Post on 28-Oct-2014
International Trade Pattern and Balance of payments
World TradeIndia’s Foreign TradeBalance of Payments
Case – Developing Countries Trade Dependence and Export Growth Opportunities
Friday, April 7, 2023 1Dr. S. Jain
Dr. S. Jain 2
Learning Objectives
• To explain the significance of international trade
patterns
• To provide an overview of world trade
• To evaluate India’s international trade
• To outline the concept of terms of trade
• To explicate balance of payments
• To highlight key issues in India’s foreign trade
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Significance of International Trade Patterns
Patterns of international trade facilitate in developing an overview about the types of products traded and the countries involved in trade. The shifts in trade patterns and their causes provide insights into the upheavals in the economic environment and trade policies of nations.
Macroeconomic factors in the trading countries as well as the overall world economic environment influence the international flow of goods and services. Thus, past international trade patterns reveal vital information about macro economic environment and its changes.
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World Trade: An Overview
The world merchandise exports grew from US$ 59 billion in
1948 to US$ 13.57 trillion in 2007, and imports grew from US$
62 billion to US$ 13.94 trillion during the same period.
The exports of services grew more rapidly compared to
merchandise exports from US$ 390.8 billion in 1980 to US$ 3.26
trillion in 2007 whereas during the same period, imports rose
from US$ 431.8 billion in 1980 to US$ 3.06 trillion in 2007.
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Composition of World Trade (2007)
Commercial Services19.4%
Merchandise80.6%
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Direction of World Trade
Direction of Trade: The statistical analysis of the set of a country’s trading partners and their significance in trade.
Direction of Exports: The set of countries where the goods are exported and their significance on a country’s exports.
Direction of Imports: The set of countries from where the goods are imported and their significance on a country’s imports.
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Direction of World Exports
0
2000000
4000000
6000000
8000000
10000000
12000000
14000000
F.O
.B.
US
$ M
illi
on
19
80
19
90
20
00
20
03
20
04
20
05
20
06
20
07
Years
Developed Economies Developing Economies Economies in Transition
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Direction of World Merchandise Exports (2007)
North America13.7%
Asia28.0%
Europe42.5%
Africa3.1%
South and Central America
3.7%
Middle East5.3%
CIS3.7%
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Direction of World Merchandise Imports(2007)
Middle East3.3%
South and Central America
3.3%
CIS2.7% Africa
2.5%
North America19.4%
Asia25.3%
Europe43.4%
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Composition of World Merchandise Trade
Composition of Trade: The statistical analysis of a
country’s product groups in its international trade.
Composition of Exports: The analysis carried out for
product groups exported.
Composition of Imports: The analysis carried out for
product groups imported.
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Patterns of World Merchandise Exports
0%
20%
40%
60%
80%
100%
Per
cent
age
1965
1970
1980
1995
2000
2002
2005
2006
Years
Food Items Agricultural raw materials Ores, metals and precious stones Fuels Manufactured goods
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Composition of World Merchandise Exports (2006)
Fuels17.2%
Textiles2.1%
Clothing3.0%
Automotive products9.8%
Agricultural Products9.2%
Other machinery14.0%
Other semi Manufactures7.7%
Pharmaceuticals3.0%
Office & telecom equipment14.1%
Ores & minerals1.9%
Iron & Steel3.6%
Non-ferrous metals3.0%
Scientific and controlling instruments
2.3%
Other chemicals9.1%
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World Commercial Services Trade
The world commercial services exports rose by 21 per cent to US$ 3.26 trillion in 2007. Since the commercial services data are derived from BoP statistics, it does not include the sales of majority-owned foreign affiliates abroad.
‘Other commercial services’ that include software, education, health financial services, etc, has been the fastest growing category at 12 per cent growth in the world exports of commercial services trade.
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South & Central America
2.8%
Africa2.6% Middle East
2.4%
CIS2.0%
North America16.4%
Asia22.9%
Europe51.0%
Direction of World Commercial Services Exports (2007)
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Direction of World Commercial Services Imports (2007)
South & Central America3.2%
Middle East4.1%
Africa3.2%
CIS2.9%
North America14.4%
Asia25.4%
Europe46.8%
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Composition of World Exports of Commercial Services (2007)
Other Commercial Services50.8%
Travel26.5%
Transport22.8%
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India’s Foreign Trade: An Overview
India’s foreign trade was largely determined by the strategic needs of the British colonial powers prior to its independence in 1947. Like other colonies, India too was a supplier of raw materials and agricultural commodities to Britain and other industrial countries and it used to import the manufactured goods from Britain. The dependence of colonial India on Britain for manufactured goods hindered the process of industrialization and obliterated the indigenous handicraft and cottage industries.
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Friday, April 7, 2023 20Dr. S. Jain
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Composition of India's External Trade (2006-07)
Merchandise, 72.6%
Services, 27.4%
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Direction of India's Trade : Exports
0
20000
40000
60000
80000
100000
120000
140000
US$
(M
illio
n)
1987
-88
1991
-92
1993
-94
1995
-96
1997
-98
1999
-00
2001
-02
2003
-04
2004
-05
2005
-06
2006
-07*
Years
OECD countries OPEC Eastern Europe Developing countries Others / unspecified
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Direction of India's Trade : Imports
0.0
20000.0
40000.0
60000.0
80000.0
100000.0
120000.0
140000.0
160000.0
180000.0
200000.0
US
$ M
illio
n
1987
-88
1991
-92
1993
-94
1995
-96
1997
-98
1999
-00
2001
-02
2003
-04
2004
-05
2005
-06
2006
-07*
Years
OECD countries OPEC Eastern Europe Developing countries Others / unspecified
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Composition of India's Export
15.2
2.5
80.7
0.1
1.5
13.52.6
78.0
4.21.7
13.5
2.9
76.1
4.82.7
12.8
3.8
76.6
4.92.0
10.55.5
74.3
8.51.2
10.25.2
72.0
11.51.1
10.34.8
68.6
15.01.3
9.34.0
67.4
17.9
1.4
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Per
cent
age
1999
-200
0
2000
-01
2001
-02
2002
-03
2004
-05
2005
-06
2006
-07
2007
-08*
Years
Agriculture &allied products Ores & Minerals Manufactured Goods Crude & Petroleum Products Others & Unclassified items
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Composition of India's Imports
5.8
27.4
2.80.9
12.0
32.8
18.3
3.7
33.2
1.50.9
11.0
29.8
19.9
4.5
29.5
1.30.9
11.4
30.3
22.1
4.6
30.7
1.00.7
12.1
28.2
22.7
3.5
29.6
1.10.7
13.0
48.3
3.8
2.5
32.1
1.30.6
15.8
43.7
4.0
2.9
33.2
1.60.6
15.4
43.8
2.5
2.2
33.6
1.90.6
13.2
40.4
8.1
0
10
20
30
40
50
60
70
80
90
100P
erce
nta
ge
19
99
-20
00
20
00
-01
20
01
-02
20
02
-03
20
04
-05
20
05
-06
20
06
-07
20
07
-08
*
Years
Food and allied products Fuel Fertilizers Paper board, manufactures & newsprint Capital goods Others Unclassified items
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India’s Services Trade
The services sector in India has grown remarkably and account
for over 55 per cent of India’s GDP making it the most
significant component of the country’s economy. India’s
services exports have significantly grown from a meager US$
295 million in 1970–71 to US$ 76.2 billion in 2006–07 with a
growth of 32.1 per cent over the previous year.
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Composition of India’s Service Exports (2007-08)**
Miscellaneous*, 28.1
Travel, 12.9
Transportation, 10.8
Insurance, 1.8
G.N.I.E., 0.4
Software, 46.0
** Provisional, * Excluding Software Services
G.N.I.E- Government Not Included Elsewhere
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Gains from International Trade
Trade indices are widely-used instruments to measure
the benefits derived by a nation from international trade.
These facilitate in assessing the impact of trade volume
and / or unit value realization on a country’s gains from
trade.
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Terms of Trade
The terms of trade is a measure of relative changes in export and import prices of a nation. It reflects the quantity of imports that a given quantity of exports can buy.
The terms of trade refers to ratio of the price of its export commodity to the price of its import commodity.
In case of a hypothetical assumption of a two-nation world, the export of a country equals its trade partner’s imports wherein the terms of trade of a country are equal to the inverse of the terms of trade of its trade partner.
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Types of Terms of Trade
Net terms of trade: It implies unit value index of exports expressed as a percentage of unit value index of imports.
Net value terms of trade:
(N) = Unit value index of exports (Px) Unit value index of imports (Pm)
X 100
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Gross terms of trade: It implies volume index of imports expressed as a percentage of volume index of exports
Gross terms of trade = Volume index of imports (Qm) Volume index of exports (Qx)
X 100
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Income terms of trade: It implies the product of net terms of trade and volume index of exports expressed as a percentage. It reflects a nation’s capacity to import.
Income Terms of Trade (I) =
Net terms of trade (Px/Pm)*volume index of exports( Qx) *100
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• Single factorial terms of trade: Net barter terms of
trade adjusted for changes in productivity of exports
• Double factorial terms of trade: Net barter terms of
trade adjusted for changes both in productivity of
exports and imports
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YearYear Terms of TradeTerms of Trade
Developed Developed
EconomiesEconomiesDeveloping Developing
EconomiesEconomies
19801980 9797 117117
19901990 103103 101101
19951995 105105 102102
20012001 101101 9898
20032003 103103 9898
20052005 102102 105105
20062006 100100 107107
Trade Indices : Developed vs. Developing Economies (Base Year 2000=100)
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Reasons for Deterioration in Terms of Trade for Developing Countries
•International demand for export of manufactured goods by developed countries tends to increase at a much faster rate compared to demand for agricultural commodities and primary goods due to their higher income elasticity of demand.
•Any productivity gain in manufactured goods by developed countries is generally passed on to its workers in the form of higher wages and income. Whereas, any such gains in productivity of agricultural commodities and primary products by developing countries are reflected in price decline. This leads to a consistent deterioration in the collective terms of trade of developing countries.
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India’s Terms of Trade
India’s Unit Value Index for imports rose from 35.3 in 1970–71 to 608 in 2006–07 compared to corresponding rise in Unit Value Index of exports from 45 to 863 during the period.
It implies that the rise in the value of imports grew much more than the quantity of goods imported which added to India’s financial burden.
Factors responsible for this include relative inelasticity of India’s import demands for petroleum products, foodgrains, fertilizers, oilseeds, and capital goods constrained India in making any substantial cuts on imports.
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YearsYears Terms of tradeTerms of trade
GrossGross NetNet Income Income
1970-711970-71 113.9113.9 127.4127.4 75.275.2
1978-791978-79 100.0100.0 100.0100.0 100.0100.0
1980-811980-81 127.6127.6 80.880.8 87.387.3
1990-911990-91 122.5122.5 109.3109.3 212.2212.2
2000-012000-01 122.1122.1 128.1128.1 732.0732.0
2003-042003-04 126.9126.9 123.4123.4 943.5943.5
2004-052004-05 124.0124.0 110.0110.0 991.0991.0
2005-062005-06 164.0164.0 135.0135.0 1357.01357.0
2006-072006-07 176.0176.0 142.0142.0 1653.01653.0
Trade Indices of India’s Foreign Trade
(Base: 1978-79=100)
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Balance of Payments (BoP)
The summary of all its economic transactions that have taken place between the country’s residents and the residents of other countries during a specified time period.
It is used as an indicator of a country’s political and economic stability. A consistently positive BoP reflects more foreign investment and money coming into the country and not much of its currency being exported. On the other hand, adverse or negative BoP indicates more outflows of money compared to inflows.
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Balance of TradeThe difference between the value of exports and imports is termed as Balance of Trade.
India had negative balance of trade over the years except during two financial years, i.e,. a positive trade balance of US$ 134 million 1972–73 and US$ 77 million in 1996–97.
There has been a steep rise in trade deficit from US$ 5.98 billion in 2000–01 to US$ 80.39 billion in 2007–08 mainly due to the steep rise in its unit value prices of India’s import products, especially the petroleum products and fertilizers besides domestic demand
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India’s Trade Balance
-70000
-60000
-50000
-40000
-30000
-20000
-10000
0
10000
Years
US
$ (
Mil
lio
n)
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Constraints in India’s Exports Growth
• Adoption of ‘import substitution’ rather than ‘export promotion’ strategy
• Overprotection to Indian industry from external competition
• High import barriers
• High import tariff
• Inadequate infrastructure
• Complexity of trade procedures
Friday, April 7, 2023