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ROLE OF TRADE IN DEVELOPMENT
Assess India’s Trade and It’s Contribution
Nishant Kumar
(I120412)
III year Int. M.Sc.Economics
Dept. Of Economics
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INTRODUCTION
Trade, also called goods exchange economy ,is to transfer the
ownership of goods from one person or entity to another by
getting a product or service in exchange from the buyer.
Trade is the basic component of economic activity and is
undertaken for mutual advantage.
Trade is believed to have first begun in South West of Asia.
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WHY TRADE HAPPENED?
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All countries are different from each other.
To achieve the economics of scale in production.
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TRADE THEORY
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MERCANTILISTS’ VIEWS ON TRADE
Mercantilists measured the wealth of a nation by the stock
of precious metals it possessed.
Mercantilists advocated strict government control of all
economic activity and preached economic nationalism
because they believed that a nation could gain in trade only
at the expense of other nations(trade was a zero-sum
game).
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TRADE BASED ON ABSOLUTE
ADVANTAGE: ADAM SMITH
When one nation is more efficient than another in the production of one commodity but is less efficient than other nation in producing a second commodity, then both nations can gain by each specializing in the production of the commodity of its absolute advantage and exchanging part of its output with the other nation for the commodity of its absolute disadvantage.
Adam believed that all nations would gain from free trade and strongly advocated a policy of laissez-faire .
Adam’s theory served the interest of factory owners (who were able to pay lower wages because of cheaper food imports) and harmed landowners (because food became less scarce due to cheaper imports).
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TRADE BASED ON COMPARATIVE
ADVANTAGE :DAVID RICARDO
When one nation is less efficient than(has an absolute disadvantage with respect to) the other nation in the production of both commodities, there is still a basis for mutually beneficial trade.
Under the labour theory of value, the value or price of a commodity depends exclusively on the amount of labour going into the production of the commodity.
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HECKSCHER -OHLIN MODEL
A nation will export the commodity whose production requires the intensive use of the nation’s relatively abundant and cheap factor and import the commodity whose production requires the intensive use of the nation’s relatively scarce and expensive factor.
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ROLE OF TRADE IN DEVELOPMENT
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1. Trade can help boost development and reduce poverty by generating growth through increased commercial opportunities and investment, as well as broadening the productive base through private development.
Between 2000 and 2008, GDP per capita increased from $325 to over $625 in Least-Developed Countries.
Much of this can be attributed to an increase in trade and foreign investment.
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2. Trade enhances competitiveness by helping developing countries reduce the cost of inputs, acquire finance through investments, increase the value added of their products and move up the global value chain .
Emerging economies like China, Brazil, India and South Africa are steadily catching up with developed countries, thanks to increased trade.
The GDP per capita increase of G20 developing countries stands at 115% for the decade 2000-2010.
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3. Trade facilitates export diversification by allowing developing countries to access new markets and new materials which open up new production possibilities.
India cut import duties from an average of 90% in 1991 to 30% in 1997. This gave Indian manufacturers access to a variety of intermediate and capital goods. Imports of intermediate goods increased by 227% over the period.
Two thirds of the intermediate goods imported were products Indian producers could not buy before 1991. As a result, industrial output grew by 50% with new products accounting for 25% of the total.
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4. Trade encourages innovation by facilitating exchange of know-how, technology and investment in research and development, including through foreign direct investment.
Investment and trade have facilitated the deployment of information and communication technology, with mobile cellular coverage reaching 86% of the world’s population in 2008.
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5. Trade openness expands business opportunities for domestic companies by opening up new markets, removing unnecessary barriers and making it easier for them to export.
6. Trade expands choice and lowers prices for consumers by broadening supply sources of goods and services and strengthening competition.
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7. Trade plays a role in the improvement of quality, labour and environmental standards through increased competition and the exchange of best practices between trade partners, building capacity in industry and product standards.
8. Trade contributes to cutting government spending by expanding supply sources of goods and services and strengthening competition for government procurement.
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9. Trade strengthens ties between nations by bringing people together in peaceful and mutual beneficial exchanges and as such contributes to peace andstability.
A study undertaken by the Centre for Economic Policy Research on empirical data showed that the probability disputes escalating to conflict is lower for countries thattrade more because of the opportunity cost associatedwith the loss of trade gains.
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10. Trade creates employment opportunities by boosting economic sectors that create jobs and usually higher incomes, thus improving livelihoods.
Manufacturing workers in open economies received pay rates 3 to 9 times greater than those in closedeconomies, depending on the region.
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ASSESS INDIA’S TRADE AND IT’S
CONTRIBUTION
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India’s ranking in the top merchandise exporters and
importers in the world has also improved from 31st in
2000 to 19th in 2013 in exports and from 26th to 12th for
imports in the same years.
India’s total merchandise trade to GDP ratio from 21.8
percent in 2000-01 to 44.1 percent in 2013-14.
Net barter and income terms of trade improved in 2012-13
compared to 2011-12.
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-200000
-100000
0
100000
200000
300000
400000
500000
600000
700000
800000
Year 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
(US$
mil
lion
)
EXPORT-IMPORT DATA
Export
Import
Total Trade
Trade Balance
Source: dbie.rbi.org.in
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-20
-10
0
10
20
30
40
50
2009-10 2010-11 2011-12 2012-13 2013-14
%
year
% of Growth in trade
% of Growth in export
%of Growth in Import
Source: dbie.rbi.org.in
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Nis
ha
nt K
um
ar
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
EXPORTS OF PRINCIPAL COMMODITIES
Others (All Commodities)
Petroleum Products
Manufactured Goods
Primary Products
Source: dbie.rbi.org.in
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Nis
ha
nt K
um
ar
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0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
IMPORTS OF PRINCIPAL COMMODITIES
Non Bulk Import
Bulk Import
Source: dbie.rbi.org.in
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Nishant Kumar Source: Economic Survey 2013-14
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INDIA’S TRADE SHARE AND EXPORT-IMPORT RATIO WITH MAJOR TRADING
PARTNERS
Nishant Kumar Source: Economic Survey 2013-14
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CONCLUSION
When prices of petroleum increases in the international
market, it affects the balance of payments of India
Many labour-intensive export sectors performed
relatively well in 2013-14.
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REFERENCES
Datt & Sundharam, Indian Economy, S Chand
Publishing.
Economic Survey, 2013-14
Handbook of Statistics on the Indian Economy, RBI
Paul R .Krugman & Maurice Obstfeld International
Economics Theory and Policy.