Extended Essay in Economics: Topic: International Trade and Government Intervention

Extended essay in
Economics
Topic: International trade and

government intervention
RQ: “To what extent does Merchandise Exports from India Scheme (MEIS) increase the
exports of Emrusa Jewellers, Jaipur from 2016-2019?”
Word count
3988
1
Table of contents
Introduction 3
Research methodology 5
Background of the firm 6
Exchange rate 7
Diagram 1: Exchange rate 8
Graph 1: Exchange rate of India during 2012-2019 9
Inflation rate 12
Diagram 2: Inflation 13
Graph 2: India’s inflation rate relative to that of the US during 2012-2019 14
Graph 3: Regression analysis 15
Diagram 3: PED of Brass Jewelry 18
Diagram 4: PED of Silver Jewelry 19
Merchandise Exports from India Scheme 21

Diagram 5: Cost analysis of Emrusa 22
Cost calculation 23
Diagram 6: Impact of US tariffs on import of Brass Jewelry 26
Conclusion 28
Bibliography 30
Appendices 32
Appendix 1: Interview with the director of Emrusa Jewellers 32
Appendix 2: Brass jewelry export volume in the US during 2012-2019 34
Appendix 3: Brass jewelry sales revenue in the US during 2012-2019 35
Appendix 4: Brass jewelry average cost in the US during 2012-2019 36
Appendix 5: Brass jewelry price and PED in the US during 2012-2019 37
Appendix 6: Silver jewelry export volume in the US during 2016-2019 38
Appendix 7: Silver jewelry sales revenue in the US during 2016-2019 39
Appendix 8: Silver jewelry average cost in the US during 2016-2019 40
Appendix 9: Silver jewelry price and PED in the US during 2016-2019 41
Appendix 10: Brass jewelry export volume in Australia during 2016-2019 42
Appendix 11: Brass jewelry sales revenue in Australia during 2016-2019 43
Appendix 12: Brass jewelry average cost in Australia during 2016-2019 44
Appendix 13: Brass jewelry price and PED in Australia during 2016-2019 45
Appendix 14: Inflation rate of India during 2012-2019 46
Appendix 15: Inflation rate of the US during 2012-2019 47
Appendix 16: Exchange rate of INR in terms of USD during 2016-2019 48
2
Introduction
Perceptive economists Mr. Pathan Sarfaraj Sikandar Khan & Shaikh Azhar Akhil declared “The
implementation of the Merchandise Export from India Scheme (MEIS) in India was a historical
move, as it marked a significant change in Incentive and Subsidy reform in the country1.” The
analysis performed by Mr. Mahipat Singh in his book fortifies such statements2. MEIS
(Merchandise Exports From India Scheme) is an incentive scheme designed by the Indian
government, which compensates exporters for the heavy-duty and import tariffs imposed on their
exports. It also offsets any infrastructural inefficiencies a firm might have faced3. The Foreign
Trade Policy (2015-2020), MEIS is an amalgamation of its predecessors. Under this scheme,
incentives - in the form of duty credit scrips - are provided to Indian exporters, making Indian
goods more competitive in the global market. Indian government has segregated three groups
which consist of countries having similar characteristics4. The amount of incentive received by
an exporting firm depends on the group of its destination country. Group B has the highest
quantum of incentive, Group A receives relatively less amount of incentive and Group C has no
incentive at all. The effectiveness of MEIS has been acknowledged by various economists but
1
Pathan, Sarfaraj, and Azhar Sheikh. "A Cogitation On Increase In Merchandise Export From India
Scheme (MEIS ) In Indian Economy In The Financial Year 2017-18 , Indian Service Sector : The Rising
Sun." Research Gate. Web. 10 Dec. 2020.
<https://www.researchgate.net/publication/339656933_A_Cogitation_On_Increase_In_Merchandise_Exp
ort_From_India_Scheme_MEIS_In_Indian_Economy_In_The_Financial_Year_2017-18_Indian_Service_
Sector_The_Rising_Sun>.
2
Singh, Mahipat. Export Benefits - MEIS: Merchandise Exports from India Scheme. Amazon, 2015.
Amazon. 13 Dec. 2015. Web. 10 Dec. 2020.
<https://www.amazon.in/Export-Benefits-Merchandise-Exports-Scheme-ebook/dp/B019C57JFM>.
3
"MEIS Scheme." EEPC. 2016. Web. 10 Dec. 2020.
<https://www.eepcindia.org/MEIS/about-MEIS-scheme.aspx>.
4
3
this isn’t the universal truth, some researchers tend to believe otherwise. MEIS is strictly
violating the WTO's Agreement on Subsidies and Countervailing Measures (SCM Agreement)5.
Violating this agreement means discouraging free trade across nations. Additionally, MEIS, a
policy that is nothing more than the combination of previous policies6, disrupts David Ricardo’s
comparative advantage theory by discouraging quality production and providing unfair
advantages.
Due to such conflicting opinions, it is worthy of investigating whether the MEIS benefits truly
affect the exports of “Emrusa Jewelers”. The scope of this research is limited to one of the firms
of the Sitapura industrial area, Jaipur. The research question that will be examined in this
research is “To what extent does Merchandise Exports from India Scheme (MEIS) increase
the exports of Emrusa Jewellers, Jaipur from 2016-2019?” The study hypotheses that MEIS
does increase the exports of Emrusa Jewelers’ jewelry. The conclusions drawn from the analysis
will help in eradicating any discrepancies regarding the efficacy of MEIS.
5
"WTO Rules against India’s Export Subsidies: All You Need to Know." India Today. 2019. Web. 10 Dec.
2020.
<https://www.indiatoday.in/business/story/wto-rules-against-india-s-export-subsidies-all-you-need-to-know
-1614635-2019-11-01>.
6
Mukewar, Pushkar. "Why India Needs to Stop Betting on MEIS Scheme to Boost Exports." Economic
Times. 30 Nov. 2019. Web. 10 Dec. 2020.
<https://m.economictimes.com/small-biz/trade/exports/insights/why-india-needs-to-stop-betting-on-meis-s
cheme-to-boost-exports/articleshow/72304406.cms>.
4
Research methodology
The investigation will compare the export of Emrusa Jewelers’ brass jewelry before and after the
introduction of MEIS. The exports of the firm’s jewelry will be segregated into two time-frames:
2012-2015 and 2016-2019, inclusive. The results gathered from both the time-frames will then
be compared. A comparison is essential to validate that the changes in export occur due to the
introduction of MEIS or external factors play a role. To further validate our claims, export data
across products and countries will be compared, keeping the other one constant in each case. The
export of brass jewelry during 2016-2019 to the US will be compared to that of Australia. These
two countries fall in group A and Group C of the MEIS policy, respectively7. Thus, government
incentive is provided when jewelry is being exported to the US whereas no incentive will be
provided when jewelry is being exported to Australia. Then, the export of brass jewelry during
2016-2019 to the US will be compared to that of silver jewelry. Silver jewelry falls under the
ineligible goods category of MEIS8, therefore shedding light on the true effectiveness of MEIS.
Before starting the research, parameters determining the sale of exports of jewelry were
compiled by referring to research papers9. They were namely inflation rate, exchange rate and
competitive pressure.
7
Mehra, Paras. "Appendix 3B: MEIS Schedule - List of Countries under Country Group A, Country Group
B and Country Group C." Hubco.in. Hubco.in, 20 Sept. 2017. Web. 10 Dec. 2020.
<https://www.hubco.in/articles/appendix-3b-meis-schedule-list-of-countries-under-country-group-a-country
-group-b-and-country-group-c#:~:text=(1)%20Austria%2C%20(2,Poland%2C%20(23)%20Portugal%2C>.
8
"Merchandise Exports from India Scheme (MEIS)." IndiaFilings. 09 Mar. 2020. Web. 10 Dec. 2020.
<https://www.indiafilings.com/learn/merchandise-exports-from-india-scheme-meis/>.
9
Gururaj, B., M. Satishkumar, and Aravinda Kumar. "Analysis of Factors Affecting the Performance of
Exports in India." Thesis. College of Agriculture, Hassan, India, 2016. International Journal of Agriculture,
Environment and Biotechnology (2016). Print.
5
To gather the aforementioned data, a request was put forth to Emrusa Jewelers. After gathering
quantitative data from the accounts department, an interview was conducted with the director of
the firm. The open-ended interview provided some key qualitative insights regarding competitive
pressure and miscellaneous factors. While the interview was insightful, it did, inevitably,
incorporate subjectivity and a biased opinion. Thus, secondary research was performed to
validate the claims. Secondary research was also used to gather data regarding inflation and
exchange rates and was conducted through news websites, research papers, and government
reports. The drawback of using this secondary data was that it was collected for an entirely
different purpose and thus lacked sufficient standardization. Regression analysis of inflation rate
and export volume was done to evaluate the relationship between both the variables. The values
required for analysis were calculated with the help of python code. The values of PED were also
calculated to assess the impact of changes in price on the demand of jewelry.
Background of the firm
Emrusa Jewelers, founded in 1998, attempts to provide top-tier jewelry to foreign buyers10. The
firm specializes in silver and brass jewelry, exporting its products mainly to Australia, Spain, and
the US11. To expand their scale of production and enjoy economies of scale, Emrusa jewellers
shifted its production premises to Sitapura Industrial area in 201512.
10
Appendix 1: Interview with the director of Emrusa Jewellers
11
12
6
Exchange rate
Exchange rate relates the value of one currency to another13. There are two types of exchange
rate systems adopted by an economy: fixed and floating; India has been operating a floating
exchange rate regime since March 199314. The floating exchange rate depends on the demand
and supply of the concerned currency. The demand of a currency has a direct relationship with its
exchange rate, whereas the supply of a currency has an inverse relationship. Fluctuations in
exchange rates have a major impact on companies that are heavily dependent on exports. An
appreciation in the exchange rate of INR would lead to a reduction in the demand for a firm’s
goods thereby decreasing their international competitiveness and vice versa.
13
Tragakes, Ellie. Economics for the IB Diploma. Cambridge ... Et Al.: Cambridge UP, 2012. Print.
14
Josh, Jagran. "Exchange Rate Management in India." Jagranjosh.com. 28 Nov. 2015. Web. 15 Dec.
2020.
<https://www.jagranjosh.com/general-knowledge/exchange-rate-management-in-india-1448706656-1#:~:t
ext=Since%20Independence%2C%20the%20exchange%20rate,market%2Ddetermined%20exchange%2
0rate%20regime>.
7
Diagram 1: Exchange rate
The exchange rate of the currency depends on the demand and supply of the respective currency.
In diagram 1, the market for indian rupee is considered. When the demand for INR increases, the
demand curve shifts to the right from D1 to D2, forming a new equilibrium point - E1.
Consequently, the price of INR, or the exchange rate, increases from P1 to P2 and the quantity
traded of INR increases from Q1 to Q2. Similar effects can be seen on the exchange when the
8
supply of the currency fluctuations rather than the demand. When a currency is sold extensively
in the market, its value depreciates.
Graph 1: Exchange rate of India during 2012-2019 15
While the exchange rate depreciated from 0.0199 USD to 0.0185 USD in 201216, the export of
brass jewelry remained fairly constant. During the later quarters of 2013, exchange rate took a
major hit, falling from 0.0179 USD to 0.0161 USD17. FIIs pulling out capital from the debt and
equity markets was the major reason for this depreciation18. Despite this unprecedented drop, the
15
Appendix 16: Exchange rate of INR in terms of USD during 2012-2019
16
17
18
Mukherjee, Subho. "Depreciation of Rupee in 2013: Causes, Measures and Other Details." Economics
Discussion. 26 Aug. 2015. Web. 15 Dec. 2020.
9
exports of brass jewelry in the 4th quarter of 2013 was lower than the average export volume of
that year19.Throughout 2014-2017, the exchange rate consistently dropped20. Subsequently, the
export of brass to the US increased in accordance with the theoretical explanation21. The
apparent reason for this increment was the expansion of Emrusa’s largest US buyer22.
The exchange rate again took a major hit in 2018, falling by nearly 14 percent between April and
October23. Investors dumping rupee coupled with widening current account deficit caused this
depreciation in the currency24. However, Emrusa’s export of brass to the US remained unaffected
by these fluctuations as they increased from 17000 pieces to 79000 pieces from the 1st to 3rd
quarter25, implying that changes in exchange rate are insignificant to Emrusa’s exports. The
overarching reason for this insignificance might be Emrusa’s production methods. Emrusa
Jewelers partly imports its raw materials26, so if INR appreciates the average variable cost of
production for Emrusa Jewelers reduces as imports become cheaper. These reductions in the
average cost of production might offset the rise in price due to the appreciation on INR. Thus, the
fluctuations in the exchange rate of INR does not affect its exports significantly.
<https://www.economicsdiscussion.net/money/depreciation/depreciation-of-rupee-in-2013-causes-measur
es-and-other-details/10871#:~:text=These%20large%20capital%20outflows%20coupled,US%20dollars%
20from%20its%20foreign>.
19
Appendix 2: Brass jewelry export volume in the US during 2012-2019
20
21
22
23
24
Kumar, Chitranjan. "5 Factors That Affected Indian Currency in 2018." Business Today. 23 Dec. 2018.
Web. 15 Dec. 2020.
<https://www.businesstoday.in/current/economy-politics/5-factors-that-affected-indian-currency-in-2018/st
ory/303603.html>.
25
26
10
Emrusa Jewellers uses HDFC bank for all of its forex transactions. Due to decades of business
with HDFC, the commission rate for Emrusa jewellers stays put at a minimal rate of 0.1%,
decreasing with the increase in the amount of currency traded27. This leads to spreading of costs,
thus helping Emrusa in decreasing its average variable cost of production and achieving
economies of scale. Additionally, Emrusa Jewelers has adopted a future market regime with all
of its buyers28, meaning that the exchange rate is fixed at the time of the placement of the order.
The payments are then made keeping this exchange rate in mind, irrespective of the market
exchange rate at the end of the credit period. The fixed commission rate from the bank coupled
with the future market regime reduces uncertainty while trading with Emrusa Jewelers thereby
increasing demand for its exports.
During the past 8 years (2012-2019) the exports of Emrusa have stayed largely unaffected by the
fluctuation of INR. The insignificance of exchange rate on exports may be limited to Emrusa
Jewellers only and not other relatively smaller exporting firms because of its brand loyalty and
fixed commission rate, enabling the firm to battle global competition.
27
28
11
Inflation rate
The percentage increase in average prices and fall in purchasing power is known as inflation29.
Inflation rate is the change in inflation over a certain period of time. Change in inflation is
calculated by comparing the Consumer Price Index (CPI) of the concerned year with the base
year, where base year is an year in which price level remains fairly constant and CPI is a
weighted average of prices based upon a basket of goods.
𝐶𝑃𝐼𝑐𝑢𝑟𝑟𝑒𝑛𝑡 − 𝐶𝑃𝐼𝑏𝑎𝑠𝑒
𝐶𝑃𝐼𝑐𝑢𝑟𝑟𝑒𝑛𝑡
* 100 = 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒
29
12
Diagram 2: Inflation
The price level in the economy increases when the aggregate demand of the economy rises more
than the aggregate supply of the economy. As the aggregate demand curve shifts right from AD1
to AD2, the price level increases from PL1 to PL2 and the output increases from Y1 to Y2. This is
known as demand-pull inflation. Cost-push inflation also might occur wherein the increase in
price level occurs due to supply shocks and increased average cost of production.
13
Graph 2: India’s inflation rate relative to that of the US during 2012-2019 30 31
30
Appendix 14: Inflation rate of India during 2012-2019
31
Appendix 15: Inflation rate of the US during 2012-2019
14
Graph 3: Regression analysis 32 33
32
33
15
The negative gradient of Graph 1 indicates that there is an inverse relationship between the
inflation rate of India and the export volume of Emrusa Jewellers. The root mean squared error
(RMSE) of the line of best fit, which is a measure of error in the prediction, is extremely low.
This implies that there is a strong correlation between the inflation rate of India and export
volume of Emrusa Jewellers34. The R-squared value of the dataset, which is the coefficient of
determination, is close to 1, suggesting that the line fits the dataset closely. However, limitations
of regression analysis do exist. In simple linear regression, the effect of one variable is tested on
another apparent response variable, ceteris paribus. While it’s highly likely that the cause of
reduction in export volume is inflation, one can’t know for sure until factors like the inflation
rate of competing nations are taken into consideration. To take multiple factors into account,
multiple linear regression needs to be performed. However, evaluating the results of a multiple
linear regression model can be challenging. Also, the results of such models can’t be visualised
graphically as they generally exceed 3 dimensions35.
34
Neill, Simon P., and M. Reza Heshami. "Root-Mean-Squared Error." Root-Mean-Squared Error - an
Overview | ScienceDirect Topics. 2018. Web. 25 Dec. 2020.
<https://www.sciencedirect.com/topics/engineering/root-mean-squared-error#:~:text=This%20criterion%2
0measures%20the%20mean,magnitude%20of%20the%20observed%20values.>.
35
Wood, Robert. "Visualizing Multiple Linear Regression with Heatmaps." Blog post. Towardsdatascience.
21 July 2020. Web. 25 Dec. 2020.
<https://towardsdatascience.com/visualizing-multiple-linear-regression-with-heatmaps-3f69f1652fc4>.
16
Sometimes a regression is sensitive to outliers36. Basing the line of best fit on outliers can be
dangerous as the probability of such quantities occuring again is low. As the dataset of export
volume and inflation rates is small, consisting of just 8 data points, single data points yield the
power of significantly impacting the line of best fit. Thus, the outliers in the dataset might
misdirect the regression.
In comparison to the inflation rate of the US, the inflation rate of India is higher throughout the
concerned time-frame (2012-2020) by 4.59% on an average37. In accordance with the economic
theory, the export of brass jewelry decreased with a rise in inflation rate. The probable reason for
this strong correlation between inflation rate and exports is the presence of competitors in the
US. As the price of Indian exports increase, buyers prefer pivoting to cheaper substitutes.
Despite having a negative correlation with the inflation rate, the export volume doesn’t fall by
much due to the PED of Emrusa’s jewelry.
36
Moeedlodhi. "How Outliers Can Pose a Problem in Linear Regression." Blog post. Medium. 20 Aug.
2020. Web. 26 Dec. 2020.
<https://medium.com/swlh/how-outliers-can-pose-a-problem-in-linear-regression-1431c50a8e0>.
37
17
Diagram 3: PED of Brass Jewelry
18
Diagram 4: PED of Silver Jewelry
The price elasticity of demand depends on a number of factors, including availability of
substitutes and the necessity of the good38. For the same increase in the prices (P2-P1), the change
in quantity demanded differs for inelastic and elastic markets. For price elastic markets, such as
the silver market, a change in price causes a more than proportionate change in the quantity
demanded. Thus, when price rises from P1 to P2, the total revenue of the firm decreases to
(P2*Q2) . On the other hand, for price inelastic markets, such as the brass market, a change in
38
19
price causes a less than proportionate change in quantity demanded. Thus, when price rises from
P1 to P2, the total revenue of the firm increases to (P2*Q2).
During 2013-2019, the PED of brass jewelry in the US stayed below -0.439. As |-0.4| is
significantly smaller than 1, it can be safely concluded that the demand for Emrusa’s brass
jewelry in the US is highly price inelastic40. The buyers of Emursa have put faith in the brand for
decades now and minor fluctuations in prices does not push them towards other firms41. Constant
innovation in the designs in accordance with the trends and fashion fortifies the buyers’ faith in
Emrusa, increasing the price inelasticity of the firm’s jewelry. Additionally, even after inflation
the price of Emrusa’s jewelry remains competitive with its global competitors because of India’s
cheap labour costs. India’s national minimum wage stands at 0.61 dollars/hour which is 12 times
less than that of the US (7.5 dollars/hour)42, enabling Emrusa Jewellers to fight the domestic
producers of the US.
While PED of Emrusa’s jewelry limits the negative effect inflation has on exports, it still doesn’t
completely eradicate its consequences. The exports of Emrusa Jewellers might fall by a small
margin but they do, certainly, decrease with an increase in inflation rate as shown in Graph 2.
39
Appendix 5: Brass jewelry price and PED in the US during 2012-2019
40
41
42
"India vs United States Labor Stats Compared." NationMaster.com. NationMaster. Web. 26 Dec. 2020.
<https://www.nationmaster.com/country-info/compare/India/United-States/Labor>.
20
Merchandise Exports from India Scheme
MEIS aims to offset industrial inefficiencies by providing duty credit scrips (DCS) to the
exporters43. DCS is awarded to an exporter as an incentive for exporting goods and possibly
decreasing the Indian current account deficit in the long run. It can be used to pay off the custom
duties imposed by the Indian government44. As Emrusa partially imports its raw material, instead
of paying the custom duty they can use the DCS in store and reduce their average cost of
production. With a low cost of production, Emrusa can make its jewelry more price competitive
and hence enjoy an increase in demand and exports.
43
44
"Directorate General of Foreign Trade: Ministry of Commerce and Industry: Government of India."
Directorate General of Foreign Trade | Ministry of Commerce and Industry | Government of India. 2015.
Web. 7 Jan. 2021. <https://www.dgft.gov.in/CP/?opt=meis>.
21
Diagram 5: Cost analysis of Emrusa
The average cost of buying raw materials forms about 63% of the overall cost of the piece45.
Thus, a reduction in the average cost of raw materials reduces the total average cost of
production and shifts the AC curve from AC1 to AC2. To maximise its profits., Emrusa produces
at a point where the MC curve cuts the MR curve. Therefore, initially Emrusa produces at Q1 but
after the downward shift of the MC curve from MC1 to MC2 (due to decrease in AVC), the
produces at Q2. For a total cost of (C1*Q1), the total revenue earned by the firm is (P1*Q1). After
45
22
the total cost reduced to (C2*Q1), the total revenue change to (P2*Q1). After the implementation
of MEIS, the average cost of Emrusa reduced from 0.56 USD (C1) to 0.51 USD (C2)46.
Consequently, the price of a piece reduced from 1.4 USD (P1) to 1.33 USD (P2)47 and the export
volume increased from 57000 (Q1) pieces to 61000 pieces (Q2)48.
Cost calculation
2016:
𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 = 1. 4 * 57000 = 79800 𝑈𝑆𝐷
𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = 0. 56 * 57000 = 31920 𝑈𝑆𝐷
𝑝𝑟𝑜𝑓𝑖𝑡 = 79800 − 31920 = 47880 𝑈𝑆𝐷
2017:
𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 = 1. 33 * 61000 = 81130 𝑈𝑆𝐷
𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = 0. 51 * 61000 = 31110 𝑈𝑆𝐷
𝑝𝑟𝑜𝑓𝑖𝑡 = 81130 − 31110 = 50020 𝑈𝑆𝐷
Thus, it is safe to assume that when the average cost of production of Emrusa decreases, its
profits increase. These profits were then used to further extend the scale of production of jewelry
by buying more capital49, thereby increasing the productive efficiency of the firm. Also, these
profits were utilised in buying better technology and performing R&D50, increasing dynamic
46
Appendix 4: Brass jewelry average cost in the US during 2012-2019
47
48
49
50
23
efficiency of the firm. However, Emrusa still has to buy some of its raw material domestically,
reducing the usefulness of the stored duty scrips. But at the same time, the DCS are easily
transferable from one firm to another at any price agreed by both the firms.51 So, even if the firm
is not able to utilise the DCS completely in importing raw materials, they can sell the DCS to
other importers and then invest the funds for further expansion.
After the shift of the factory and a sudden increase in total fixed costs, the export volume of
brass jewelry to the US didn’t decrease52, the exports volume of silver jewelry to the US did
significantly drop53. This implies that MEIS does play a role in eradicating industrial
inefficiencies and increasing exports because the MEIS benefits are only applicable on brass
jewelry and not silver jewelry.
The PED of silver jewelry in the US was -1.3693 and -1.45429 in 2017 and 2019, respectively54.
As the absolute value of PED is greater than 1 in each year it can be concluded that the demand
for silver jewelry is price elastic55. Unlike brass jewelry, silver jewelry comes under luxurious
products, making its demand price elastic56. As the average cost of production increased from
3.31 USD to 5.09 USD57, the prices increased from 13.0 USD to 13.7 USD58. Due to the slightest
increase in prices, the export volume of silver jewelry dropped from 26000 pieces to mere 5000
51
"Directorate General of Foreign Trade: Ministry of Commerce and Industry: Government of India."
Directorate General of Foreign Trade | Ministry of Commerce and Industry | Government of India. 2015.
Web. 7 Jan. 2021. <https://www.dgft.gov.in/CP/?opt=meis>.
52
53
Appendix 6: Silver jewelry export volume in the US during 2016-2019
54
Appendix 9: Silver jewelry price and PED in the US during 2016-2019
55
56
57
Appendix 8: Silver jewelry average cost in the US during 2016-2019
58
24
pieces59. This might also be the reason for the stability of brass jewelry exports to Australia. The
PED of brass jewelry in Australia stays below -0.6 during 2017-201960, therefore its demand is
price inelastic. Even after the shift of production premises, the exports of brass jewelry to
Australia weren’t affected. As the demand for brass jewelry is price inelastic, the increment in
price of brass jewelry didn’t affect the market share of Emrusa jewelers in Australia. Another
factor that adds to the inelasticity of Emrusa’s jewelry is its heritage value. Indian ethnic jewelry
can only be imported from India, making the demand for Emrusa’s jewelry price inelastic.
Other than being price inelastic, the demand for brass jewelry in Australia is also income
inelastic. As brass jewelry categorises under normal goods, theoretically it’s YED lies between 0
and 161. Thus, in 2019, when Australia hit a record-low GDP and household incomes fell 62, the
demand for Emrusa’s jewelry remained unaffected. In contrast, the demand for silver jewelry is
income elastic (YED > 1) as it falls under the category of luxurious goods63. Thus after a
consistent increase in average household income of the US, the export of silver to the US
increased by 10000 pieces on an average64.
The effectiveness of MEIS is also influenced by the protectionism measures undertaken by the
US. While the US strongly encourages free trade, it does, however, impose tariffs on the import
59
60
Appendix 13: Brass jewelry price and PED in Australia during 2016-2019
61
62
Pandey, Swati. "Australia's GDP Growth Hits Decade Low, Stimulus Needed to Avoid Recession."
Reuters. 5 June 2019. Web. 30 Jan. 2021.
<https://www.reuters.com/article/us-australia-economy-gdp-idUSKCN1T606I>.
63
64
25
of brass jewelry. Despite the comparative advantage provided by the cheap labour costs, tariffs
make Emrusa’s jewelry less competitive in the global market as the domestically manufactured
jewelry appeals more to the buyers due to lower prices. A limitation of this study is lack of
communication with competitors. Some attempts were made to reach out the management of
competitor firms in the US, but all in vain. Interviews with US firms would shed light on the
efficacy of the protectionist policies imposed by the government such as tariffs. It would also
help in assessing the comparative advantages US firms hold over indian exporters.
Diagram 6: Impact of US tariffs on import of Brass Jewelry
The equilibrium price set by the supply and demand - SUS and DUS respectively - of jewelry in the
US is P. However, the world price set for jewelry is Pw. At Pw, the quantity demanded of jewelry
26
will be Q4 whereas the quantity supplied of jewelry will be Q1. This mismatch between Q1 and Q4
gives rise to imports. The difference between Q1 and Q4 is the quantity of jewelry imported by the
US to fulfil the desired demand. Imposing tariffs on the import of jewelry increases the world
price from Pw to Pw+t thereby shifting the quantity supplied of jewelry to Q2 and quantity
demanded of jewelry to Q3. Since (Q4 - Q1) > (Q3 - Q2), therefore imports decrease as tariffs are
imposed. The 5.5% tariff imposed by the US in 201965 brought down the average export volume
of brass jewelry to the US from 43000 pieces to 25000 pieces66. Similarly, the export volume of
silver jewelry to the US also decreased from 26000 pieces to 5000 pieces67. Thus, the tariffs
imposed by the US overpower the comparative advantage of labour costs and Emursa has to
further cut its costs to remain competitive.
65
"INDIA'S GEM INDUSTRY HAS "$1 BILLION OPPORTUNITY"." Israeli Diamond. 21 Jan. 2020. Web. 2
Feb. 2021. <https://en.israelidiamond.co.il/news/world/india-china-trade-war/>.
66
67
27
Conclusion
While investigating the RQ - “To what extent does Merchandise Exports from India Scheme
(MEIS) increase the exports of Emrusa Jewellers, Jaipur from 2016-2019?” - we analysed
various factors that potentially affected the export volume of Emrusa Jewellers. It may be
concluded that the exports of Emrusa Jewellers stay unaffected by exchange rate because with a
consistent fall in exchange rate throughout 2012-2019, the export volume of Emrusa Jewellers
didn’t follow a definitive trend. The future market regime and fixed commission rate add to the
insignificance of exchange rate on export volume. As shown in the regression analysis, inflation
does strongly correlate with the export volume. The export volume does decrease as inflation
occurs but the impact is on a minute scale, possibly due to the PED of Emrusa’s brass jewelry.
Additionally, the comparative advantage of labour India holds over the US enables it jewelry to
stay competitive globally even after the increase in prices. MEIS does influence the export
volume of Emrusa significantly. As shown in the cost revenue analysis the reduction in the
average cost of production of jewelry due to duty scrips increased the output and profits of
Emrusa Jewelers. Even if Emrusa is not able to enjoy the duty scrips while importing raw
material, it sells these duty scrips to other importers in India which indirectly reduces its average
cost of production. However, while MEIS does provide an edge to Emrusa over other
international exporters and US domestic producers, it doesn’t help it to compete with the other
indian exporters. The export market of India is fierce and to deal with the intense domestic
competition, Emrusa has to further reduce its costs and work on improving its designs.
Conversations with indian competitors will elucidate how other firms benefit from MEIS and do
28
Emrusa Jewellers have an edge over them. Not all firms import their raw materials and some
firms completely import their raw materials whereas Emursa only imports some of its raw
materials. Such factors influence how a firm might benefit from MEIS. Additionally, firms in
other states might enjoy comparative advantages over Emrusa. In comparison to Rajasthan the
labour costs of Nagaland are much lower (₹115 to ₹135 per day)68, enabling firms located in
Nagaland to produce at significantly lower costs. Interviews with competitors in other states will
allow us to incorporate the benefits they receive due to other indian policies or their state specific
policies. Thus, it is imperative to consider indian competition to make a more concrete claim
regarding the efficacy of MEIS in increasing export volume.
68
Nanda, Prashant K. "₹375 Minimum Wage Plan Junked as Govt Opts for ₹2 Hike." Livemint. 13 July
2019. Web. 15 Jan. 2020.
<https://www.livemint.com/news/india/rs-375-minimum-wage-plan-junked-as-govt-opts-for-rs-2-hike-1563
035733771.html>.
29
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31
Appendices
Question: What is the aim of Emrusa and where is your manufacturing unit
located?
Answer: Our aim to provide the best quality jewelry to our buyers on time. Earlier
our production unit was located in Raja park, but in 2015 we shifted to Sitapura
industrial area.
Question: Which countries do you export to?

Answer: We export to the US, Australia, Spain.
Question: What caused the increase of exports volume during 2014-2017?

Answer: During 2014-2017, one of our largest US buyers - Anthropologie -
expanded rapidly. Consequently, we witnessed a surge of orders from them which
increases our export volume.
Question: Do you import your raw materials?

Answer: Yes, we partly import our raw materials.
Question: What bank do you use for forex transactions and what commision rate is
offered to you?
Answer: We have been using HDFC bank for all of our Forex transactions since
the firm was founded. Because we are a consistent customer of the bank and trade
an increasing amount of currency each year, the commision rate offered to us stays
constant at 1.0%.
Question: While trading with customers do you use a spot marker regime or a
future market regime?
Answer: We have adopted a future market regime.
32
Question; Why do you think your buyers don't go to other brands?
Answer: Most buyers have been with us for a long time and show great
satisfaction with the quality of the jewelry bought. Pivoting to another
manufacturer and trusting them with large order becomes a cumbersome job for
them, therefore they prefer sticking with us.
Question: Which cost forms the major component of the total cost of production
and what percentage does this cost account for.
Answer: Cost of buying raw materials, around 63%.
Question: How did you use the increased profits earned in 2017?
Answer: We invested in capital, hired more qualified designers, and purchased the
latest technology available.
33
US(B) Quantity
(in lakh pieces) Q1 Q2 Q3 Q4 AVG
2012 0.11 0.28 0.49 0.22 0.28
2013 0.12 0.3 0.51 0.24 0.29
2014 0.18 0.34 0.62 0.8 0.49
2015 0.2 0.5 0.8 0.5 0.5
2016 0.21 0.57 1.05 0.45 0.57
2017 0.24 0.59 1.13 0.46 0.61
2018 0.17 0.44 0.79 0.33 0.43
2019 0.16 0.2 0.45 0.2 0.25
34
Appendix 3: Brass jewelry sales revenue in the US during 2012-2019
US(B) Sales
(in lakh USD) Q1 Q2 Q3 Q4 AVG
2012 0.28 0.7 1.23 0.55 0.69
2013 0.29 0.72 1.22 0.58 0.7
2014 0.39 0.73 1.33 1.71 1.04
2015 0.29 0.72 1.14 0.72 0.72
2016 0.29 0.8 1.47 0.63 0.8
2017 0.32 0.78 1.5 0.61 0.8
2018 0.51 1.33 2.39 1 1.31
2019 0.51 0.64 1.44 0.64 0.81
35
Appendix 4: Brass jewelry average cost in the US during 2012-2019
US(B) Average
Cost (USD) Q1 Q2 Q3 Q4 AVG
2012 0.97 0.92 0.95 0.95 0.95

2013 0.95 0.95 1.01 0.95 0.97
2014 0.8 1.04 1.05 0.36 0.81
2015 0.55 0.55 0.62 0.44 0.54
2016 0.6 0.55 0.53 0.55 0.56
2017 0.51 0.51 0.48 0.53 0.51
2018 1.16 1.12 1.12 1.19 1.15
2019 0.69 1.37 1.12 1.12 1.08
36
Price
US(B) (USD) PED
2012 2.5 -
2013 2.4 -0.33448
2014 2.14 -0.38148
2015 1.43 -0.03042
2016 1.4 -0.32749
2017 1.33 -0.35831
2018 3.02 -0.11077
2019 3.2 -0.24
37
US(S) Quantity
2016 0.07 0.15 0.27 0.12 0.15
2017 0.03 0.75 0.14 0.06 0.25
2018 0.03 0.8 0.13 0.08 0.26
2019 0.02 0.05 0.09 0.04 0.05
38
Appendix 7: Silver jewelry sales revenue in the US during 2016-2019
US(S) Sales
2016 0.07 0.15 0.27 0.12 0.15
2017 0.03 0.75 0.14 0.06 0.25
2018 0.03 0.8 0.13 0.08 0.26
2019 0.02 0.05 0.09 0.04 0.05
39
Appendix 8: Silver jewelry average cost in the US during 2016-2019
US(S) Average
2016 4.4 5.17 5.15 5.13 4.96

2017 4.94 0.47 4.56 4.75 3.68
2018 4.56 0.43 4.82 3.42 3.31
2019 5.13 5.02 5.07 5.13 5.09
40
Price
US(S) (USD) PED
2016 12.57 -
2017 13 -1.3693
2018 13 -
2019 13.7 -1.45429
41
Appendix 10: Brass jewelry export volume in Australia during 2016-2019
AUS(B) Quantity
2016 0.07 0.14 0.26 0.12 0.15
2017 0.06 0.17 0.31 0.14 0.17
2018 0.08 0.18 0.33 0.15 0.19
2019 0.05 0.19 0.35 0.16 0.19
42
Appendix 11: Brass jewelry sales revenue in Australia during 2016-2019
AUS(B) Sales
2016 0.17 0.34 0.62 0.29 0.36
2017 0.15 0.43 0.78 0.35 0.43
2018 0.18 0.41 0.76 0.35 0.43
2019 0.15 0.55 1.02 0.46 0.55
43
Appendix 12: Brass jewelry average cost in Australia during 2016-2019
AUS(B) Average
2016 0.76 0.98 0.95 0.92 0.9

2017 1.08 0.96 0.96 0.95 0.99
2018 1.05 1.16 1.14 1.11 1.12
2019 1.82 1.2 1.18 1.14 1.34
44
Appendix 13: Brass jewelry price and PED in Australia during 2016-2019
Price
AUS(B) (USD) PED
2016 2.4 -
2017 2.5 -0.58235
2018 2.3 -0.58947
2019 2.9 -0.35263
45
Inflation rate
(IND) Q1 Q2 Q3 Q4 AVG
2012 7.17 10.1 9.76 10.1 9.28
2013 11.7 10.7 10.8 10.6 10.95
2014 6.89 6.86 6.76 4.98 6.37
2015 6.58 5.87 4.62 6.46 5.88
2016 5.65 6.19 5.3 2.72 4.97
2017 2.36 1.46 2.4 3.73 2.49
2018 4.74 3.95 5.61 5.11 4.85
2019 7.08 8.53 6.61 5.2 6.86
46
Appendix 15: Inflation rate of the US during 2012-2019
Inflation rate
(US) Q1 Q2 Q3 Q4 AVG
2012 1.63 1.21 2 2.2 1.76
2013 2.5 2.39 2.16 2.75 2.45
2014 2.93 3.02 2.31 1.72 2.5
2015 1.33 1.51 1.5 1.69 1.51
2016 1.31 1.02 1.3 1.48 1.28
2017 2.13 1.93 1.83 1.91 1.95
2018 1.9 2.08 1.89 1.78 1.91
2019 1.33 1.59 1.67 1.84 1.61
47
Exchange rate
(INR to USD) Q1 Q2 Q3 Q4 AVG
2012 0.0199 0.018498 0.018142 0.018467 0.018752
2013 0.018457 0.01787 0.016113 0.016132 0.017143
2014 0.016184 0.016742 0.01651 0.016129 0.016391
2015 0.016049 0.015751 0.015406 0.01517 0.015594
2016 0.014815 0.014939 0.014934 0.014826 0.014878
2017 0.014925 0.015513 0.015552 0.015451 0.015361
2018 0.015542 0.014912 0.014271 0.013873 0.01465
2019 0.014188 0.014376 0.014219 0.014039 0.014206
48

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Extended Essay in Economics: Topic: International Trade and Government Intervention

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Topic: International trade and

Background of the firm 6

Merchandise Exports from India Scheme 21

comparative advantage theory by discouraging quality production and providing unfair

will help in eradicating any discrepancies regarding the efficacy of MEIS.

calculated to assess the impact of changes in price on the demand of jewelry.

Background of the firm

shifted its production premises to Sitapura Industrial area in 201512.

goods thereby decreasing their international competitiveness and vice versa.

in the market, its value depreciates.

Graph 1: Exchange rate of India during 2012-2019 15

increasing demand for its exports.

fixed commission rate, enabling the firm to battle global competition.

weighted average of prices based upon a basket of goods.

graphically as they generally exceed 3 dimensions35.

misdirect the regression.

concerned time-frame (2012-2020) by 4.59% on an average37. In accordance with the economic

much due to the PED of Emrusa’s jewelry.

The price elasticity of demand depends on a number of factors, including availability of

P1 to P2, the total revenue of the firm increases to (P2*Q2).

producers of the US.

and hence enjoy an increase in demand and exports.

volume increased from 57000 (Q1) pieces to 61000 pieces (Q2)48.

𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 = 1. 4 * 57000 = 79800 𝑈𝑆𝐷

𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = 0. 56 * 57000 = 31920 𝑈𝑆𝐷

𝑝𝑟𝑜𝑓𝑖𝑡 = 79800 − 31920 = 47880 𝑈𝑆𝐷

𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 = 1. 33 * 61000 = 81130 𝑈𝑆𝐷

𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = 0. 51 * 61000 = 31110 𝑈𝑆𝐷

𝑝𝑟𝑜𝑓𝑖𝑡 = 81130 − 31110 = 50020 𝑈𝑆𝐷

jewelry and not silver jewelry.

increased by 10000 pieces on an average64.

Diagram 6: Impact of US tariffs on import of Brass Jewelry

further cut its costs to remain competitive.

regarding the efficacy of MEIS in increasing export volume.

Appendix 1: Interview with the director of Emrusa Jewellers

Question: Which countries do you export to?

Question: What caused the increase of exports volume during 2014-2017?

Question: Do you import your raw materials?

2012 0.11 0.28 0.49 0.22 0.28

2013 0.12 0.3 0.51 0.24 0.29

2014 0.18 0.34 0.62 0.8 0.49

2015 0.2 0.5 0.8 0.5 0.5

2016 0.21 0.57 1.05 0.45 0.57

2017 0.24 0.59 1.13 0.46 0.61

2018 0.17 0.44 0.79 0.33 0.43

2019 0.16 0.2 0.45 0.2 0.25

2012 0.28 0.7 1.23 0.55 0.69

2013 0.29 0.72 1.22 0.58 0.7

2014 0.39 0.73 1.33 1.71 1.04

2015 0.29 0.72 1.14 0.72 0.72

2016 0.29 0.8 1.47 0.63 0.8

2017 0.32 0.78 1.5 0.61 0.8

2018 0.51 1.33 2.39 1 1.31

2019 0.51 0.64 1.44 0.64 0.81

2012 0.97 0.92 0.95 0.95 0.95

2013 2.4 -0.33448

2014 2.14 -0.38148

2015 1.43 -0.03042

2016 1.4 -0.32749

2017 1.33 -0.35831

2018 3.02 -0.11077