trade theories and development experience
DESCRIPTION
Pertains to India’s transition from a closed economy to open economy. India’s reforms and commonalities and differences with other countries. Effectiveness of reforms in various dimensions. Shortfalls in the reforms. India’s future prospects.TRANSCRIPT
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Trade Theories and Development Experience
Presentation by:
Arghya Das(14PGP005)
Garima(14PGP018)
Pranav Kumar(14PGP031)
Sounak Shah(14PGP044)
Praveen(14PGP056)
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International trade and finance
Throughout Asia, Africa, Middle East and Latin America, Exports have traditionally amounted to a sizeable proportion of GNPs of nations
25% or more GNP from Agriculture and primary products in some small countries
Risk and uncertainties in non-mineral primary product exports due to unstable markets
At least 35 LDCs received at least 2/5th of their Export earnings from 1 or 2 agricultural or mineral products
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High
import to
fuel industrial expansion
Increasing Current
Accoun
t deficit
Depletion of Internationa
l Monetar
y Reserves
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5 Basic Questions about Trade and development
How does International trade affect the rate, structure and character of LDC economic growth?How does trade alter the distribution of income and wealth within a country and among different countries?Under what conditions can trade help LDCs achieve their development objectives?
Can LDCs by their own actions determine how much they trade?
Should LDCs adopt an outward-looking policy or and inward-looking policy or a combination of both?
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Importance of Exports
Developing countries generally more dependent on trade than developing countries
Large countries with relatively closed economies less dependent, Ex. India
Exports of LDCs much less diversified than developed countries
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Demand Elasticities
Primary products mainly from developing countries: Income Elasticity of Demand Low
Manufactured goods mainly from developed countries: Income Elasticity of Demand High
Item Income elasticity of Demand
Foodstuff 0.6
Agricultural Raw materials
0.5
Petroleum Products 2.4
Manufactures 1.9
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Exports Earnings Instability
Low Income
Elasticity of
Demand
Low Price Elasticity of
Demand
Exports Earning Instability
Relative price of primary products decline over time
Large and volatile price fluctuations due to any shift in demand or supply curves
Terms of trade & Prebisch-Singer thesis
Ratio between the price of typical unit of exports and the price of typical units of import is known as commodity terms of trade.Expressed as Px/Pm where Px & Pm representsexport & import price indexes.There would be a secular decline in terms of trade of primary-commodity exporters due to a combination of low income & price elasticities of demand.This is known as the Prebisch-Singer thesis.
It will result in long term transfer of income from poor to rich countries.
Real Non oil-commodity terms of trade
1987 1992 19971977
40
60
80
100
120
Comparative Advantage
People find it profitable to trade the things they possess in larger quantities relative to their tastes or needs in return for things they
want more urgently.
Concept of relative cost & price differences is basic to the theory
of international trade.Principle of comparative
advantage states that a country under competitive conditions should specialize in export of
products that it can produce at the lowest relative cost.
Relative factor Endowments
The Neo Classical Model
It enables us to describe analytically the impact of economic growth on trade partners and impact of trade on the structure of national economies and on differential returns to various factors of production.
Factor Endowment Theory
Different products require productive factors in different relative proportion.
Countries have different endowments
of factors of production.
The Traditional Arguments
Trade is an important simulator of economic
growth.
Trade tends to promote greater international and
domestic equality
It helps countries achieve development.
International prices and cost of production
determine how much should a country trade.
For trade, an outward looking international policy is required.
Criticism of Traditional Free Trade TheoryAll productive resources are fixed in quantity.
The technology of production is fixed or same available to every country.
Perfect competition state across countries
No role of national government in international economic relations.
Trade is balanced for each country at all times.
Challenged by North-South trade models
Michael Porter’s Competitive Advantage theory
Vent for Surplus theory
Fixed Resources, Full Employment, and the International Immobility of Capital and Skilled Labor
The Vent-for-Surplus Theory of Trade in LDCs
Fixed, Freely Available Technology and Consumer Sovereignty
Challenged by the Product Cycle theory
Development of synthetic substitutes for developing country exports
International Factor Mobility, Perfect Competition, and Uncertainty: Increasing Returns, Imperfect Competition, and Issues in Specialization
Structural realities in developing countries
Increasing returns and exercise of monopolistic control over world markets
Risk and uncertainty inherent in international trading arrangements
The Critique of Traditional Free-Trade Theory in the Context of Developing-Country Experience
Definite role for State
Industrial policy is crafted by governments
Commercial policies instruments (tariffs, quotas) are state constructs
International policies can result in uneven distribution of gains from trade
The Absence of National Governments in Trading Relations
Balanced Trade and International Price Adjustments
Unrealistic (example: impact of oil price hikes of the 1970s)
Balance of payments deficit & depletion of foreign reserves was major cause of concern for all nations rich & poor.
For non oil producing country declining trade & sluggish demand for export led to trade deficit.
Trade gains accruing to nationals
Enclave economies in developing countries are promoted by trade
Difference between GDP and GNI becomes important
Some Conclusions on Trade Theory and Economic Development Strategy
Trade can lead to rapid economic growth under some circumstances
Trade seems to reinforce existing income inequalities
Trade can benefit LDCs if they can extract trade concessions from developed countries
LDCs generally must trade
Regional cooperation may help LDCs
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Thank You