ms - 03 solved assignment jul-dec 2013

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Management Programme

ASSIGNMENT

SECOND SEMESTER

2013

MS-03: Economic and Social Environment

School of Management Studies

INDIRA GANDHI NATIONAL OPEN UNIVERSITY

MAIDAN GARHI, NEW DELHI – 110 068

MS-03

http://www.ignousolvedassignments.com/


ASSIGNMENT

Course Code : MS-03

Course Title : Economic and Social Environment

Assignment Code : MS-03/TMA/SEM-II/2013

Coverage : All Blocks

Note: Attempt all the questions and submit this assignment on or before 31st October, 2013 to

the coordinator of your study centre.

1. “All modern economies have certain economic problems to deal with”. Examine and

illustrate the statement.

Solution :

What is an Economic Problem?

In a broad sense, an economic problem can be defined as an abnormal and irrational or irrelevant

behavior by socio-economic units and market components. An economic problem can be

triggered by any case or causes or even another economic problem. Though there is no scale that

measures the level of abnormal behavior, an economic problem is said to have arisen when the

abnormal behavior by economic components tend to affect several institutions.

In this discussion, market components signifies 3 major constituents of the market, namely,

demand, supply and price. Though the magnitude of all the three components is small, it plays a

highly influential role at a macro level. The term institute defines individuals, organizations,

companies, government, governing bodies and any unit which is capable of conducting an

economic activity.

Meaning

There are several definitions that elaborate upon an economic problem. However, the simplest

definition that is accepted world wide is that a problem is an abnormality in economic

institutions or constituents that in the view of society at large has a negative influence on earning

and spending. The real gist is thus that a 'problem' is a subjective view of the entire society. Rise

in gas price by 1 cent is not an economic problem, but a rise by $10 is stated to be an economic

problem.

Scarcity



Classical and neo-classical economists and also their school of though, have presented a very

practical explanation of the challenges facing any economy, the human wants are unlimited.

However, the volume of available resources that is used to fulfill them is very limited. Even the

alternatives that are present limited. This combination of limited resources and unlimited wants

results into problems. This approach is often termed as the scarcity approach. Thus, when you try

to find the solution to any economic crisis, you will have to focus on unlimited wants and limited

resources.

List of Economic Problems

Here is small list which is not totally complete and academic arguments to some elements in the

list are welcome.

Anti-competitive behavior, laws and practices

Mass bankruptcy filings and insolvency

Economic bubbles and mass business failure

Child labor and improper child welfare development

Commercial crimes and intentional or planned corporate offenses

Corporate crime and planned economic turmoil

Corporate scandals

Corruption

Uncontrolled debt

Economic disasters

Government or bureaucracy induced economic crisis

Mass economic inequality

Energy crises

Ethically disputed business practices

Financial crises (restricted to the financial sector)

Uneven income distribution

Inflation

Market failure (component failure)

Monetary hegemony

Monopoly



Offshoring and outsourcing

Poverty

Economic recessions

Social inequality

Stock market crashes

Unemployment

Mass public affluenza

Abnormal (too long or too short) age stratification

Agflation

Asset price inflation

Bank run

Benefit shortfall

Biflation

GDP or market component contraction

Credit crunch crisis

Crony capitalism

Currency crisis

Cycle of poverty

Deflation

Deindustrialization

Demographic trap

High dependency ratio

Dominant minority

Dutch disease

Economic collapse

Economic mobility

Economic stagnation

Expenditure cascades

Exploitation



Financial contagion

Flight-to-liquidity

Flight-to-quality

Free rider problem

Glass ceilings

Hahn's Problem

Horizontal inequality

Hyperinflation

Income deficit

Innovation butterfly

Insider trading

Kleptocracy

Liquidity crisis

Malthusian catastrophe and trap

Market abuse

Middle class squeeze

Monetary inflation

National bankruptcy

Crude oil depletion

Overcapitalisation

Overpopulation

Pandemic

Panic selling

Pensions crisis

Plutocracy (the rule of wealthy, or rather a combination of wealth and power, sufficing reach

other)

Population decline

Real estate bubble

Rural flight



Societal collapse

Spending wave

Stagflation

State monopoly capitalism

Staycation (a time period where a person or a family takes off a non festive, or a non sick leave

from work to relax for a day or two)

Stock market bubble

Sunshine tax (a significantly lower wage rate in one region as a result of excessive tax)

Urban decay

Waithood (refers to the long time period between the date of completion of education and date of

employment in the lives of many young people)

In the recent past, a considerable number of problems have plagued the world's markets. Here are

some explanations.

Inflation

One of the biggest problems ever seen in the developing nations, inflation, involves the rise in

price levels of goods and services. The basic reason that can be pointed out is that the population

rise is not proportional and is excessive, in comparison to the available resources. Hence the

more number of people demand a limited number of goods which leads to price hike. In contrast

to this commonly observed theory, inflation is also seen when currency in circulation is

increased. Wars, natural disasters other calamities are also accused of inflation. Hyperinflation is

very, very fast and disproportional inflation. South east Asian economies are of date suffering

from this phenomenon.

Economic Bubble

An economic bubble is high trade and market values of commodities, goods and products, the

intrinsic prices of which are very low. The same opposite situation can also arise. Real estate

bubbles in United States were responsible for a great deal of reduction in economic activities.

Recession

The third prominent economic problem is recession, which was severely experienced in 2008.

This economic cycle is a product of several causes, where in market values, GDP, rate of

employment, economic growth stall or fall. This results into credit crunches, fall in rates of

employment and overall economic activities. A very prolonged recession is known as a

depression.



It must be noted that since economics is a science and art that deals with man, there are several

economic challenges that overlap the scope of other social sciences. The reason being that, the

focal point of all these issues and other social sciences is mankind.

2. Briefly examine the growth of SSI in the post-reforms period.

Solution :

According to the committee of economic development USA, a small business is one which

possesses at least 2 of the following 4 characteristics:

Management of the firm is independent. Usually the managers are also the owners.

Capital is supplied and the ownership is held by an individual or a small group.

The area of operation is mainly local, with the workers and owners living in one

home community.

The relative size of the firm within its industry must be small when compared with

the biggest units in its field. These measures can be of sales volume, number of

employees or other significant comparisons.

The basic of distinction between the large, medium, and small scale industries is

generally the size, capital resources and labour force of the individual unit.

SSI Sector in India creates largest employment opportunities for the Indian populace,

next only to Agriculture. It has been estimated that a lakh rupees of investment in fixed

assets in the small scale sector generates employment for four persons.

Generation of Employment - Industry Group-wise

Food products industry has ranked first in generating employment, providing

employment to 4.82 lakh persons (13.1%).

The next two industry groups were Non-metallic mineral products with employment of

4.46 lakh persons (12.2%) and Metal products with 3.73 lakh persons (10.2%).

In Chemicals & chemical products, Machinery parts and except Electrical parts, Wood



products, Basic Metal Industries, Paper products & printing, Hosiery & garments,

Repair services and Rubber & plastic products, the contribution ranged from 9% to 5%,

the total contribution by these eight industry groups being 49%.

In all other industries the contribution was less than 5%.

Production

The small scale industries sector plays a vital role for the growth of the country. It

contributes 40% of the gross manufacture to the Indian economy.

It has been estimated that a lakh rupees of investment in fixed assets in the small scale

sector produces 4.62 lakhs worth of goods or services with an approximate value

addition of ten percentage points. The small scale sector has grown rapidly over the

years. The growth rates during the various plan periods have been very impressive.

The number of small scale units has increased from an estimated 8.74 lakhs units in

the year 1980-81 to an estimated 31.21 lakhs in the year 1999.

From the year 1990-91 this sector has exhibited a comparatively lower growth trend

(though positive) which continued during the next two years. However, this has to be

viewed in the background of the general recession in the economy. The transition

period of the process of economic reforms was also affected for some period by

adverse factors such as foreign exchange constraints, credit squeeze, demand

recession, high interest rates, shortage of raw material etc.

When the performance of this sector is viewed against the growth in the manufacturing

and the industry sector as a whole, it instills confidence in the resilience of the smallscale

sector.

The estimates of growth for the year 1995-96 have shown an upswing. The growth of

SSI sector has surpassed overall industrial growth from 1991 onwards. The positive

trend is likely to strengthen in the coming years. This trend augurs a bright future for

the small-scale industry.

Export contribution

SSI Sector plays a major role in India's present export performance. 45%-50% of the



Indian Exports is being contributed by SSI Sector. Direct exports from the SSI Sector

account for nearly 35% of total exports. The number of small-scale units that undertake

direct exports would be more than 5000.

Besides direct exports, it is estimated that small-scale industrial units contribute around

15% to exports indirectly. This takes place through merchant exporters, trading houses

and export houses. They may also be in the form of export orders from large units or

the production of parts and components for use for finished exportable goods.

It would surprise many to know that non-traditional products account for more than 95%

of the SSI exports. The exports from SSI sector have been clocking excellent growth

rates in this decade. It has been mostly fuelled by the performance of garment, leather

and gems and jewellery units from this sector.

Opportunities

Small industry sector has performed exceedingly well and enabled our country to

achieve a wide measure of industrial growth and diversification.

Economic Indicators

The Small Scale Industry today constitutes a very important segment of the Indian

economy. The development of this sector came about primarily due to the vision of our

late Prime Minister Jawaharlal Nehru who sought to develop core industry and have a

supporting sector in the form of small scale enterprises.

Small Scale Sector has emerged as a dynamic and vibrant sector of the economy.

Today, it accounts for nearly 35% of the gross value of output in the manufacturing sector and

over 40% of the total exports from the country.

In terms of value added this sector accounts for about 40% of the value added in

the manufacturing sector.

The sector's contribution to employment is next only to agriculture in India. It is

therefore an excellent sector of economy for investment.



3. Critically analyze the achievements and adverse effects of regulatory framework in

the course of India’s industrialization.

Solution :

India's experience with regulation in the sense of control is not new. Till recently, all sectors of

the economy were regulated. For example, in the infrastructure sectors, the governments or their

instrumentalities owned, operated, and regulated services. The central government, the Central

Electricity Authority, state governments, and state electricity boards regulate the power sector

under the authority of the

Electricity (Supply) Act, 1948 and Indian Electricity Act, 1910; the Department of

Telecommunications regulates the telecom sector under the Indian Wireless Telegraphic Act,

1933 and the Indian Telegraphic Act, 1885; the central government, state governments,

Directorate General of Shipping, and dock labour boards regulate the port sector under the Ports

Act, 1908, the Major Port Trusts Act, 1963, the Merchants Shipping Act, 1958, and the Dock

Workers (safety, health and welfare) Act, 1986. In addition, there are other regulators created

under various other acts relating to environment, safety, labour, etc. Regulation as it existed then,

and still continues to exist in several areas, is rooted in the belief that only the public sector can

provide basic infrastructure services, that the entry of the private sector should strictly be

regulated if it cannot be altogether prevented, and that the public sector agencies providing

services should serve the interests and compulsions of the government. There was no attempt to

distance the government's role as the policy maker and

protector of public interest from its role as operator or provider of services. In fact,

considerations of efficiency, productivity, and consumer interests were not of any importance.

There was also the implied belief that accountability to the government and through the

government to the Parliament or the legislature was adequate to ensure transparency and that no

objectivity in regulation or disclosure to the public was necessary. This form of regulation or

control inevitably resulted in unlimited discretionary powers to the service providers operational

inefficiency and poor quality of service lack of transparency in the decision-making process and

of accountability high barriers to entry and negligible flow of private capital financial

mismanagement lack of protection of consumer interest with non-competitive prices at the

consumer end and highly restricted consumer choices.

Reforms and liberalization of the Indian economy started in 1991/92 with the power and telecom

being thrown open gradually to private investment and competition.

The telecom sector was opened up in 1991 with private investment being permitted in

the manufacture of telephone equipment. Value-added services were thrown open for

private investment in 1992, and in 1994, the National Telecom Policy reiterated the

government's commitment to further liberalize the sector. The guidelines of 1991

allowed private sector entry in the generation of power. This was followed by several

initiatives to attract and facilitate private investment in the power sector. Private sector



participation by way of leasing port facilities was permitted in 1994 and investment in

the creation of new facilities in the existing ports or establishment of new ports in 1996.

However, regulation in the power and telecom sectors was not contemplated or

provided for as a part of the initial reforms process, unlike in the UK where the

electricity industry restructuring and positioning of the regulator were simultaneous. In

the case of the telecom and power sectors, the regulators came much later, whereas in

the case of the port sector the decision to set up a tariff regulatory authority was

announced as a part of the policy statement in 1996. In the insurance sector, the

regulatory authority has preceded the opening up of the sector. This sequence would

seem to indicate that progressively there is a realization in the government that reform

cannot be put into force without independent regulation and that a regulatory authority

should be set up. In the hydrocarbons sector, where the pace of reform is rapid, the

regulator is not yet in sight. To what extent do the laws setting up these regulatory

bodies incorporate the requisites of a sound regulation? Annex 1 sets out the

provisions of the TRAI (Telecom Regulatory Authority of India) Act, 1997; the PLA (Port

Laws [Amendment]) Act, 1997; the ERC (Electricity Regulatory Commissions) Act,

1998; and the IRA (Insurance Regulatory Authority) Bill, 1998 under the categories of

scope, autonomy, accountability, and powers. The scope of regulation in the four

sectors differs widely. Whereas TRAI has been specifically mandated to regulate the

telecom sector as a whole and advise on the timing of entry of players, licensing

conditions, technical capability, etc., the CERC (Central Electricity Regulatory

Commission) is essentially set up to regulate tariff for central generating agencies and

for interstate transmission of power. On the other hand, TAMP (Tariff Authority for

Major Ports) is only a tariff regulatory authority on the lines of a tariff commission and is

not a regulator of port activities at all. The IRA is being assigned a bigger mandate,

which is comparable with that of TRAI, in the insurance sector. Also TRAI and the IRA

at the bill stage have been specifically mandated to protect the interests of the

consumers, monitor the quality of service, and ensure compliance of minimum service

obligations, whereas in the case of the CERC, these have been left as objectives of the



CAC (Central Advisory Committee), without any clear indication of the value of the

advice of the CAC or how such advice would be heeded. In the case of TAMP, these

issues have not been addressed at all.

The regulatory laws do not provide for any flexibility for speedy and effective response

to changing circumstances. Since a regulator facilitates the process of transition from

the monopolistic market to a competitive economy, its form, functions, and scope

cannot be static. It is possible that as services are unbundled and competition increases, certain

areas presently regulated may at some future date call for no regulation. For example, in the

power sector it is possible that at some stage generation or distribution may not require tariff

regulation. Secondly, as an economy matures and becomes sophisticated, the approach to

regulation may have to change.

The traditional practice of regulating the rate of return of the utilities is already

undergoing a change with concepts like performance-based regulation or marginal cost

approach being introduced. Technological advances may also alter the boundaries of

regulation, a possibility that is looming large with telecommunications and broadcasting

beginning to use the same pathways. Ideally, therefore, there should be some provision

in the laws or mechanisms to ensure that the scope and nature of regulation is

continuously under review.

India has had robust economic growth since 1991 when the government reversed its

socialist-inspired policy of a large public sector with extensive controls on the private

sector and began to liberalize the economy. Liberalization has proceeded in fits and

starts since then, mainly due to political pressures, but the economy has responded

well by posting strong growth in many sectors. A 2003 report by Goldman Sachs

predicts that India's economy would be the third largest by 2050.

With a GDP of $550 billion ($2.66 trillion at PPP) India has the world's 12th largest

economy in US dollar terms and the 4th largest in PPP terms. However, the large

population means that per capita income is quite low. In 2002 the World Bank ranked

India 145th in PPP per capita income and 159th in real terms, among 208 countries.

About 60% of the population depends directly on agriculture. Industry and services

sectors are growing in importance and account for 25% and 50% of GDP, respectively,

while agriculture contributes about 25.6% of GDP. More than 25% of the population live



below the poverty line, but a large and growing middle class of 300 million has

disposable income for consumer goods.

India embarked on a series of economic reforms in 1991 in reaction to a severe foreign

exchange crisis. Those reforms have included liberalized foreign investment and

exchange regimes, significant reductions in tariffs and other trade barriers, reform and

modernization of the financial sector, and significant adjustments in government

monetary and fiscal policies.

The reform process has had some very beneficial effects on the Indian economy,

including higher growth rates, lower inflation, and significant increases in foreign

investment. Real GDP growth was 4.3% in 2002-03, mainly due to a severe drought.

Growth in 2003-2004 is expected to be above 6%. Foreign portfolio and direct

investment flows have risen significantly since reforms began in 1991 and have

contributed to healthy foreign currency reserves ($85 billion in August 2003) and a

moderate current account deficit of about 1% (2002-03). India's economic growth is constrained,

however, by inadequate infrastructure, cumbersome bureaucratic procedures, and high real

interest rates. India will have to address these constraints in formulating its economic policies

and by pursuing the second generation reforms to maintain recent trends in economic growth.

4. Distinguish between free trade and protection. Discuss the merits and demerits of

free trade vs. protection for a developing country like India.

Solution :

The global economy is set to decline for the first time since World War II. Economists have engaged in a lively debate over the benefits and pitfalls of free trade and protectionism. Many economies have adopted free-trade policy, or an economy in which trade tariffs and barriers have been lifted. allowing for the free flow of trade between one or more nations. Protectionism refers to policies where nations restrict imports and exports. What is Protectionism? Protectionism refers to policies, rules and regulations that help a nation place barriers in the form of tariffs while trading with any other country. It is sometimes also a ploy by a country to safeguard the interests of its domestic producers as cheap imported commodities tend to shut down factories making that commodity inside the country. Though at times protectionism is adopted to serve national interests, there are times when countries cry foul as they face non economic tariffs. For example, carpets made in India are world famous and India exports them to many countries including Europe and the US. But suddenly US chose to place barriers in this trade citing use of child labor in the manufacture of carpets in India.



One of the easiest ways to reduce imports of commodities is to raise the price of imports by putting in place tariffs. This helps domestic producers as they remain competitive in the domestic markets. Other ways of protectionism are to place quota restrictions on commodities so that the quantity entering the country is miniscule which does not affect local producers. Advantages of Trade Protectionism If a country is trying to grow strong in a new industry, tariffs will protect it from foreign competitors. This allows companies in the new industry time to learn how to produce the good efficiently, and develop their own competitive advantages. Protectionism also temporarily creates jobs for domestic workers. As domestic companies are protected by tariffs, quotas or subsidies, they will hire locally. This will occur until other countries retaliate by erecting their own protectionism within that industry. Disadvantages of Trade Protectionism In the long term, trade protectionism weakens the industry. Without competition, companies within the industry won't innovate and improve their products or services. There's no need to. Eventually, consumers will pay more for a lower quality product than they would get from foreign competitors. Job outsourcing is a result of declining U.S. competitiveness, itself is a result of decades of the U.S. not investing in education. This is particularly true for high tech, engineering, and science. Increased trade opens new markets for businesses to sell their products. The Peterson Institute for International Economics estimates that ending all trade barriers would increase U.S. income by $500 billion. Increasing U.S. protectionism will further slow economic growth and cause more layoffs, not less. If the U.S. closes its borders, other countries will do the same. This could cause layoffs among the 12 million U.S. workers who owe their jobs to exports. What is Free Trade? The concept of Free trade on the other hand refers to a situation where there are no barriers in trade between two countries. This not only helps both the nations, it also paves the way for cooperation and trade in more areas and removing mistrust and ill will that is always there in an atmosphere riddled with sanctions, tariffs and embargos. Free trade does not take place overnight and this is why nations are entering into economic pacts and agreements to slowly and gradually remove all such artificial tariffs. Free trade encourages transparency and healthy competition. Nations have come to realize that others can be superior to them in production of certain goods and services while they can be superior in other areas. To help nations of the world prosper through international trade, GATT has paved the way for World Trade Organization that sets the guidelines for international trade and puts into place a robust mechanism for the resolution of disputes between member countries. In brief: Free Trade vs Protectionism • Free trade is an ideal situation while protectionism is the order of the day in international trade • Protectionism takes many shapes and sometimes, countries crying foul as they are made to suffer hardships cannot even prove it • WTO has been set up to pave the way for free trade by gradually removing all artificial barriers between member countries • Free trade encourages healthy competition whereas protectionism leads to jealousy and ill will.



Advantages of free trade Free trade occurs when there are no artificial barriers put in place by governments to restrict the flow of goods and services between trading nations. When trade barriers, such as tariffs and subsidies are put in place, they protect domestic producers from international competition and redirect, rather than create trade flows. Increased production Free trade enables countries to specialise in the production of those commodities in which they have a comparative advantage . With specialisation countries are able to take advantage of efficiencies generated from economies of scale and increased output. International trade increases the size of a firm’s market, resulting in lower average costs and increased productivity, ultimately leading to increased production. Production efficiencies Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to higher productivity and increasing total domestic output of goods and services. Increased competition promotes innovative production methods, the use of new technology, marketing and distribution methods. Benefits to consumers Consumers benefit in the domestic economy as they can now obtain a greater variety of goods and services. The increased competition ensures goods and services, as well as inputs, are supplied at the lowest prices. For example in Australia imported motor vehicles would cost 35% more if the 1998 tariff levels still applied. Clothing and footwear would also cost around 24% more. Foreign exchange gains When Australia sells exports overseas it receives hard currency from the countries that buy the goods. This money is then used to pay for imports such as electrical equipment and cars that are produced more cheaply overseas. Employment Trade liberalisation creates losers and winners as resources move to more productive areas of the economy. Employment will increase in exporting industries and workers will be displaced as import competing industries fold (close down) in the competitive environment. With free trade many jobs have been created in Australia, especially in manufacturing and service industries, which can absorb the unemployment created through restructuring as firms close down or downsize their workforce. When tariffs were increased substantially in the period 1974–1984 for textiles and footwear - employment in the sector actually fell by 50 000, adding to overall unemployment. Economic growth



The countries involved in free trade experience rising living standards, increased real incomes and higher rates of economic growth. This is created by more competitive industries, increased productivity, efficiency and production levels. Disadvantages of free trade Although free trade has benefits, there are a number of arguments put forward by lobby groups and protestors who oppose free trade and trade liberalisation. These include: o With the removal of trade barriers, structural unemployment may occur in the short term. This can impact upon large numbers of workers, their families and local economies. Often it can be difficult for these workers to find employment in growth industries and government assistance is necessary. o Increased domestic economic instability from international trade cycles, as economies become dependent on global markets. This means that businesses, employees and consumers are more vulnerable to downturns in the economies of our trading partners, eg. Recession in the USA leads to decreased demand for Australian exports, leading to falling export incomes, lower GDP, lower incomes, lower domestic demand and rising unemployment. o International markets are not a level playing field as countries with surplus products may dump them on world markets at below cost. Some efficient industries may find it difficult to compete for long periods under such conditions. Further, countries whose economies are largely agricultural face unfavourable terms of trade (ratio of export prices to import prices) whereby their export income is much smaller than the import payments they make for high value added imports, leading to large CADs and subsequently large foreign debt levels. o Developing or new industries may find it difficult to become established in a competitive environment with no short-term protection policies by governments, according to the infant industries argument. It is difficult to develop economies of scale in the face of competition from large foreign TNCs. This can be applied to infant industries or infant economies (developing economies). o Free trade can lead to pollution and other environmental problems as companies fail to include these costs in the price of goods in trying to compete with companies operating under weaker environmental legislation in some countries. o Pressure to increase protection during the GFC During the global financial crisis and recession of 2008-2009, the impact of falling employment meant that protection pressures started to rise in many countries. In New South Wales, for example, the state government was criticised for purchasing imported uniforms for police and firefighters at cheaper prices rather than purchasing Australian made uniforms from Australian companies. Similar pressures were faced by governments in the United States, Britain and other European countries. External Sector Management refers to Policies adopted by a country with reference exports and imports. It can be free trade policy or restricted trade policy. A restricted trade policy seeks to maintain a system of trade restrictions with the objective of protecting domestic economy from competition of foreign products. A free trade policy involves complete absence of tariffs, quotas, exchange restrictions etc. Thus, external sector management strongly influences the direction, trend and growth of foreign trade of country. This is an important economic instrument, which can be used by a, country, with suitable modifications from time to time, to achieve its longterm objectives.? Trade policy is alternatively called as (EXIM) Export- Import policy. In India Trade policy is a policy, which is adopted by a country with references to exports and imports. FREE TRADE POLICY: A policy that doesn’t impose any constraints on the



interchange of goods and services between separate countries. A policy includes full absence of tariffs, quotas; interchange constraints on production taxes and subsidies. Case in favour of Free Trade Most arguments for free trade have been built on the grounds of efficiency, economic growth and welfare. According to Samuelson "trade promotes a mutually profitable regional division of labour, greatly enhances the potential real national product of all nations, and makes possible higher standards of living all over the globe" Free trade policy is economically advantageous to the participating countries since it maximizes their social product. Free trade is supposed to be carried out under the conditions of free competition in which price mechanism "… automatically ensures that each country, specialized in the production of those goods, and those goods which it can produce more cheaply, talking account of transport (cost)". Given the real resources of a country, if it specializes in the production of goods in which it is relatively more efficient, or its cost of production is comparatively lower, its total national product will be much larger than if it spreads its limited resources over the production of all goods, irrespective of the cost of production. With specialization in the efficient sectors, a larger national product can be achieved; a larger exportable surplus can be generated; and a larger volume of goods & services of the country’s requirements can be imported from other countries at lower prices. This increases total availability of goods and services and raises the standard of living of the people. Possibly the mist attractive argument in favour of free trade is that ‘it lowers the prices of imported goods’. Moreover, free trade in international market has an ‘educative effect’ in the sense that it compels countries to enhance their efficiency through better management of resources and quick adoption of improved and more efficient techniques of production. In theoretical terms, free trade offers various MERITS in realistically below developed countries where as DEMERITS in such a system of international trade. As an inference, international economy survives a difficult period of protective trade policies. Trade policies may be outward looking or inward looking.

(i) Outward looking: An outward looking trade policy encourages not only free trade but also the free movement of capital, workers enterprises and students, a welcome to the (MNC) organizations and an open system of communications Primary outward Policies: Goaled at encouraging export of raw material and agricultural. Secondary outward Policies: Goaled at promoting manufactured exports (ii) Inward looking: An inward looking true policy stresses the requirement for a Country to its own style of development and to be the master of its own fate with limitations on the movement of goods, services and people in and out of the Country. Primary inward policies: Opinion is to get agricultural self-sufficiency Secondary inward policies: By import substitution opinion is attaining manufactured commodity self-sufficiency. Merits of FREE trade If free trade between nations did not exist, then economies would stagnate. Free trade allows nations to flourish at what goods and/or services they excel at providing, fits into this scenario like a hand to a glove. Free trade gives consumers more, and cheaper, choices. It also helps to facilitate co-operation between the weaker developing countries and help the South build a joint economic perspective. Demerits



FREE trade affects every country in the world and every section of society within those countries. Industries face stiff competition from foreign companies. Small scale industries, which already have very less resources have to face high competition. Protection For some political reasons most countries had adopted a projectionist policy. Perhaps the world market never provided the perfect conditions required for free trade on a global scale. For the purpose of regulating foreign trade or protecting a country’s interest in foreign trade, tariff is one of the most important tools. Merits 1. A protective trade policy by a country seeks to maintain a system of trade limitations

with the opinion of protecting the domestic economy from the competition of foreign products. 2. During the decades of 50, 60 and 70 and some enhanced in 80. Protective trade policy constituted a significant plank (part) in the commercial policies of below developed countries. 3. It helps in development of the industries in the country. 4. Local industries don't have to face high competition from the foreign countries. DEMERITS Many undeveloped countries continue to have protective trade policies. The product prices are high due to protective trade policies. Consumers have to feel the heat of protective trade policies. The economy can't grow at high pace. It also discourages foreign investments. In a developing country like India, we cannot have a full-fledged free trade policy due to the following reasons: Several industries in a developing country like India are in the initial stage of industrial growth, most industries are in their infancy. In infant industries are exposed to competition with the industries of developed nations, which have achieved a high level of technical efficiency , economies of scale and financial strength, they would run the risk of dying out in their infancy. The infant industries of developing economy need protection. Promotion of employment: Tariff protection is also suggested as an effective remedy to the serious unemployment problem in underdeveloped countries. Imposition of tariffs on imports directly competing with the domestic products helps to expand employment opportunities in the import-competing industries by securing the domestic market

5. Collect data on foreign technical and financial collaborations for the period 2005-2012

and write a note on the trends of these collaborations.



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ms - 03 solved assignment jul-dec 2013

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