1. Explain the term international trade.

Also, explain the specific features and

objectives of international trade. (10)marks

According to Wasserman and Haltman, “International trade consists of transactions

between residents of different countries”. International trade is purchasing and selling
goods and services by companies in different countries. International trade allows
countries to expand their markets and access goods and services that otherwise may
not have been available domestically.

FEATURES OF THE INTERNATIONAL MARKET

1. HETEROGENOUS MARKET
2. SEPARATION OF BUYERS AND SELLERS
3. RISK ELEMENT
4. RESTRICTIONS
5. MULTIPLE OPPORTUNITIES
6. RESTRICTIONS

OBJECTIVES OF THE INTERNATIONAL MARKET

• To earn profits by selling as much as possible products and services to collect the
maximum revenue.
• Access to international markets, there results in an expansion in the consumer base
of a company’s products or services.
• Income opportunities and business success to the corporations
• To access products and services at a lower cost than the alternatives available in
the domestic market
• A variety of options are available
• Harmonious relationships between the citizens of respective countries encourage
cross-national social and cultural management

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 2. Explain the main stages of international trade development.(5)marks

According to Wasserman and Haltman, “International trade consists of transactions

between residents of different countries”. International trade is purchasing and selling
goods and services by companies in different countries. International trade allows
countries to expand their markets and access goods and services that otherwise may
not have been available domestically.

Stages of International Trade Development:

1. Domestic Market Establishment

The domestic market is an appropriate place to test the deemed and performance of the product
before expanding internationally. As the international market has a wider scope, such market
development requires resources of time and money. Hence it is important to ensure that a strong
domestic market is fully equipped to market is created on which the future international expansion
process can be extended. The product belonging to EPZ, then It doesn’t hold correctly.

2. Export Research and Planning

When companies trade abroad they generally target such markets initially which are similar legally,
financially, and economically. It is always advisable that before venturing into an unfamiliar market
companies must prepare themselves thoroughly by doing a thorough study of the international
market.

3. Initial Export Sales

When a company plans to implement the export procedure it is always advisable, to begin with
testing the market. During this stage, the exporter should use the initial shipments to become
familiar with the mechanics of exporting such as documenting, distribution channels, transpiration
and the other various other components affecting the business.

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 4. Expansion of International sales
If the initial sales have been good, the company can plan for larger orders and expand the market
accordingly. This stage is usually accompanied by intensive market research, more aggressive
participation shows, events and other such activities having significance to the target market in the
international market.

5. Investment
If the profits and sales are encouraging and promising, the company may expand its presence in the
target market. This final stage carries responsibilities as the scope of the company’s presence
broadens in the global market.

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 3. Define international trade. Explain the main types of market/products.(10) marks.
Ans:
(industrial product and consumer product)
According to Wasserman and Haltman, “International trade consists of transactions
between residents of different countries”. International trade is purchasing and selling
goods and services by companies in different countries. International trade allows
countries to expand their markets and access goods and services that otherwise may
not have been available domestically.
TYPES OF MARKET

The market can be classi ed into 4 types:-




1. On the basis of area: (local market, national market, international market) 


Local Market: In such a market the buyers and sellers are limited to the local
region or area. They usually sell perishable goods for daily use since the transport
of such goods can be expensive.


Regional Market: These markets cover a wider area than local markets like a
district, or a cluster of a few smaller states. For example, food grains such as
wheat, paddy, maize, millet, sugar, oil etc are bought and sold in such regional
markets.

National Market: This is when the demand for goods is limited to one speci c
country Or the government may not allow the trade of such goods outside national
boundaries. For example, The products such as clothes, steel, cement, iron, tea,
co ee, soap, cigarette, etc are bought and sold nationwide.


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International Market: When the demand for the product is international and the
goods are also traded internationally in bulk quantities, we call it an international
market. For example, The market for some goods such as gold, silver, tea, clothes,
machines and machinery, medicines etc. has spread the world over.



2. On the basis of times: very short(6-7 days), Short Period( less than 1 year),
Long Time period (more than 1 year and less than 10 years) 


Very Short Period: For 6-7 days This is when the supply of the goods is xed, and
so it cannot be changed instantaneously. Say for example the market for owers,
and vegetables.


Short Time Period: Less than one year. The market is slightly longer than the
previous one. Here the supply can be slightly adjusted.


Long Period Market: For more than one year but less than 10 years. Here the
supply can be changed easily by scaling production. 


3. On the basis of Competition: 1. Perfect Market 2. Imperfect market (Monopoly,

Oligopoly, Monopolistic competition, Duopoly, Monopsony) 


1. Perfect Market: Perfect competition occurs when there is a large number of

small companies competing against each other. They sell similar products
(homogeneous), lack price in uence over the commodities, and are free to enter or
exit the market.



2. Imperfect Market: Consists of Oligopoly, Monopolistic Competition, Duopoly,
and Monopsony.

Monopoly: There is a single seller and many buyers in the marketplace.

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   Monopsony: A market form where there are many sellers but a single buyer is
called monopsony.


Monopolistic competition: Sellers compete among themselves and can

di erentiate their goods in terms of quality and branding to look di erent.

Duopoly: An oligopoly market consists of a small number of large companies that

sell di erentiated or identical products. Since there are few players in the market,
their competitive strategies are dependent on each other.





4. On the basis of regulation:

Regulated Market: In such a market there is some oversight by appropriate government

authorities. For example, the stock market is a highly regulated market.

Unregulated Market: This is an absolutely free market. There is no oversight or

regulation, the market forces decide everything

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 TYPES OF PRODUCTS

1. Consumer product: Convince goods, speciality goods, unsought goods (we know
about them but generally don’t buy them)

2. Industrial Product: Raw Material, Essential Equipments, Accessory products,

operating supplies(lubricants, packaging materials, necessary to keep the industrial
production process run smoothly.)

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 4. What are the key differences between the Ricardian theory and the Heckscher-
online theory? Models of international trade. Which model does u think is more
relevant in explaining contemporary trade patterns? (10marks)

1. Absolute Advantage Trade Theory: The theory of absolute cost advantage was
propounded by Adam Smith who is known for his classical work including ‘An inquiry
into nature’ and ‘Causes of the wealth of the nation (1776).
According to the theory of Absolute Advantage, a country should specialise in the
production of such a commodity which can be produced more cheaply than the other
country and exchange it with another commodity which has a higher cost in the same
country but is Lower in another country. This is not a realistic situation that a country
will get the benefit of trade only when it will have an absolute cost advantage over
other countries.
This Assumption is not true for many developing as well as under-developing
countries which don’t have an advantage in the production of any commodity. Though
Adam Smith’s theory of international trade is very logical and also convincing it
doesn’t explain the majority of International Trade. It was David Ricardo who
propounded the stronger argument and placed Adam Smith’s theory in a stronger
manner through the comparative cost advantage theory of International Trade.

2. Comparative Cost Advantage Theory: This theory was given by the famous
economist David Ricardo. The theory of Comparative Advantage is based on the
labour theory of value.
According to this theory, it is not absolute but the comparative cost advantage which
determines the trade relationship between the two countries.
It may be possible that a country has an absolute cost advantage in the production of
both commodities but has a comparative cost advantage in the production of the only
commodity. The country will export that commodity which causes greater cost
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 advantage and import those commodities which cause least comparative cost
advantage.
The Assumptions of this theory are as follows:
-Labour is the only factor of production and all units of labour are homogenous
-There are two countries that produce two commodities
-The production process follows the law of Returns to Scale
-there is free trade system between two countries
-Labour is perfectly mobile within the country but immobile between different
countries
-There is no technological change in any nation
-There is no transportation cost and there exists perfect competition in the labour
market.

The theory of Comparative Cost Advantage: It is the basic theory of international

trade and is also based on scientific assumptions. This was the first theory of
International Trade, which was widely accepted by researchers but this theory also
faces some criticism.
There are many countries that impose tariffs and quotas to improve their trade. Thus,
the free trade concept is not used by many countries.
it is said that labour is immobile at the international border but in present-day Labour
can migrate from on place to another for its own benefit.
the assumption of no transportation cost and no change in the technological
environment is also unrealistic. In fact, the technological advancement of a nation
depends on its research and development expenditure which always keeps on
changing.

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 3. Trade Theory Of Technology Gap: written by Josiah Tucker in the mid-1700s.
This theory views technological similarities as important long-run determination of
trade. Moreover, it also captures interactions between trade flows and changes in long-
run growth patterns and levels of employment. Several writers had expressed concern
that England’s export markets would be taken over by poorer countries that could
produce goods cheaper because of their lower wages and other costs. Tucker
responded with an increasing returns argument that demonstrated richer countries’ cost
advantage in producing the most complex commodities. The rich country not only has
the best tools and technologies, but also the “superior skill and knowledge (acquired
by long Habit and experience) for inventing and making of more.” Moreover, the rich
country need not rely only on the “genius” of its own manufacturers and farmers to
maintain this pace of innovation. The high wages, easier access to capital, and greater
“Exertion of Genius Industry, and Ambition” will cause the best and brightest of the
poor countries to emigrate to the rich ones, draining the poor countries.

4. Heckscher - Ohlin's theory of factor Endowment: The theory of comparative

advantage is based on the cost of production difference that Exists between different
countries however does not explain the reason behind these variations in the cost of
production across the nation. Bertin Ohlil in his book "inter-regional and international
trade" proposed the theory of factor endowment. this theory is also known as
Heckscher Ohlin theory after Heckscher a Swedish economist is known for his book
Mercantilist. Heckscher developed the essential factor endowment theory of
international trade in 1919 Heckscher student Bertin Ohlil further developed an
elaborate factor endowment theory hence it is known as Heckscher Ohlil (H-O) theory.
According to this theory, international trade between two countries is only possible
because of different endowments some countries are rich in capital and some have
more labour. The countries which are rich in capital will engage in capital-intensive
goods and those in labour will engage in the production of labour-intensive
commodities.
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 The assumptions of the theory are as follows:
There are two countries, two commodities and two factors of production
- No transportation cost
- There exists perfect competition
- There exists free trade between two countries
- Factors are not completely mobile
- Production function exhibits constant returns to scale
- There is no change in technology

Thus the basic idea of this theory is the countries who are rich in the capital will export
capital intensive goods and whereas the countries which are or which specialises in
labour will export more of labour-intensive goods. Thus most of the developing
economies have abundant labour and according to tho this theory such economies
should specialise in the production of labour-intensive commodities as labour is cheap
in such countries. Thus in most traditional theories, only labour is considered but this
theory considers both labour and capital. This theory also clarifies that a country that is
capital-intensive will still produce some commodities which are labour-intensive for
domestic consumption keeping the capital-intensive goods more for export.

Criticism of the theory

It is assumed that there will be no technological upgradation but in reality, every nation
contributes a percentage of capital towards more research and development the
assumptions of constant returns to scale is also not correct some industries follow
increasing returns to scale and diminishing returns to scale.

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 5. What are trade wars? How do they impact global trade and economic growth .or
how do trade wars affect the business and the consumers in the country involved?
What are some examples of recent trade wars and what were the outcomes?
(10)marks

A trade war occurs when one country retaliates against another by raising import
tariffs or placing other restrictions on the other country's imports. A country will
generally undertake protectionist actions to shield domestic businesses and jobs from
foreign competition. A trade war that begins in one sector can grow to affect other
sectors. Likewise, a trade war that begins between two countries can affect other
countries not initially involved in the trade war.

IMPACT OF TRADE WARS

On Global Economy

The global economy may suffer a worldwide recession, as explained below:

1. Global Price Rise: When tariffs on imports increase, exports depending on

those raw materials also become expensive. As a result, these products
become too expensive in the international market.

2. Increase in Inflation: The upsurge in prices results in global inflation. This

can potentially cause a recession. Share prices could plummet, impacting
international markets.

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 3. Threat to Global Economy: In a cold war between two countries, the

supporting nations may also restrict imports from the common enemy. This can
seriously impact the global economy.

4. Slows the Economic Growth: War between two nations hinders the economic
growth of the affected countries as well. Raw materials are not always
available locally. During the war, raw material becomes expensive or
inaccessible; this is what causes an economic downturn.

5. Fall in Global Stock Market: When the world’s largest economies are
engaged in trade wars, it affects international markets. There is a worldwide
slump.

On Domestic Economy

These wars affect local businesses, citizens, lifestyles, earnings and employment.
The following are the consequences faced at a domestic level:

1. High Cost of Raw Material: If the local companies import raw materials from
an enemy nation, then a high import tariff can increase the cost of production

2. Poor Quality and Expensive Products: In the absence of foreign competition,

local customers are with fewer options. They now have only domestic
manufacturers and might have to compromise on quality. Despite the dip in
quality, prices can rise as the domestic sellers now have a monopoly.

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 3. Lack of Employment Opportunities: It may result in job loss and affect the
Economy mainly affecting the companies chiefly dependent on imports.

4. Results in Inflation: Since the local product prices go up, there is a risk of
inflation

EXAMPLES OF TRADE WARS

In early 2018, President Trump stepped up his efforts, particularly against China,
threatening a substantial fine over alleged intellectual property (IP) theft and
significant tariffs. The Chinese retaliated with a 25% tax on over 100 U.S. products.

Since late 2019, China and Australia have been in a quasi-tit-for-tat trade war that has
left both countries suffering economic consequences. Australia’s complaints range
from a lack of transparency regarding the origin of COVID-19 to serious human
rights concerns that Australia considers deeply disturbing.

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 6. What is trade discrimination? What is the difference between trade war and
trade discrimination? (10marks)

Trade discrimination refers to the practice of treating certain countries or types of goods
differently from others in international trade. There can be several types of trade
discrimination such as Tariffs, Quotas, Subsidies, and other trade barriers that are imposed
selectively on certain counties or products.

FACTORS RESPONSIBLE FOR TRADE DISCRIMINATION

Protection of local industries: Countries may impose trade barriers such as tariffs and
quotas in order to protect the domestic industry from foreign competition. This can lead to
trade discrimination against certain countries or products.

Political Factors: Trade discrimination can be influenced by political factors such as Jio
Political Rivalries or disputes over human rights or environmental policies.

Differences in Economic Development: Countries may use trade discrimination as a way

to protect their own less-developed industries from competition with more advanced
economies.

Cultural Differences: Cultural factors such as language barriers, or different consumer

preferences, can create trade barriers and lead to discrimination against certain countries or
products.

Historical Trade Patterns: Overall trade discrimination can have significant negative
effects on global trade and economic growth as it can lead to reduced competition, higher
prices for consumers, and reduced incentives for innovation or investment.

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 7. X plain the types of duties /tariff methods (5)marks

TYPES OF DUTIES

1. IMPORT DUTY: These are the taxes which are imposed on imported goods which
are usually collected by the customs authorities of the importing country. Such duties
are based value, quantity or weight of the imported goods.
2. EXPORT DUTIES: These are the taxes imposed on goods exported from one country
to another. These export duties are less common than import duties and are used by
countries to restrict the export of certain commodities or raise revenue.
3. TRANSIT DUTY: These are the taxes imposed on the goods that are passing through
a country from one foreign country to another.
4. PROTECTIVE DUTIES: These are the duties imposed on imported goods to protect
domestic producers from foreign competition. These duties can be in the form of Ad
Valorem Taxes, Specific duties, or a combination of both.
5. COUNTERVAILING DUTIES (CVD): These are the duties imposed on imported
goods that are subsidies by the government.
6. ANTI-DUMPING DUTIES: These are the duties imposed on the imported goods that
are being sold at a price lower than the price charged in the exporter’s domestic
market. These duties aim to prevent unfair competition from foreign producers and to
protect domestic producers.

OPTIMAL TARIFF

It is the tariff rate that maximises the net welfare of a country. This theory suggests that a
country can improve its welfare by imposing a tariff on imported goods but upto a certain
point. Beyond that point, increasing the tariff will create negative welfare for the country.

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 8. Explain the methods of export and import operations through direct method/
indirect method OR Explain the essence of export and import operations through
direct /indirect method in international trade with examples.

1. Direct Exporting: Direct export means direct sales to a customer abroad. For
instance: you produce handmade mobile casings and mail them to your customers in
Belgium and Germany. You maintain close contact with your customers and undertake
your own marketing and sales.

2. Licensing: This involves a company granting a foreign company the right to use its
intellectual property such as trademarks and patents in exchange for certain fees or
royalties. Example, Merch

3. Franchising: This involves a company granting a foreign company use its brand and
business model in exchange for a certain amount of fees or royalty. For example Fast
Food chains like KFC

4. Joint Venture: This involves two or more companies forming a partnership to jointly
operate a business in the foreign market. For Example Vistara

5. Foreign Direct Investment (FDI): This involves a company investing in a foreign

subsidiary or acquiring a foreign company in order to establish its presence in the
foreign market. For example, McDonald's investing in an Asian country to increase the
number of stores in the region. Here, a business enters a foreign economy to strengthen
a part of its supply chain without changing its business in any way.

6. Indirect Export: This involves a company selling its products to an intermediary such
as an export trading company or foreign company that sells its product in the market.

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