INTERNATIONAL

TRADE
Presented By:

●VIVEK GAUR ● SUSHIL SHARMA ●DHARMESH SHARMA

MBA PART- I
SECTION-B
NIS ACADEMY
AJMER
 What is International Trade ?

•International Trade may be defined as “Trade carried on across the

National Boundaries.”

•According to Hess and Cateora - “International trade is the performance

of business activities that direct the flow of goods and services to consumers
or users in more than one nation.”

Thus , International Trade is the process of focusing on the resources of the

globe and objectives of the organizations on global business opportunities and
threats.
 EVOLUTION

•Since times immemorial.

•Unexpected expansion after world war II.

•The post 1990’s has given greater fillip to international trade.

•The MNC’s which were producing the products in their home countries and

marketing them in various foreign countries before 1980’s, started locating

their plants and other manufacturing facilities in foreign/host countries.

 Difference between Internal trade and
International Trade:
Difference in Jurisdiction.

Difference in Production condition.

Difference in National Resources and Geographical Conditions.

Restrictions on Import and Exports.

Differences in Monetary System.

Differences in Market Condition.

 Basis of Foreign Trade

The basis of International Trade is the difference in the resource endowment

of the nation.

The important feature of distribution of the world resources is Irregularity or

Imbalance.Possibly no country can claim self-sufficiency in its resource
requirement or a perfectly balance supply of resources.

For example, while India has a large supply of Human Power, it lacks capital
and technology , minerals and other raw materials. While ARAB countries are
rich in oil , they are deficient in oil technology and man power.
WHY GO INTERNATIONAL?
 To achieve higher Rate of Profits.

Expanding the production Capacities beyond the Demand of the Domestic

Country.

Serve Competition in the Home Country.

Limited Home Market.

Political Stability vs. Political Instability.

Availability of Technology and Managerial Competence.

High Cost of Transportation.

Nearness to Raw Materials.

Availability of Quality Human Resources at Low Cost.

To Increase Market Share.

 Theories Of INTERNATIONAL
TRADE

Adam Smith’s Theory of Absolute Differences in Cost.

RICARDIAN Theory of Comparative Advantage.

HECKSCHER-OHLIN Theory Of Trade.

Adam Smith’s Theory of Absolute Differences in Cost

In 1776, Adam Smith proposed 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. According to
this theory, countries should produce and export surpluses of goods in
which it has absolute advantage and buy whatever else they need
from other countries. Adam Smith believed that this would lead to
specialization and the resultant increase in productivity.
 Per Quintal Labour Cost(man-hour)

COUNTRY RICE JUTE

India 30 60

Bangladesh 50 20

For example , let us suppose that India produces both rice and jute. She will
have to sacrifice 2 quintals of rice for 1 quintal of jute. If India specializes in
rice production, she can get 1.67 quintals of jute from Bangladesh in
exchange of one quintal of rice. Similarly, in their domestic trade, people in
Bangladesh get only 0.4 quintals of rice in exchange for 1 quintal of jute
whereas they can import 0.67 quintal of rice against 1 quintal of jute.
These gains to both the countries will be available only if India specializes in
rice production and Bangladesh in jute production and there is trade between
them.
 RICARDIAN Theory of Comparative Advantage
In 1817, David Ricardo, an English economist, came out with the Theory of
Comparative Advantage. Ricardo believed that two countries would trade to
increase their national welfare provided each has a comparative advantage in
the production of one good over the other. In other words, two countries would
trade even when one country has absolute advantage in all products or another
country does not have absolute advantage in any products. According to this
theory, each country should produce that good, in which it has a comparative
advantage. A country will be better off by concentrating on the production of
goods in which it has the lower relative labour costs, or higher relative labour
productivity.
 Per Quintal Labour Cost(man-hour)

COUNTRY RICE JUTE

India 30 60

Bangladesh 50 80

(i) In India :
1 Qtl. Of rice =30 ∕60 =0.5 Qtl. Of Jute
1 Qtl. Of jute =60 ∕30 = 2 Qtls. Of Rice
(ii) In Bangladesh :
1 Qtl. Of rice =50∕80 =0.625 Qtl. Of jute
1 Qtl. Of jute = 80∕ 50 =1.6 Qtls. Of rice
 HECKSCHER-OHLIN Theory Of Trade.
According to this theory, there are two types of products – labor intensive and
capital intensive. Two countries operating at the same level of efficiency can, and
do, benefit from trade due to the differences in their factor endowments. The labor-
rich country is likely to produce labor-intensive goods, while the country rich in
capital is likely to produce capital-intensive goods. The two countries will then
trade in these goods and reap the benefits of international trade.
 BARRIERS TO INTERNATIONAL TRADE
Sometimes, in order to protect domestic industries from foreign competitors, governments
put up barriers to the international trade. These barriers may be in the form of tariff and non-
tariff barriers.

•Tariffs
A tariff is a blatant way of making imports expensive. Tariffs take three common forms: Ad
valorem duties, specific duties and compound duties. An ad valorem duty is collected as a
percentage of the value of the product. A specific duty is a fixed amount of money per unit
of good traded regardless of the value of the individual unit. Compound duties are those
which combine both specific and ad valorem duties. When a tariff is introduced on the
import of a good for which there are no domestic producers, it can be termed a pure
revenue tariff. A prohibitive tariff is one that is so high that it effectively stops all imports.
•Non Tariff Barriers
Non-tariff barriers are rules, laws, or regulations, which can block or delay an import.
The most common non-tariff barriers are quotas, subsidies, licensing requirements ,
etc.

•Quotas
Quotas are the most popular form of non tariff barriers (NTBs). Import quotas are aimed at
reducing the quantity of imports in order to protect the interests of domestic producers or to
conserve foreign exchange. Export quotas are meant to protect the economy from the excessive
exports of specified goods. Sometimes export quotas are imposed as a result of agreement
between trading nations. Quotas that completely eliminate trade in certain products are called
embargoes.

•Subsidies
Subsidies are provided to domestic producers to make their products globally competitive.
Increased foreign exchange earnings and the subsequent tax revenues are favourable for the
government. But the subsidies are given out of taxes on individuals.
•Licensing
Licensing requires importers and exporters to obtain licenses from the authorities to import or
export certain goods.

•Corruption
Corruption has become an international phenomenon. The higher rate bribes and
kickbacks discourage the foreign investors to expand their operations.

•Entry Requirements:
Domestic government impose entry requirement s to multinationals. For example,
an MNC can enter Ethiopia only through a joint venture with a domestic company.
 ECONOMIC INTEGRATION

An important phenomenon that took place as trade among nations grew, was
that of countries of the same region coming together to form close trading ties.
Depending on the degree of co-operation among members trading blocs may
be divided as follows:

1). Free Trade Area :

If a group of countries agree to abolish all trade restrictions and barriers
among or charge low rates of tariffs in carrying out international trade, such group is
called as “Free Trade Area ”.

2). Customs Union:

In a customs union, there are no internal trade barriers among the member nations.
These nations adopt a uniform commercial policiy of barriers for non-member
countries.
3). Economic Union:
The members of an economic union have well-coordinated economic policies.
There is a unified Central Bank and a common currency. The fiscal as well as
monetary policies are well co-ordinated, some of them being decided upon by the
Central Bank. Member countries even have the same policies on agriculture,
industry, research, welfare and regional development. Countries forming an
economic union have to give up a lot of economic and social freedom in favor of the
central decision-making authority of union.
 Conclusion
International trade plays a major role in deciding the economic and financial strength
of a country. Countries can exploit their natural resources and gain competitive
advantage through trade. They can export anything they have in surplus and at the
same time import what they lack. International trade enables a country to obtain the
benefits of specialization. It results in an increase in the rate of economic growth of
both the countries involved in trade as both can use resources more productively.