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

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.

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.

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

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

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

Nishant Kumar Source: Economic Survey 2013-14

INDIA’S TRADE SHARE AND EXPORT-IMPORT RATIO WITH MAJOR TRADING

PARTNERS

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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.

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.