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1. Explain the term international trade. Also, explain the specific features and
objectives of international trade. (10)marks
According to Wasserman and Haltman, “International trade consists of transactions
between residents of different countries”. International trade is purchasing and selling
goods and services by companies in different countries. International trade allows
countries to expand their markets and access goods and services that otherwise may
not have been available domestically.
FEATURES OF THE INTERNATIONAL MARKET
1. HETEROGENOUS MARKET
2. SEPARATION OF BUYERS AND SELLERS
3. RISK ELEMENT
4. RESTRICTIONS
5. MULTIPLE OPPORTUNITIES
6. RESTRICTIONS
OBJECTIVES OF THE INTERNATIONAL MARKET
- To earn profits by selling as much as possible products and services to collect the
maximum revenue.
- Access to international markets, there results in an expansion in the consumer base
of a company’s products or services.
- Income opportunities and business success to the corporations
- To access products and services at a lower cost than the alternatives available in
the domestic market
- A variety of options are available
- Harmonious relationships between the citizens of respective countries encourage
cross-national social and cultural management
2. Explain the main stages of international trade development.(5)marks
According to Wasserman and Haltman, “International trade consists of transactions
between residents of different countries”. International trade is purchasing and selling
goods and services by companies in different countries. International trade allows
countries to expand their markets and access goods and services that otherwise may
not have been available domestically.
Stages of International Trade Development:
1. Domestic Market Establishment The domestic market is an appropriate place to test the deemed and performance of the product before expanding internationally. As the international market has a wider scope, such market development requires resources of time and money. Hence it is important to ensure that a strong domestic market is fully equipped to market is created on which the future international expansion process can be extended. The product belonging to EPZ, then It doesn’t hold correctly. 2. Export Research and Planning When companies trade abroad they generally target such markets initially which are similar legally, financially, and economically. It is always advisable that before venturing into an unfamiliar market companies must prepare themselves thoroughly by doing a thorough study of the international market. 3. Initial Export Sales When a company plans to implement the export procedure it is always advisable, to begin with testing the market. During this stage, the exporter should use the initial shipments to become familiar with the mechanics of exporting such as documenting, distribution channels, transpiration and the other various other components affecting the business.
3. Define international trade. Explain the main types of market/products.(10) marks.
Ans:
(industrial product and consumer product)
According to Wasserman and Haltman, “International trade consists of transactions
between residents of different countries”. International trade is purchasing and selling
goods and services by companies in different countries. International trade allows
countries to expand their markets and access goods and services that otherwise may
not have been available domestically.
TYPES OF MARKET
The market can be classified into 4 types:-
- On the basis of area: (local market, national market, international market) Local Market: In such a market the buyers and sellers are limited to the local region or area. They usually sell perishable goods for daily use since the transport of such goods can be expensive. Regional Market: These markets cover a wider area than local markets like a district, or a cluster of a few smaller states. For example, food grains such as wheat, paddy, maize, millet, sugar, oil etc are bought and sold in such regional markets. National Market: This is when the demand for goods is limited to one specific country Or the government may not allow the trade of such goods outside national boundaries. For example, The products such as clothes, steel, cement, iron, tea, coffee, soap, cigarette, etc are bought and sold nationwide.
International Market: When the demand for the product is international and the goods are also traded internationally in bulk quantities, we call it an international market. For example, The market for some goods such as gold, silver, tea, clothes, machines and machinery, medicines etc. has spread the world over.
2. On the basis of times: very short(6-7 days), Short Period( less than 1 year), Long Time period (more than 1 year and less than 10 years) Very Short Period: For 6-7 days This is when the supply of the goods is fixed, and so it cannot be changed instantaneously. Say for example the market for flowers, and vegetables. Short Time Period: Less than one year. The market is slightly longer than the previous one. Here the supply can be slightly adjusted. Long Period Market : For more than one year but less than 10 years. Here the supply can be changed easily by scaling production. 3. On the basis of Competition: 1. Perfect Market 2. Imperfect market (Monopoly, Oligopoly, Monopolistic competition, Duopoly, Monopsony) 1. Perfect Market: Perfect competition occurs when there is a large number of small companies competing against each other. They sell similar products (homogeneous), lack price influence over the commodities, and are free to enter or exit the market. 2. Imperfect Market: Consists of Oligopoly, Monopolistic Competition, Duopoly, and Monopsony. Monopoly: There is a single seller and many buyers in the marketplace.
TYPES OF PRODUCTS
- Consumer product: Convince goods, speciality goods, unsought goods (we know about them but generally don’t buy them)
- Industrial Product: Raw Material, Essential Equipments, Accessory products, operating supplies(lubricants, packaging materials, necessary to keep the industrial production process run smoothly.)
4. What are the key differences between the Ricardian theory and the Heckscher-
online theory? Models of international trade. Which model does u think is more
relevant in explaining contemporary trade patterns? (10marks)
- Absolute Advantage Trade Theory: The theory of absolute cost advantage was propounded by Adam Smith who is known for his classical work including ‘An inquiry into nature’ and ‘Causes of the wealth of the nation (1776). According to the theory of Absolute Advantage, a country should specialise in the production of such a commodity which can be produced more cheaply than the other country and exchange it with another commodity which has a higher cost in the same country but is Lower in another country. This is not a realistic situation that a country will get the benefit of trade only when it will have an absolute cost advantage over other countries. This Assumption is not true for many developing as well as under-developing countries which don’t have an advantage in the production of any commodity. Though Adam Smith’s theory of international trade is very logical and also convincing it doesn’t explain the majority of International Trade. It was David Ricardo who propounded the stronger argument and placed Adam Smith’s theory in a stronger manner through the comparative cost advantage theory of International Trade.
- Comparative Cost Advantage Theory: This theory was given by the famous economist David Ricardo. The theory of Comparative Advantage is based on the labour theory of value. According to this theory, it is not absolute but the comparative cost advantage which determines the trade relationship between the two countries. It may be possible that a country has an absolute cost advantage in the production of both commodities but has a comparative cost advantage in the production of the only commodity. The country will export that commodity which causes greater cost
3. Trade Theory Of Technology Gap: written by Josiah Tucker in the mid-1700s. This theory views technological similarities as important long-run determination of trade. Moreover, it also captures interactions between trade flows and changes in long- run growth patterns and levels of employment. Several writers had expressed concern that England’s export markets would be taken over by poorer countries that could produce goods cheaper because of their lower wages and other costs. Tucker responded with an increasing returns argument that demonstrated richer countries’ cost advantage in producing the most complex commodities. The rich country not only has the best tools and technologies, but also the “superior skill and knowledge (acquired by long Habit and experience) for inventing and making of more.” Moreover, the rich country need not rely only on the “genius” of its own manufacturers and farmers to maintain this pace of innovation. The high wages, easier access to capital, and greater “Exertion of Genius Industry, and Ambition” will cause the best and brightest of the poor countries to emigrate to the rich ones, draining the poor countries. 4. Heckscher - Ohlin's theory of factor Endowment : The theory of comparative advantage is based on the cost of production difference that Exists between different countries however does not explain the reason behind these variations in the cost of production across the nation. Bertin Ohlil in his book "inter-regional and international trade" proposed the theory of factor endowment. this theory is also known as Heckscher Ohlin theory after Heckscher a Swedish economist is known for his book Mercantilist. Heckscher developed the essential factor endowment theory of international trade in 1919 Heckscher student Bertin Ohlil further developed an elaborate factor endowment theory hence it is known as Heckscher Ohlil (H-O) theory. According to this theory, international trade between two countries is only possible because of different endowments some countries are rich in capital and some have more labour. The countries which are rich in capital will engage in capital-intensive goods and those in labour will engage in the production of labour-intensive commodities.
The assumptions of the theory are as follows: There are two countries, two commodities and two factors of production
- No transportation cost
- There exists perfect competition
- There exists free trade between two countries
- Factors are not completely mobile
- Production function exhibits constant returns to scale
- There is no change in technology Thus the basic idea of this theory is the countries who are rich in the capital will export capital intensive goods and whereas the countries which are or which specialises in labour will export more of labour-intensive goods. Thus most of the developing economies have abundant labour and according to tho this theory such economies should specialise in the production of labour-intensive commodities as labour is cheap in such countries. Thus in most traditional theories, only labour is considered but this theory considers both labour and capital. This theory also clarifies that a country that is capital-intensive will still produce some commodities which are labour-intensive for domestic consumption keeping the capital-intensive goods more for export. Criticism of the theory It is assumed that there will be no technological upgradation but in reality, every nation contributes a percentage of capital towards more research and development the assumptions of constant returns to scale is also not correct some industries follow increasing returns to scale and diminishing returns to scale.
3. Threat to Global Economy : In a cold war between two countries, the
supporting nations may also restrict imports from the common enemy. This can
seriously impact the global economy.
4. Slows the Economic Growth : War between two nations hinders the economic
growth of the affected countries as well. Raw materials are not always
available locally. During the war, raw material becomes expensive or
inaccessible; this is what causes an economic downturn.
5. Fall in Global Stock Market : When the world’s largest economies are
engaged in trade wars, it affects international markets. There is a worldwide
slump.
On Domestic Economy
These wars affect local businesses, citizens, lifestyles, earnings and employment.
The following are the consequences faced at a domestic level:
1. High Cost of Raw Material : If the local companies import raw materials from
an enemy nation, then a high import tariff can increase the cost of production
2. Poor Quality and Expensive Products : In the absence of foreign competition,
local customers are with fewer options. They now have only domestic
manufacturers and might have to compromise on quality. Despite the dip in
quality, prices can rise as the domestic sellers now have a monopoly.
3. Lack of Employment Opportunities : It may result in job loss and affect the
Economy mainly affecting the companies chiefly dependent on imports.
4. Results in Inflation : Since the local product prices go up, there is a risk of
inflation
EXAMPLES OF TRADE WARS
In early 2018, President Trump stepped up his efforts, particularly against China,
threatening a substantial fine over alleged intellectual property (IP) theft and
significant tariffs. The Chinese retaliated with a 25% tax on over 100 U.S. products.
Since late 2019, China and Australia have been in a quasi-tit-for-tat trade war that has
left both countries suffering economic consequences. Australia’s complaints range
from a lack of transparency regarding the origin of COVID-19 to serious human
rights concerns that Australia considers deeply disturbing.
7. X plain the types of duties /tariff methods (5)marks
TYPES OF DUTIES
- IMPORT DUTY: These are the taxes which are imposed on imported goods which are usually collected by the customs authorities of the importing country. Such duties are based value, quantity or weight of the imported goods.
- EXPORT DUTIES: These are the taxes imposed on goods exported from one country to another. These export duties are less common than import duties and are used by countries to restrict the export of certain commodities or raise revenue.
- TRANSIT DUTY: These are the taxes imposed on the goods that are passing through a country from one foreign country to another.
- PROTECTIVE DUTIES: These are the duties imposed on imported goods to protect domestic producers from foreign competition. These duties can be in the form of Ad Valorem Taxes, Specific duties, or a combination of both.
- COUNTERVAILING DUTIES (CVD): These are the duties imposed on imported goods that are subsidies by the government.
- ANTI-DUMPING DUTIES: These are the duties imposed on the imported goods that are being sold at a price lower than the price charged in the exporter’s domestic market. These duties aim to prevent unfair competition from foreign producers and to protect domestic producers. OPTIMAL TARIFF It is the tariff rate that maximises the net welfare of a country. This theory suggests that a country can improve its welfare by imposing a tariff on imported goods but upto a certain point. Beyond that point, increasing the tariff will create negative welfare for the country.
8. Explain the methods of export and import operations through direct method/
indirect method OR Explain the essence of export and import operations through
direct /indirect method in international trade with examples.
- Direct Exporting: Direct export means direct sales to a customer abroad. For instance: you produce handmade mobile casings and mail them to your customers in Belgium and Germany. You maintain close contact with your customers and undertake your own marketing and sales.
- Licensing: This involves a company granting a foreign company the right to use its intellectual property such as trademarks and patents in exchange for certain fees or royalties. Example, Merch
- Franchising: This involves a company granting a foreign company use its brand and business model in exchange for a certain amount of fees or royalty. For example Fast Food chains like KFC
- Joint Venture: This involves two or more companies forming a partnership to jointly operate a business in the foreign market. For Example Vistara
- Foreign Direct Investment (FDI): This involves a company investing in a foreign subsidiary or acquiring a foreign company in order to establish its presence in the foreign market. For example, McDonald's investing in an Asian country to increase the number of stores in the region. Here, a business enters a foreign economy to strengthen a part of its supply chain without changing its business in any way.
- Indirect Export: This involves a company selling its products to an intermediary such as an export trading company or foreign company that sells its product in the market.
