those international forces which influence domestic economic condition as well as those which shape the economic relationship between countries, world economic integration and transition.
International economics is regarded as a distinct branch of economics due to following reasons –
- The international economics explains the nature of trade among the different countries and also shows its impact on the domestic economy.
2. The international economics explains the pattern and direction of international trade. Here we get the knowledge of different trade related concepts like terms of trade, balance of payments, etc.
3. At present international economics studies the transection of currencies and capital among the different trading countries. Hence it explains the functions of IMF, world bank, Asian Development bank, etc.
4. The international monetary theory deals with matters pertaining to balance of payments and international monetary system. It covers, area such as causes and methods of correcting balance of payment disequilibrium, exchange rate determination, international liquidity, etc.
5. International economics analyses the reasons for and the effects of tariff and non-tariff retractions upon trade.
6. After the second world war, different international institutions have been created to deal with the problem of international trade such as IMF, IBRD, WTO, etc.
Nature of International Economics
• It is a distinct branch of the general economics which examines the theoretical base of the international trade among different countries.
• The international economics is both normative as well as positive economics. As a positive economics it explains various tools of the international trade. As a normative economics it explains the justification of trade.
• It is an applied branch of the general economics. This is because it uses different mathematical tools to analyze the international trade.
• International economics also uses monetary concepts in the international trade relation. It explains the international movement of capital and finance among the trading countries.
• International economics is a welfare economics which explains the international welfare on the basis of international trade relations.
Scope or Importance of International Economics
In the present day world international economics has immense scope or importance. The scope of international economics is explains below-
• The international economics studies the nature of trade and its impact on the national economy as well as international economics.
• In the competitive world economy it is essential to establish trade relations with other countries for better utilization of world resources. Basically trade channelizes resources from the developed to the poor countries.
• Through the international economics we can understand the functions and objectives of the international institutions like IMF, World bank, WTO, etc.
• Both developed and poor countries have to depend upon foreign capital for financing BOPs and economic development. International economics cultivates mutual co-operation among the countries which leads to easy flow of capital form one country to another.
• International economics establishes a trust among the trading countries which encourages flow of raw materials, technical knowledge and finance from advanced to backward economics.
Key takeaways –
- International economics deals with those international faces which influences the domestic economic conditions.
International economics deals basically with those economic principles which govern the exchange of goods (and services) between sovereign nations (more accurately, between their residents) and with special policy problems which arise in view of this. It must be understood, however, that these general principles are the same as those which apply to trade between groups and individuals within a given country . This is so because the gains from trade, whether national or international, arise from specialization through division of labour which increases productivity of factors. Specialization is, however, impossible without trade. Of course, mutually beneficial exchange can arise even without production, when tastes differ between trading partners. This gain from pure exchange can be substantially increased when trade makes it possible to reallocate productive resources on the basis of comparative advantage.
If so, why study international economics separately from (say) money and banking or labour economics? Each of the latter branches has specific groups of transactors. So has international economics - residents of different nations . Traditionally, two reasons are given to justify a separate study of international economics.
- In the long run, factors of production such as labour and capital move freely within the national frontiers, while their mobility is severely restricted between nations. As a result, it is argued, factors cannot move to any location to take advantage of higher rewards (reflecting higher productivities).
But we know that factors are not completely immobile between countries. The great international migrations of the nineteenth century are instant reminders to the contrary. Nor is it entirely true that factors can move absolutely freely within a country, particularly when it is a large country with diverse culture and ethnic groups. Nevertheless, it is true that factors, especially unskilled and semi-skilled labourers, are far less mobile (generally speaking) between nations than within any given country. In view of this, it becomes interesting to ask whether and to what extent free flows of goods and services between countries can substitute for the relative immobility of factors in equalizing factor returns. In other words, can trade lead to international reallocation of factors and hence to higher levels of world real income and welfare?
2. The second point about the need for special treatment of international economics is that international trade takes place between sovereign nations, and therefore, it is possible, and indeed likely, that in pursuance of conflicting national objectives they will adopt policies which will, intentionally or not, tend to diminish trade flows. In this context, the specific task of international trade theory would be to highlight the gains from free trade and to focus on the need for, and the possibility of, harmonies and conflicts in international economic relations.
The familiar breakdown of the entire corpus of economic theory into micro and macro domains has its parallel in international economics. International economics consists of two main branches- international trade and international finance. The former corresponds to its microeconomic counterpart and employs the methods of static equilibrium theory to barter exchange with money assumed to be a veil. The theory of international finance, on the other hand, is fundamentally macroeconomic in nature and deals with international monetary relations which assumes special significance in the event of balance of payment disequilibrium and the adjustment that it calls for.
In the present day world, economic interdependence among nations is very strong, particularly in matters of macroeconomic policy. For example, if US national income grows, its trading partner may benefit from US citizen's increased imports. At the same time, domestic US policies may export inflation or unemployment abroad. The foreigners may then initiate countervailing policies.
Key takeaways -
- International economics deals basically with those economic principles which govern the exchange of goods (and services) between sovereign nations (more accurately, between their residents) and with special policy problems which arise in view of this.
Similarities between Inter-Regional Trade & International Trade
1. Participants in both trade have the same desire i.e. to achieve maximum gain at minimum of sacrifice.
2. The difference between the two trades is one of the degree and not of kind.
3. No area and no region of any country can produce all that is necessary for itself.
4. Immobility of factors of production give rise to both internal and international trade. Eg: Distance between two location
5. The fundamental principle in both trades is the same.
6. Both trades are due to division of labour.
7. In both trades, people specialize in producing goods in which they have greater comparative advantage.
Differences between Inter-Regional Trade & International Trade
1. Immobility of factors of production
According to classical writers, labour and capital were perfectly mobile within the country and immobile between countries, The immobility is due to differences in language, social and political life, religion and traditions, etc.
2. Differences in production conditions
Production conditions differs due to several causes. An advanced country in science and technology uses better methods of production than that of an under developed country. Due to this the costs and prices also vary. Because of these differences in production costs and prices, the international trade takes place.
3. Natural Resources
The countries differ in natural resources and geographical conditions. This leads to territorial division of labour and localization in industries. Countries rich in iron and coal resources specialize in the production of steel. And countries having plenty of land and favorable climate produce agricultural commodities. These advantages can not be transferred at all to other countries. It is only possible to transfer, thereby the cost becomes extremely prohibitive.
4. Currency system differs
Different countries have different currency systems, and conversion of one country currency into another currency is difficult. Sometimes scarcity of foreign exchange restricts the imports. Besides, due to changes in the monetary policies, the price levels also vary, and this makes international trade much more difficult.
5. Trade and Exchange controls
There are lot of restrictions like exchange controls, customs duties, tariff barriers and quotas followed by countries which restrict the free flow of international trade.
6. Market knowledge
People possess a very good knowledge of the conditions of trade in their own country. But they cannot be so conversant with the conditions obtained in other countries. This lack of knowledge may hinder international trade.
7. Barter systems
In international trade, exchange of goods and services is done mostly on barter terms. In external trade the exchange is often made for money of that country.
8. Difference in law
Internal trade is governed by the law of the land. But international trade is conditioned by the law of the exporting countries and importing countries and the countries through which the goods and services pass.
9. Objective differs
In internal trade, profit motive in terms of monetary unit of the that country is the primary objective. But in international trade, the main objective is balancing the payments position between different countries.
10. Cultural distinctions
The various cultural practices between countries make international trade difficult. Eg. Britain produces right hand driven cars while the France uses left hand driven cars. The trade in cars between these two countries will not take place. Markets are also separated by language, customs, trading, usage, habits, tastes and other factors which make trade between countries difficult.
There is no country in the world today which produces all the commodities it needs. Every country, therefore, tries to produce those commodities in which it has comparative advantage. It exchanges part of those commodities with the commodities produced by other countries relatively more efficiently. The relative difference in factor endowments, technology, tastes etc, among the nations of the world have greatly widened the basis of international trade.
Importance/Role of foreign trade in economic development
The role of foreign trade can be judged by the following faces:
Foreign trade and economic development - Foreign trade plays very important role in the economic development of any country. Pakistan also exports a lot of agricultural product to other countries and imports the capital goods from other countries. Therefore, it is not wrong to say that economic development of a country depends of foreign trade.
Foreign exchange earning- Foreign trade provides foreign exchange which can be used to remove the poverty and other productive purposes.
Market expansion - The demand factor plays very important role in increasing the production of any country. The foreign trade expands the market and encourages the producers. In Pakistan home market is very limited due to poverty. So it is necessary chat we should sell our product in other countries.
Increase in investment - Foreign trade encourages the investor to increase the investment to produce more goods. So the rate of investment increases.
Foreign investment- Besides the local investment, foreign trade provides incentives for the foreign investors to invest in those countries where there is a shortage of investment.
Increase in national income- Foreign trade increases the scale of production and national income of the country. To meet the foreign demand we increase the production on large scale so GNP also increases.
Decrease in unemployment - With the rise in the demand of goods domestic resources are fully utilized and it increases the rate of development in the country and reduces the unemployment in the world.
Price stability- Foreign trade helps to bring stability in price level. All those goods which are short and prices are increasing can be imported and those goods which are surplus can be exported. There by stopping fluctuation in prices.
Specialization- There is a difference in the quality and quantity of various factors of production in different countries. Each country adopts the specialization in the production of those commodities, in which it has comparative advantage. So all trading countries enjoy profit through international trade.
Remove monopolies- Foreign trade also discourages the monopolies. Where every any monopolist increases the prices, government allows the import of goods to reduce the prices in the country.
Removal of food shortage- India is also facing the food shortage problem. To remove the food shortage India has imported the wheat many times. So due to foreign trade we are solving this problem for many years.
Agricultural development- Agricultural development is the back bone in our economy. Foreign trade has played very important role for the development of our agriculture sector. Every year we export rice, cotton, fruits and vegetables to other countries. The export of goods makes our farmer more prosperous. It inspires the spirit of development in them.
Import of consumer goods- India and Pakistan imports the various consumer goods from other countries, which are not produced inside the country. Today the shortage of any commodity can be removed through international trade.
To improve quality of local products- Foreign trade helps to improve quality of local products and extends market through changes in demand and supply as foreign trade can create competition with the rest of the world.
External economics- External economics can also be achieved through foreign trade. The industries producing foods on large scale in Pakistan and India are enjoying the external economics due to international trade.
Competition with foreign producers- We can compete with the foreign producers in foreign trade so it improves the quality and reduces the cost of production. It is also an advantage of foreign trade.
Useful for the world peace - Today all the countries are tied in trade relations with each other. So foreign trade also contribute to peace and prosperity in the world.
Import of capital goods and technology - The inflow of capital goods and technology in the less developed countries has increased the rate of economic development, and this is due to foreign trade.
Import substitution- These countries not only produce import substitute, but also reduce deficit in balance of payment of their countries.
Key takeaways -
- The 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.
The recovery from the 2008 global economic crisis has been challenging for the LDCs as their performance continues to be undermined by external economic conditions. The economic growth of the LDCs as a group was worse in the past three years than in the pre-crisis period, when they showed average growth rates of 7.9% between 2002 and 2008. Despite seeing a positive recovery in 2010 with the real gross domestic product (GDP) growing at the rate of 5.6%, the group experienced a slowdown in 2011, growing by only 4.2%.
Overall trends in international trade show that the deficit in the trade balance of LDCs as a whole was 5.7% of GDP in 2011, narrowing from 6.1% of GDP in 2010. The value of exported goods from countries most severely affected by the crisis in 2009 surpassed the pre-crisis level, increasing by 20% in 2011. However, the improvement in export growth has been mostly attributable to a few oil-exporting LDCs, thus the performance of the group as a whole becomes less impressive if oil is excluded from the calculation.
Because LDCs have less diversified economies, they depend on a limited range of exports, often primary commodities. While countries that are net exporters of commodities benefited from an increase in prices during 2009-2011, the price volatility of certain products remains a major problem, creating a significant vulnerability for the exporters’ performance.
The LDCs only account for 1.12% of global trade. Further integration into the global economy continues to be hampered by a range of supply-side constraints in these countries. Increasing foreign earnings by exporting higher value-added goods has proven to be difficult for most countries because lack of access to technology and the challenge of complying with quality standards of developed countries, for instance, have typically kept them from moving up in the export value chain. Development assistance can enhance productive capacities and reduce constraints on the private sector in LDCs. According to the Organisation for Economic Co-operation and Development (OECD) Creditor Reporting System (CRS), LDCs accounted for 31% of the Aid for Trade funds disbursed in 2011.
Here we detail about the ten problems of foreign trade faced by developing countries of the world.
1. Primary Exporting:
Most of the developing countries, in its initial stage of development are exporting mostly primary products and thus cannot fetch a good price of its product in the foreign market. In the absence of diversification of its export, the developing countries have failed to raise its export earnings.
2. Un-Favourable Terms of Trade:
Another problem of trade faced by these developing countries is that the terms of trade are always going against it. In the absence of proper infrastructure and the quality enhancement initiative, the terms of trade of these countries gradually worsened and ultimately went against the interest of the country in general.
3. Mounting Developmental and Maintenance Imports:
The developing countries are facing the problem of mounting growth of its developmental imports which include various types of machineries and equipment’s for the development of various types of industries as well as a huge growth of maintenance imports for collecting intermediate goods and raw materials required for these industries. Such mounting volume of imports has been creating a serious problem towards round management of international trade.
4. Higher Import Intensity:
Another peculiar problem faced by the developing countries is the higher import intensity in the industries development resulting from import intensive industrialisation process followed in these countries for meeting the requirements of elitist consumption (viz., colour TVs, VCR, Refrigerators, Motor cycle, cars etc.). Such increasing trend towards elitist consumption has been resulting a huge burden of burgeoning imports in these developing countries, resulting serious balance of payment of crisis.
5. BOP Crisis:
The developing countries are facing the problem of burgeoning imports and sluggish growth in its exports resulting in growing deficit in its balance of payments position. In some countries, this deficit has gone to such an extent at a particular point of time that ultimately it led to a serious crisis in its international trade.
6. Lack of Co-ordination:
The developing countries are not maintaining a good co-ordination among themselves through promotion of integration economies grouping, formation of union etc. Thus in the absence of such co-ordination, the developing countries could not realize those benefits of foreign trade which they could have realised as a result of such economic grouping.
7. Depleting Foreign Exchange Reserve and Import Cover:
The developing countries are sometimes facing the problems of depleting foreign exchange reserves as a result of growing volume of imports and continuous balance of payment crisis. Such depleting foreign exchange reserve results in shorter import cover for the country.
8. Steep Depreciation:
Steep depreciation of the currency with dollar and other currencies in respect of developing countries has been resulting in a considerable increase in the value of its imports which ultimately leads to huge deficit in its balance of trade.
9. Higher Prices of POL imports:
The worsening of the current account deficit in balance of payments of the developing countries has been partly on account of higher price of POL imports charged by the oil producing countries especially since the Gulf War.
10. International Liquidity Problem:
Most of the developing countries has been facing all the more serious international liquidity problem. Accordingly, these countries are experiencing chronic deficiency of capital and technology resulting heavy dependence on the developed countries for their scarce resources.
Key takeaways-
- The less developed countries countries require resources so as to cover their short-term balance of payments, resources and also for meeting long-term capital requirements of economic growth. Thus have seen that the developing countries have been facing some serious problems relating to their foreign trade. They are also making serious efforts to settle these problems either bilateral or multi-lateral means.
Sources
1. Dr.D.M.Mithani – International Economics (Himalaya Publishing house ltd)
2. Bo Sodersten, Geoffirey Reed, International Economics (3rd Edition) Publisher Red Globe Press
3. Z.M.Jhingan : International Economics (Vrinda Publication)
4. Robert Feenstra, Alan M Taylor, International Trade (5th Edition) Publisher Worth
5. Dr.Mrs.NirmalBhalerao&S.S.M.Desai – International Economics (Himalaya Publishing house ltd)
