Modern theory of trade
No perfect competition
Market structure having monopolistic or oligopolistic character
Market imperfection
Industries differentiate their product to capture the domestic and worldwide market
Example of Japanese automobile industry about fuel efficient cars
Absolute advantage and Comparative advantage
Absolute advantage is when one country can produce same goods absolutely more efficiently than the other country
Comparative advantage is when one country can produce same goods relatively more efficiently or less inefficiently compared to
other country
Terms of Trade
How many units of one good exchange for another good between two trading countries. It has two concepts-
Commodities terms of trade
Price of one good (say X) in terms of the other (say Y)
Factorial Terms of Trade
Refers to the ratio between the home country's wage rate and foreign country's wage rate
Free Trade
Free trade means when there are no restrictions or barriers to trade between countries.
There are no quotas exchange controls, taxes etc. on the movement of goods.
Gains from Trade Read in detail on page 26
The amount by which a country benefits from trade is called gains from trade.
There are two types of gains from trade-
Production gains: Each country should specialize in the production of the good in which it enjoys either more comparative advantage
or less comparative disadvantage
Consumption gains: Means gains to the customers
Electronic Commerce
Where both offers for sale and their acceptance are made electronically
Benefits
Global market
Customized product and services
Cost reduction
Global Trade Point Network
Established by UNCTAD (United Nations Conference on Trade and Development)
Links all national and regional trade point networks on internet
Trade points serve as trade information centres
Objective is to open international trade to new participants
Simplifying trade procedures worldwide
Bring the latest technologies within the reach of developing nations, providing them greater opportunities
World Wide Web
It is an internet service that links documents locally and remotely
Web is accessed from the client machine using a web browser
The web page to be viewed is specified by its web address
Uniform resource locator (URL) contains the adress information
Electronic Data Interchange (EDI)
Inter organizational computer to computer exchange of structured information
Through EDI, two trading partners exchange trading documents such as purchase orders, invoices etc. using electronic means
Advantages
Standardized system for coding trade transactions so that they can be communicated from one computer to another
Ensures the accuracy of transactions
Reduces the time and cost of transactions
Help companies to lower their inventory costs
Allows input of large number of transactions
Improves customer satisfaction
International business environment
Consists of a number of factors at micro level and macro level,. These factors can be grouped as under-
1 Domestic environment
Environmental factors and forces existing and operating at national level
It affects firm's business at domestic and international level
Includes economic, financial, political, legal, technological factors operating within the boundry of a country
2 Foreign environment
Environmental factors and forces existing and operating in a forign country whith whom domestic firm wants to do business
Domestic firm may not be fully aware of foreign environment and should carefully analyze it
It offers a number of opprtunities but with some constraints
Includes Geographic, Ecological, Legal, Political, Socio Cultural, Economic and Financial
3 Global environment
Environmental factors and forces existing and operating on worldwide basis
It is not confined to just one country, but entire world or group of countries
Includes international economic conditions, international financial institutions and system, international trade organizations
and agreements
Factors constituting financial environment
Monetary Policy: Policy of the central bank of the country to regulate money supply and credit in the economy
Fiscal Policy: Policy of the government regarding its revenue, expenditures and borrowings
Commerical or Trade Policy: Government's policy with regards to its trade with other countries. Inward oriented or outward oriented
Foreign Investment Policy: Government's policy towards investment in other countries. May have a liberal or controlled foreign investment policy
Balance of Payments Account: Record of all economic transactions between residents of a country and rest of the world.
Current Account: Record of all recurring trade in goods and services, private gifts and public aid transactons between
countries
Capital Account: Record of all long term direct investments, portfolio investments and other short term and long term
capital flows
Tariff and Non-Tariff Barriers
Tariff Tax on imported goods to restrict imports in the country
Ad valorem duty
Specific duty
Compound duty
Non-tariff Quantitative barriers
Quota
Anti-dumping restrictions
Subsidies
Local content requirements
Problems faced by developing countries in promoting their exports
Low income elasticity of demand
Growth of service sector
Inelasticity of supply
Competition from substitutes
Technological developments
Price fluctuations
Protectionism
Managed Trade
Multinational corporation's influence
World Bank
Provides long term developmental capital
Purpose/Objectives
Assist in reconstruction and development of the territories of the members by facilitating the investment of capital for productive purpose
To promote private foreign investment by means of guarantees or participation in loans and other investments made by private investor
To promote long term balanced growth of international trade and maintenance of equilibrium in the balance of payments
International Finance Corporation (IFC)
Set up with a view to provide long term loans and equity capital to private sector enterprises
It encourage the flow of foreign capital to developing countries
It gives assistance for promoting the development of financial markets
It attracts international investors to securities markets in host countries
It does not supply funds to governments and does not require government guarantees
Major issues involved in settlement of international trade disputes
Applicable substantive law: Law which governs the contract. if choice of law missing in contract then there is problem
Jurisdiction or forum: If no arbitration agreement exists, the courts at defendant's place of business hear and try the case
Venue of arbitration: If no arbitration agreement exists, the Arbitral Tribunal decide the place of arbitration
Applicable procedural laws: How the substantive law is implemented. Proceedings should be conducted in country where arbitration is held,
unless otherwise agreed
Recognition and enforcements of foreign judgements and arbitral awards:
Can be enforced only if there is bilateral or multilateral agreements exists or national law permits enforcement
