Dr. Vasudev P. Iyer

1

1. Engine of growth2. Check on domestic monopoly3. Benefits to consumers4. Exposure to international

standards 5. Greater economic integration6. Increase in flow of capital,

managerial skills and technology

2

1. Dominance of MNCs2. Threat to domestic

employment 3. Demonstration effects4. Greater dependency5. Interference 6. Unequal distribution of

benefits

3

Meaning Government restriction on cross

border trade

• Arguments for protectionism (advantages)1.Infant industry argument2.Pauper labour argument3.Increasing output and employment4.Self reliance5.Strategic trade policy

4

Tariff barriersImport dutyExport dutyPreferential Duties

5

Non-tariff barriers1) Export subsidy2) Import quota (quantitative

restrictions)3) Voluntary export restraints4) Domestic policies

Health Environment Safety standards Political issues

5) Bureaucratic hurdles

6

7

“International Economics (IE)

deals with the economic and

financial inter-dependence

among nations”

8

Trade between countries Surplus traded across the

border Exports earn foreign

exchange Need to determine

exchange rate Helps the process of

globalisation

Trade within a country Surplus traded within

the borders of a country

No earning of foreign exchange

Non need to determine exchange rate

Helps the process of nationalisation

INTERNATIONAL TRADE DOMESTIC TRADE

9

Comparative cost advantage theoryDeveloped by David RicardoWhen one country

manufactures goods at a lower cost relative to other goods it is said to enjoy comparative cost advantage in production of those goods.

Technological differences across borders

Reflected by: differences in labour productivity

10

11

Factor Endowments Trade Theory

• Labour surplus– Labour intensive goods and services

• Capital surplus– Capital intensive goods and services

LabourLand and Capital

Two factor types

Systematic records of all economic transactions between residents of one nation with the other during a period of time.

Structure of BOPCurrent accountCapital accountOfficial reserves account

12

• Autonomous flow of capital• Accommodating flow of capital

13

Autonomous inflow of capital =Autonomous outflow of capital

Cyclical Structural Secular

14

Monetary measuresDevaluationExchange control Tight monetary and fiscal policy

measures

Non-monetary measuresUse of tariff and non-tariff measuresMeasures to promote exportsMeasures to attract inflow of foreign

capital

15

The official reduction in the value of the domestic currency vis-à-vis a basket of foreign currencies.

Devaluation in IndiaJune 1966: 57.5%June 1991: 22%

Desired impact of devaluationExports become competitiveImports become uncompetitive

The ‘J’ Curve Effect

16

17 17

1990: BOP crisis Economic sovereignty of the country

under threat Wide spread economic reforms Improvement in BOP situation Foreign exchange reserves Cushion of foreign investment flow (?) BOP under pressure in recent years

18

MeaningThe rules, laws and regulations that

govern international transactions and the foreign exchange markets.

19

The Gold StandardOriginated in Britain in 1800sFree conversion of gold into domestic

money and vice-a-versaAllowed import and export of gold

20

21

Mount Washington

Hotel Bretton

Woods, Washington

USA to purchase

gold at $35 per 1oz

of gold

In return, $ as

reserve currency

Since 1973

Floating would be stable

Allowed independent policy making

However, dollar depreciated heavily

against DM

22

Fixed exchange rate Intervention of the central bank

Flexible exchange rateExchange rate determined by market

forces Advantages of fixed exchange rate

CertaintyNon-inflationaryBoost to international trade

23

Disadvantages of fixed exchange rate Rigid Need to maintain large reserves Not suitable for small countries Independent monetary policy not possible

Advantages of flexible exchange rate Automatic Suitable for small countries No need to maintain large reserves Independent monetary policy possible

Disadvantages of flexible exchange rate Uncertain Inflationary Speculative attacks

24

25