Foreign Trade

1. What is globalization?

The term “Globalization” means the integration of the economy of each
country with the world economy.

2. What are the trends in globalization?

1) Spread of international trade.

2) Increasing migration of people.

3) Increasing flow of money or means of payments.

4) More capital flows.

5) Increased flow of finance capital.

6) Emergence of more and more transnational companies and multinational
companies.

7) Increasing trade of technology between different countries.

8) Rapid spread of print, electronic and communication media.

9) Growth in trade and production of services of all kinds – including
education.

3. Name some multilateral organization?

The multilateral organizations like World Bank and International Monetary
Fund (IMF).

4. What is NEP?

New Economic Policy

5. What is the main objective of NEP?

The main objective of NEP has been to achieve a higher level of economic
growth.

6. What is the need of foreign investment?

Foreign investment was supposed to bring technology, marketing enterprise,
managerial techniques and new possibilities of import promotion. For
promoting foreign investment in high priority industries and advanced
technology, it was decided to provide approval for direct foreign
investment upto 51% of foreign equity (earlier 40% in such industries).

7. How are foreign investment policy classified?

1) Choice of Product: The number of products in which foreign investment is
freely permitted has been significantly increased.

2) Choice of Market: The foreign investors are free now to compete with the
domestic producers in the Indian market.

3) Choice of Ownership Structure: In most cases, the foreign investor is
free to own a majority share in equity.

4) Simplification of Procedures: Foreign direct investment (FDI) flows
through three different routes

8. What is the second route of foreign investment?

The second route for foreign direct investment is from multinational
companies on their Indian partners who want to invest in an industry
outside these 35 sub-sectors or when an FDI holding or more than 51% is
sought, permission has to be taken from the Secretariat of Industrial
approvals (SIA) or the Foreign Investment Promotion Board. (FIPB).

8. What is the third route of foreign investment?

The third route is investment by non-resident Indians.

9. Which is important for development mix?

Technology is an important ingredient of the development mix.

10. What is technology transfer?

Developing countries are generally characterized by technological
backwardness and a slow pace of technological progress. Transfer of
technology from the developed to the developing countries is a necessary
measure to speed up the pace of the economic development and modernization
process.

11. What are the methods of technology transfer method?

1. Training or Employment of Technical Export

2. Contracts for supply of machinery and equipment and

3. Licensing agreements.

12. Where is trade evoluted?

From barter to money economy.

13. What is trade?

Trade is simply the exchange of commodities which takes place at different
levels.

14. What is barter system?

The earliest form of trade was probably barter in which one type of good
was exchanged for another good.

15. What was the problem of barter system?

The main inconvenience of barter was the necessity for double coincidence
of wants.

16. Give an example for barter system?

For example, a person has a cow and he wants to exchange cow for rice.
Another person who has rice does not want a cow but he wants a horse. In
this case, the transaction cannot take place, because there is no double
coincidence of wants.

17. What is the fundamental of man`s invention?

‘Money is one of the most fundamental of all man’s inventions.

18. What is money?

Money acts a medium of exchange, a measure of value, a store of value and a
standard of deferred payments. Thus barter economy has given place to money
economy.

19. What process of exchange was followed before invention of money?

Before the introduction of paper money, any commodity that was generally
demanded was chosen by common consent as a medium of exchange. For example,
people living by sea-shore chose shells as medium of exchange, in cold
countries people used skins of animals and fur; in tropical countries,
elephant tusks, plumage of birds and tiger teeth were used as medium of
exchange

20. Who followed metallic money?

European merchants adopted the practice of carrying proper receipts showing
their title to metallic money, which they had kept with well-known
goldsmiths for safe custody

21. What is retail trade?

The type of trade with which most people are familiar is retail trade, in
which shopkeepers sell goods to individual consumers for money.

22. How do countries differ?

Countries differ in respect of climatic conditions, availability of
cultivable land, forests, mines, mineral products, labour, capital
technology and entrepreneurial skills etc. Given their diversities, no
country has the potential to produce all the commodities at the least cost.

23. Who gave theory of comparative advantage?

David Ricardo

24. What is theory of comparative advantage?

· The theory of comparative advantage just explains such advantages of free
trade.

· David Ricardo (The Principles of Political Economy and Taxation 1817)
shown that trade without barriers can be beneficial for two countries if
one is more efficient at producing goods or services needed by the other.

· What matters is not the absolute cost of production, but rather the ratio
between how easily the two countries can produce different goods.

· Thus, according to the theory of comparative advantage, if countries
specialize in producing what they are most efficient, then they can trade
these goods for those produced most efficiently by other country.

25. How does foreign trade contribute to economic development?

i) It explores means of procuring imports of capital goods, which initiates
the development process.

ii) It provides for flow of technology, it allows an increase in factor
productivity.

iii) It generates pressure for dynamic change through

a. competitive pressure from imports,

b. pressure of competition for export markets, and

c. a better allocation of resources.

iv) Exports allow fuller utilization of capacity, increased exploitation of
economies of scale, separation of production patterns from domestic demand,
and increasing familiarity with absorption of new technologies. These, in
turn, help increase the profitability of the domestic business without any
corresponding increases in price.

v) Foreign trade increases worker’s welfare. It does so at least in four
ways:

a. larger exports translate into higher wages;

b. because workers are also consumers, trade brings them immediate gains
through cheaper imports;

c. It enables most workers to become more productive as the goods they
produce increase in value;

d. trade increases technology transfers from industrial nations to UDCs and
the transferred technology is biased in favour of skilled labour;

e. Increased openness to trade has been strongly associated with the
reduction of poverty in most developing countries.

26. What are the conditions that are favorable for developing economies to
employ foreign trade?

i) Increasing spread to globalization translates into larger movement of
goods and services across the nations.

ii) Continuing reallocation of manufacturing activities from industrial
economies to developing economies offers ample opportunities to expand
trade not only in goods, but also in services, which are becoming
increasingly tradable.

iii) Trade is intertwined with another element of globalization: the spread
of international production networks.

iv) Growth of trade is firmly buttressed by international institutions of
long standing. The WTO, built on the legacy of the GATT, aims to create a
commercial environment more conducive to the multilateral exchange of goods
and services.

v) In recent years there have been substantial reductions in trade policy
and other barriers inhibiting developing country participation in world
trade. Lower barriers have contributed to a dramatic shift in the pattern
of developing country trade-away from dependence on commodity exports to
much greater reliance on manufactures and services. In addition, exports to
other developing countries have become much more important.

27. What is IMF?

International Monetary Fund (IMF).

28. What are the objectives of IMF?

1) To promote international monetary cooperation

2) To promote stability in foreign exchange rates;

3) To eliminate exchange control

4) To establish a system of multilateral trade and payments

5) To set right the disequilibria in the balance of payments.

28. What are the functions of IMF?

1) Functions as a short term credit institution.

2) Provides machinery for the orderly adjustments of exchange rates.

3) Acts as a reservoir of the currencies of all the member countries from
which a borrower nation can borrow the currency of other nations.

4) Functions as a sort of lending institution in foreign exchange. It
grants loans for financing current transactions only and not capital
transactions.

5) It also provides machinery for altering sometimes the par value of the
currency of a member country.

6) It also provides machinery for international consultations.

7) Provides technical experts to member countries having BOP difficulties
and other problems.

8) Conducts research studies and publishes them in IMF Staff papers,
Finance and development etc.

29. What is the structure of IMF?

· The highest authority of the fund is the Board of Governors.

· It consists of Executive Board, a Managing Director, a council and staff
with its headquarters in Washington, U.S.A.

· There are ad hoc and standing committees appointed by the Board of
Governors and Executive Board.

· The Board of Governors and the Executive Board are decision-making organs
of the fund. The decisions are binding on the fund and its members.

30. Where do financial resources comes from?

The bulk of its financial resources comes from quota subscriptions,
besides, selling gold, borrowing from central banks or private institutions
of industrialized countries.

31. Name some credit facilities?

1) Buffer stock Financing Facility (BSFF)

2) Extended Fund Facility (EFF)

3) Supplementary Financing Facility (SFF)

4) Structural Adjustment Facility (SAF)

5) Enhanced Structural Adjustment Facility (ESAF)

6) Compensatory and contingency Financing Facility (CCFF)

7) Systematic Transformation Facility (STF)

8) Emergency structural Adjustment Loans (ESAL) 9) Contingency credit Line
(CCL)

32. What are the components of trade?

1. Volume of trade

2. Composition of trade and

3. Direction of trade.

33. What is volume of trade?

It refers to size of international transactions.

34. What are the parts of import in India?

• Capital goods,
• Raw materials and
• Consumer goods

35. What are the compositions of exports in India?

i) Exports of traditional items and

ii) Exports of non-traditional items.

36. What are the major exports of India?

1. OECD countries (Belgium, France Germany, U.K. North America, Canada,
USA, Australia and Japan). Our exports which constituted 53.5 percent of
the total exports in 1990-91 increased to 55.7 percent in 1999 – 2000.

2. OPEC countries (Iran, Iraq, Kuwait, Saudi Arabia etc.). Our exports
which constituted 5.6 percent of the total exports in 1990-91 increased to
10.0 percent in 1999-2000.

3. Eastern Europe (GDR, Romania, Russia etc.). Our exports which
constituted 17.9 percent in 1990-91 decreased to 3.1 percent in 1999-2000.

4. Other LDC’s (Africa, Asia, Latin America). Our exports constitute 16.8
per cent in 1990-91, increased to 28.2 percent in 1999-2000.

37. What is balance of payment?

Balance of payments means a systematic record of all the economic
transactions of a country with the rest of the world during a given period,
say one year. It throws light on the international economic position of a
country.

38. What is GATT?

The General Agreement on Tariffs and Trade (GATT) was a multilateral trade
treaty between countries to regulate international trade and tariffs in
accordance with specific rules, norms or code of conduct. GATT was set up
in 1948 in Geneva to follow the objectives of free trade in order to
encourage growth and development of all member countries.

39. What are the objectives of GATT?

1) Expansion of international trade;

2) Increase of world production by ensuring full employment in the
participating nations.

3) Development and full utilization of world resources; and

4) Revising standard of living of the world community as a whole

40. What are the fundamental principles of GATT?

1) Trade should be conducted in a non-discriminatory way;

2) The use of quantitative restrictions should be condemned; and

3) Disagreements should be resolved through consultations.

41. What are the methods of GATT?

1) Most favoured Nation clause

2) Quantitative restrictions on Imports

3) Tariff negotiations and Reduction of Tariff

42. What is WTO?

Seven rounds of negotiations occurred under the GATT and the eighth round
known as “Uruguay Round” started in 1989 and concluded in 1994 with the
establishment of the World Trade Organization (WTO) in 1995.

43. What are functions of WTO?

1. Administering WTO trade agreements.

2. Forum for trade negotiations.

3. Handling trade disputes.

4. Monitoring national trade policies.

5. Technical assistance and training for developing countries.

6. Cooperation with other international organizations.

44. What is IBRD?

The International Bank for Reconstruction and Development (IBRD) better
known as World Bank was set up in 1944. Since IMF was designed to provide
temporary assistance in correcting balance of payments difficulties, an
institution was needed to assist long-term investment purposes. Thus IBRD
was established for promoting long term investment loans on concessional
terms

45. What are the functions of IBRD?

1) To assist in the reconstruction and development in the member countries
by providing capital support.

2) To promote private foreign investment.

3) To promote growth of international trade in the long run and improve
Balance of Payments of member countries.

4) To arrange for loans through for small and large projects.

46. What is SAP?

Special Action Programme (SAP) was started in 1983 to strengthen IBRD’s
ability to assist member countries in adjusting to the current economic
environment.

47. What is SAF?

The Structural Adjustment Facility was introduced in 1985 in order to
reduce the balance of payments deficits of its members while maintaining or
regaining their economic growth.

48. What are the conditions of lending?

Conditions for lending

1. An efficient regulating mechanism for ensuring transparent policies and
depoliticised environment.

2. Adequate risk management.

3. Provision for long-term finance.

4. Increase in the share of the private sector in the country’s GDP

49. What is meant by IFC?

International Finance Corporation (IFC)

50. Expand IDA?

International Development Association (IDA)

51. What is MIGA?

The Multinational Investment Guarantee Agency (MIGA)