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Copyright @ Oxford University Press InterCopyright @ Oxford University Press International Business R. M. Joshinational Business R. M. Joshi

Chapter 3: International Trade Patterns Chapter 3: International Trade Patterns and Balance of Paymentsand Balance of Payments

International BusinessInternational Business

Rakesh Mohan Joshi Rakesh Mohan Joshi

Professor & Chairperson, IIFT New DelhiProfessor & Chairperson, IIFT New Delhi

1



INTERNATIONAL TRADE INTERNATIONAL TRADE

PATTERNSPATTERNS

AND AND

BALANCE OF PAYMENTSBALANCE OF PAYMENTS

Chapter 3



Learning Objectives Learning Objectives

To explain the significance of international trade To explain the significance of international trade

patternspatterns

To provide an overview of world tradeTo provide an overview of world trade

To evaluate India’s international trade To evaluate India’s international trade

To outline the concept of terms of tradeTo outline the concept of terms of trade

To explicate balance of paymentsTo explicate balance of payments

To highlight key issues in India’s foreign tradeTo highlight key issues in India’s foreign trade



Significance of International Trade PatternsSignificance of International Trade Patterns

Patterns of international trade facilitate in developing an Patterns of international trade facilitate in developing an overview about the types of products traded and the overview about the types of products traded and the countries involved in trade. The shifts in trade patterns countries involved in trade. The shifts in trade patterns and their causes provide insights into the upheavals in and their causes provide insights into the upheavals in the economic environment and trade policies of nations. the economic environment and trade policies of nations.

Macroeconomic factors in the trading countries as well Macroeconomic factors in the trading countries as well as the overall world economic environment influence as the overall world economic environment influence the international flow of goods and services. Thus, past the international flow of goods and services. Thus, past international trade patterns reveal vital information international trade patterns reveal vital information about macro economic environment and its changes. about macro economic environment and its changes.



World Trade: An OverviewWorld Trade: An Overview

The world merchandise exports grew from US$ 59 billion in The world merchandise exports grew from US$ 59 billion in

1948 to US$ 13.57 trillion in 2007, and imports grew from US$ 1948 to US$ 13.57 trillion in 2007, and imports grew from US$

62 billion to US$ 13.94 trillion during the same period. 62 billion to US$ 13.94 trillion during the same period.

The exports of services grew more rapidly compared to The exports of services grew more rapidly compared to

merchandise exports from US$ 390.8 billion in 1980 to US$ 3.26 merchandise exports from US$ 390.8 billion in 1980 to US$ 3.26

trillion in 2007 whereas during the same period, imports rose trillion in 2007 whereas during the same period, imports rose

from US$ 431.8 billion in 1980 to US$ 3.06 trillion in 2007.from US$ 431.8 billion in 1980 to US$ 3.06 trillion in 2007.



Composition of World Trade Composition of World Trade (2007)(2007)

Commercial Services19.4%

Merchandise80.6%



Direction of World TradeDirection of World Trade

Direction of Trade:Direction of Trade: The statistical analysis of the set of a The statistical analysis of the set of a country’s trading partners and their significance in trade. country’s trading partners and their significance in trade.

Direction of Exports:Direction of Exports: The set of countries where the goods are The set of countries where the goods are exported and their significance on a country’s exports. exported and their significance on a country’s exports.

Direction of Imports:Direction of Imports: The set of countries from where the goods The set of countries from where the goods are imported and their significance on a country’s imports.are imported and their significance on a country’s imports.



Direction of World ExportsDirection 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



Direction of World Merchandise ExportsDirection of World Merchandise Exports (2007)(2007)

North America13.7%

Asia28.0%

Europe42.5%

Africa3.1%

South and Central America

3.7%

Middle East5.3%

CIS3.7%



Direction of World Merchandise ImportsDirection of World Merchandise Imports(2007)(2007)

Middle East3.3%

South and Central America

3.3%

CIS2.7% Africa

2.5%

North America19.4%

Asia25.3%

Europe43.4%



Composition of World Merchandise TradeComposition of World Merchandise Trade

Composition of TradeComposition of Trade: The statistical analysis of a : The statistical analysis of a

country’s product groups in its international trade. country’s product groups in its international trade.

Composition of Exports: Composition of Exports: The analysis carried out for The analysis carried out for

product groups exported. product groups exported.

Composition of Imports: Composition of Imports: TheThe analysis carried out for analysis carried out for

product groups imported.product groups imported.



Patterns of World Merchandise ExportsPatterns 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



Composition of World Merchandise Exports Composition of World Merchandise Exports (2006)(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%



World Commercial Services TradeWorld Commercial Services Trade

The world commercial services exports rose byThe world commercial services exports rose by 21 per 21 per cent to US$ 3.26 trillion in 2007. Since the commercial cent to US$ 3.26 trillion in 2007. Since the commercial services data are derived from BoP statistics, it does not services data are derived from BoP statistics, it does not include the sales of majority-owned foreign affiliates include the sales of majority-owned foreign affiliates abroad. abroad.

‘‘Other commercial services’ that include software, Other commercial services’ that include software, education, health financial services, etc, has been the education, health financial services, etc, has been the fastest growing category at 12 per cent growth in the fastest growing category at 12 per cent growth in the world exports of commercial services trade. world exports of commercial services trade.



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)



Direction of World Commercial Direction of World Commercial Services ImportsServices Imports (2007)(2007)

South & Central America3.2%

Middle East4.1%

Africa3.2%

CIS2.9%

North America14.4%

Asia25.4%

Europe46.8%



Composition of World Exports of Composition of World Exports of Commercial ServicesCommercial Services (2007)(2007)

Other Commercial Services50.8%

Travel26.5%

Transport22.8%



India’s Foreign Trade: An OverviewIndia’s Foreign Trade: An Overview

India’s foreign trade was largely determined by the India’s foreign trade was largely determined by the strategic needs of the British colonial powers prior to its strategic needs of the British colonial powers prior to its independence in 1947. Like other colonies, India too independence in 1947. Like other colonies, India too was a supplier of raw materials and agricultural was a supplier of raw materials and agricultural commodities to Britain and other industrial countries commodities to Britain and other industrial countries and it used to import the manufactured goods from and it used to import the manufactured goods from Britain. The dependence of colonial India on Britain for Britain. The dependence of colonial India on Britain for manufactured goods hindered the process of manufactured goods hindered the process of industrialization and obliterated the indigenous industrialization and obliterated the indigenous handicraft and cottage industries. handicraft and cottage industries.



India's Foreign TradeIndia's Foreign Trade

0

50000

100000

150000

200000

250000

300000

350000

1949

-50

1951

-52

1953

-54

1955

-56

1957

-58

1959

-60

1961

-62

1963

-64

1965

-66

1967

-68

1969

-70

1971

-72

1973

-74

1975

-76

1977

-78

1979

-80

1981

-82

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-200

0

2001

-02

2003

-04

2005

-06

2007

-08*

Years

US

$ (b

illio

n)

Exports (including re-exports) Imports



Composition of India's External Trade Composition of India's External Trade (2006-07)(2006-07)

Merchandise, 72.6%

Services, 27.4%



Direction of India's Trade : ExportsDirection 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



Direction of India's Trade : ImportsDirection 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



Composition of India's ExportComposition 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



Composition of India's ImportsComposition 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



India’s Services TradeIndia’s Services Trade

The services sector in India has grown remarkably and account The services sector in India has grown remarkably and account

for over 55 per cent of India’s GDP making it the most for over 55 per cent of India’s GDP making it the most

significant component of the country’s economy. India’s significant component of the country’s economy. India’s

services exports have significantly grown from a meager US$ services exports have significantly grown from a meager US$

295 million in 1970–71 to US$ 76.2 billion in 2006–07 with a 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.growth of 32.1 per cent over the previous year.



Composition of India’s Service Exports Composition of India’s Service Exports (2007-08)(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



Gains from International TradeGains from International Trade

Trade indicesTrade indices are widely-used instruments to measure are widely-used instruments to measure

the benefits derived by a nation from international trade. the benefits derived by a nation from international trade.

These facilitate in assessing the impact of trade volume These facilitate in assessing the impact of trade volume

and / or unit value realization on a country’s gains from and / or unit value realization on a country’s gains from

trade. trade.



Terms of TradeTerms of Trade

The terms of trade is a measure of relative changes in export and 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 import prices of a nation. It reflects the quantity of imports that a given quantity of exports can buy. given quantity of exports can buy.

The The terms of tradeterms of trade refers to ratio of the price of its export refers to ratio of the price of its export commodity to the price of its import commodity. commodity to the price of its import commodity.

In case of a hypothetical assumption of a two-nation world, the In case of a hypothetical assumption of a two-nation world, the export of a country equals its trade partner’s imports wherein 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 terms of trade of a country are equal to the inverse of the terms of trade of its trade partner. trade of its trade partner.



Types of Terms of TradeTypes of Terms of Trade

Net terms of tradeNet terms of trade: It implies unit value index of exports : It implies unit value index of exports expressed as a percentage of unit value index of imports. expressed as a percentage of unit value index of imports.

Net value terms of trade: Net value terms of trade:

(N) = (N) = Unit value index of exports (Px) Unit value index of exports (Px) Unit value index of imports (Pm)Unit value index of imports (Pm)

X 100



Gross terms of tradeGross terms of trade:: It implies volume index of imports It implies volume index of imports expressed as a percentage of volume index of exportsexpressed as a percentage of volume index of exports

Gross terms of trade = Gross terms of trade = Volume index of imports (Volume index of imports (Qm)Qm) Volume index of exports (Qx) Volume index of exports (Qx)

X 100



Income terms of trade:Income terms of trade: It implies the product of net terms It implies the product of net terms of trade and volume index of exports expressed as a of trade and volume index of exports expressed as a

percentage. It reflects a nation’s capacity to importpercentage. It reflects a nation’s capacity to import. .

Income Terms of Trade (I) = Income Terms of Trade (I) =

Net terms of trade (Px/Pm)*volume index of exports( Qx) *100Net terms of trade (Px/Pm)*volume index of exports( Qx) *100



Single factorial terms of tradeSingle factorial terms of trade: : Net barter terms of Net barter terms of

trade adjusted for changes in productivity of exportstrade adjusted for changes in productivity of exports

Double factorial terms of trade:Double factorial terms of trade: Net barter terms of Net barter terms of

trade adjusted for changes both in productivity of trade adjusted for changes both in productivity of

exports and importsexports and imports



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)



Reasons for Deterioration in Terms of Trade Reasons for Deterioration in Terms of Trade for Developing Countriesfor Developing Countries

International demand for export of manufactured goods International demand for export of manufactured goods by developed countries tends to increase at a much faster by developed countries tends to increase at a much faster rate compared to demand for agricultural commodities and rate compared to demand for agricultural commodities and primary goods due to their higher income elasticity of primary goods due to their higher income elasticity of demand. demand.

Any productivity gain in manufactured goods by Any productivity gain in manufactured goods by developed countries is generally passed on to its workers developed countries is generally passed on to its workers in the form of higher wages and income. Whereas, any in the form of higher wages and income. Whereas, any such gains in productivity of agricultural commodities and such gains in productivity of agricultural commodities and primary products by developing countries are reflected in primary products by developing countries are reflected in price decline. This leads to a consistent deterioration in price decline. This leads to a consistent deterioration in the collective terms of trade of developing countries. the collective terms of trade of developing countries.



India’s Terms of TradeIndia’s Terms of Trade

India’s Unit Value Index for imports, as shown in Table 3.13 rose India’s Unit Value Index for imports, as shown in Table 3.13 rose from 35.3 in 1970–71 to 608 in 2006–07 compared to 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 corresponding rise in Unit Value Index of exports from 45 to 863 during the period.during the period.

It implies that the rise in the value of imports grew much more It implies that the rise in the value of imports grew much more than the quantity of goods imported which added to India’s than the quantity of goods imported which added to India’s financial burden. financial burden.

Factors responsible for this include relative inelasticity of India’s Factors responsible for this include relative inelasticity of India’s import demands for petroleum products, foodgrains, fertilizers, import demands for petroleum products, foodgrains, fertilizers, oilseeds, and capital goods constrained India in making any oilseeds, and capital goods constrained India in making any substantial cuts on imports. substantial cuts on imports.



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)



Balance of PaymentsBalance of Payments (BoP)(BoP)

The summary of all its economic transactions that have The summary of all its economic transactions that have taken place between the country’s residents and the taken place between the country’s residents and the residents of other countries during a specified time residents of other countries during a specified time period. period.

It is used as an indicator of a country’s political and It is used as an indicator of a country’s political and economic stability. A consistently positive BoP reflects economic stability. A consistently positive BoP reflects more foreign investment and money coming into the more foreign investment and money coming into the country and not much of its currency being exported. On country and not much of its currency being exported. On the other hand, adverse or negative BoP indicates more the other hand, adverse or negative BoP indicates more outflows of money compared to inflows. outflows of money compared to inflows.



Balance of TradeBalance of TradeThe difference between the value of exports and imports is The difference between the value of exports and imports is termed as Balance of Trade. termed as Balance of Trade.

India had negative balance of trade over the years except during India had negative balance of trade over the years except during two financial years, i.e,. a positive trade balance of US$ 134 two financial years, i.e,. a positive trade balance of US$ 134 million 1972–73 and US$ 77 million in 1996–97. million 1972–73 and US$ 77 million in 1996–97.

There has been a steep rise in trade deficit from US$ 5.98 billion 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 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, steep rise in its unit value prices of India’s import products, especially the petroleum products and fertilizers besides domestic especially the petroleum products and fertilizers besides domestic

demanddemand



India’s Trade BalanceIndia’s Trade Balance

-70000

-60000

-50000

-40000

-30000

-20000

-10000

0

10000

Years

US

$ (

Mil

lio

n)



Constraints in India’s Exports GrowthConstraints in India’s Exports Growth

Adoption of ‘import substitution’ rather than ‘export Adoption of ‘import substitution’ rather than ‘export promotion’ strategypromotion’ strategy

Overprotection to Indian industry from external Overprotection to Indian industry from external competitioncompetition

High import barriersHigh import barriers High import tariffHigh import tariff Inadequate infrastructureInadequate infrastructure Complexity of trade proceduresComplexity of trade procedures

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