6 - 8 International Trade Pattern and Balance of Payments

International Trade Pattern and Balance of payments
World Trade Indias Foreign Trade Balance of Payments Case Developing Countries Trade Dependence and Export Growth Opportunities
Sunday, December 9, 2012
Dr. S. Jain
Learning Objectives
To explain the significance of international trade patterns To provide an overview of world trade To evaluate Indias international trade To outline the concept of terms of trade To explicate balance of payments To highlight key issues in Indias foreign trade
Sunday, December 9, 2012 Dr. S. Jain 2
Significance of International Trade Patterns

Patterns of international trade facilitate in developing an overview about the types of products traded and the countries involved in trade. The shifts in trade patterns and their causes provide insights into the upheavals in the economic environment and trade policies of nations.
Macroeconomic factors in the trading countries as well as the overall world economic environment influence the international flow of goods and services. Thus, past international trade patterns reveal vital information about macro economic environment and its changes.
World Trade: An Overview

The world merchandise exports grew from US$ 59 billion in 1948 to US$ 13.57 trillion in 2007, and imports grew from US$ 62 billion to US$ 13.94 trillion during the same period. The exports of services grew more rapidly compared to merchandise exports from US$ 390.8 billion in 1980 to US$ 3.26 trillion in 2007 whereas during the same period, imports rose from US$ 431.8 billion in 1980 to US$ 3.06 trillion in 2007.
Dr. S. Jain
Dr. S. Jain
Dr. S. Jain
Composition of World Trade (2007)

Commercial Services 19.4%
M erchandise 80.6%
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Direction of World Trade

Direction of Trade: The statistical analysis of the set of a countrys trading partners and their significance in trade. Direction of Exports: The set of countries where the goods are exported and their significance on a countrys exports. Direction of Imports: The set of countries from where the goods are imported and their significance on a countrys imports.
Dr. S. Jain
Direction of World Exports

14000000
12000000
F.O.B. US$ Million
10000000
8000000
6000000
4000000
2000000
1980
1990
2000
2003
2004
2005
Years Developed Economies Developing Economies Economies in Transition
Dr. S. Jain
2007
2006
Direction of World Merchandise Exports

(2007)
South and Central America 3.7%
CIS 3.7% M iddle East 5.3%
Africa 3.1 % Europe 42.5%
North America 1 3.7%
Asia 28.0%
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Direction of World Merchandise Imports

(2007)
South and Central America 3.3%
CIS 2.7%
Middle East 3.3%
Africa 2.5%
Europe 43.4%
North America 19.4%
Asia 25.3%
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Composition of World Merchandise Trade

Composition of Trade: The statistical analysis of a countrys product groups in its international trade. Composition of Exports: The analysis carried out for product groups exported. Composition of Imports: The analysis carried out for product groups imported.
Patterns of World Merchandise Exports

100% 80% Percentage 60% 40% 20% 0% 1970 1980 1995 2006 Manufact ured goods 1965 2000 2002 2005
Ye ars
Food It em s Agricult ural raw m at erials Ores, m et als and precious st ones Fuels
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Composition of World Merchandise Exports

(2006)
Clothing 3.0% Textiles 2.1 % Fuels 1 7.2% Ores &m inerals 1 .9% Iron &Steel 3.6% Non-ferrous m etals 3.0% Other m achinery 1 4.0% Other chem icals 9.1 %
Autom otive products 9.8% Agricultural Produ cts 9.2%
Pharm aceuticals 3.0% Other sem Manufactures i 7.7%
Scientific and controlling instrum ents 2.3% Office &telecomequipm ent 1 % 4.1
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World Commercial Services Trade

The world commercial services exports rose by 21 per cent to US$ 3.26 trillion in 2007. Since the commercial services data are derived from BoP statistics, it does not include the sales of majority-owned foreign affiliates abroad. Other commercial services that include software, education, health financial services, etc, has been the fastest growing category at 12 per cent growth in the world exports of commercial services trade.
Direction of World Commercial Services Exports (2007)

Africa 2.6% South&Central Am erica 2.8% Middle East 2.4% CIS 2.0%
NorthAm erica 1 6.4% Europe 51 .0%
Asia 22.9%
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Direction of World Commercial Services Imports (2007)

South&Central Am erica 3.2% Middle East 4.1 % Africa 3.2% CIS 2.9% Europe 46.8%
NorthAm erica 1 4.4%
Asia 25.4%
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Composition of World Exports of Commercial Services (2007)

Transport 22.8%
Other Commercial Services 50.8%
Travel 26.5%
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Indias Foreign Trade: An Overview

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

(2006-07)
Services, 27.4%
Merchandise, 72.6%
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Direction of India's Trade : Exports
140000 120000 US$ (Million) 100000 80000 60000 40000 20000 0 1995-96 1997-98 1999-00 2001-02 2003-04 2004-05 2005-06 2006-07* 1987-88 1991-92 1993-94
Ye ars OECD countries OPEC Eastern Europe Developing countries Others / unspecified
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Direction of India's Trade : Imports

200000.0 180000.0 160000.0 140000.0 120000.0 100000.0 80000.0 60000.0 40000.0 20000.0 0.0 US$ Million
1987-88
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2004-05
2005-06
Years OECD countries OPEC Eastern Europe Developing countries Others / unspecified
Dr. S. Jain
2006-07*
23
Composition of India's Export

120.0 0.1 100.0
1.5 1.7 4.2 2.7 2.0 1.2 1.1 1.3 1.4
4.8
4.9
8.5
11.5
15.0
17.9
80.0 Percentage 60.0 40.0 20.0 0.0 2000-01 2001-02 2002-03 2005-06 2006-07 2004-05 1999-2000 2007-08* 2.5 15.2 80.7
78.0
76.1
76.6
74.3
72.0
68.6
67.4
2.6 13.5
2.9 13.5
3.8 12.8
5.5 10.5
5.2 10.2
4.8 10.3
4.0 9.3
Years
Agricult ure &allied product s Ores & Minerals Manufactured Goods Crude & Petroleum P roducts Others & Unclassified items
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Composition of India's Imports

100 90 80 70 Percentage 60 50 12.0 40 30 20 10 5.8 1999-2000 0 3.7 2000-01 4.5 2001-02 4.6 2002-03 3.5 2004-05 2.5 2005-06 2.9 2006-07 2.2 2007-08* Others Unclassified items 27.4 33.2 29.5 30.7 29.6 32.1 33.2 33.6 0.9 2.8 11.0 0.9 1.5 15.8 0.6 1.3 15.4 0.6 1.6 13.2 0.6 1.9 48.3 32.8 29.8 30.3 28.2 18.3 19.9 22.1 22.7 43.8 3.8 4.0 2.5 8.1 43.7 40.4
11.4 0.9 1.3
12.1 0.7 1.0
13.0 0.7 1.1
Years Food and allied products Fuel Fertilizers Paper board, manufactures & newsprint Capital goods
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Indias Services Trade

The services sector in India has grown remarkably and account for over 55 per cent of Indias GDP making it the most significant component of the countrys economy. Indias services exports have significantly grown from a meager US$ 295 million in 197071 to US$ 76.2 billion in 200607 with a growth of 32.1 per cent over the previous year.
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Composition of Indias Service Exports

(2007-08)
**
Travel, 12.9 Miscellaneous*, 28.1 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 Trade

Trade indices are widely-used instruments to measure the benefits derived by a nation from international trade. These facilitate in assessing the impact of trade volume and / or unit value realization on a countrys gains from trade.
Terms of Trade
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 given quantity of exports can buy. The terms of trade refers to ratio of the price of its export commodity to the price of its import commodity. In case of a hypothetical assumption of a two-nation world, the export of a country equals its trade partners imports wherein the terms of trade of a country are equal to the inverse of the terms of trade of its trade partner.
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Types of Terms of Trade

Net terms of trade: It implies unit value index of exports expressed as a percentage of unit value index of imports. Net value terms of trade: (N) = Unit value index of exports (Px) Unit value index of imports (Pm)
X 100
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Gross terms of trade: It implies volume index of imports expressed as a percentage of volume index of exports
Gross terms of trade = Volume index of imports (Qm) Volume index of exports (Qx)
X 100
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Income terms of trade: It implies the product of net terms of trade and volume index of exports expressed as a percentage. It reflects a nations capacity to import.
Income Terms of Trade (I) = Net terms of trade (Px/Pm)*volume index of exports( Qx) *100
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Single factorial terms of trade: Net barter terms of trade adjusted for changes in productivity of exports Double factorial terms of trade: Net barter terms of trade adjusted for changes both in productivity of exports and imports
Trade Indices : Developed vs. Developing Economies (Base Year 2000=100)

Year
Terms of Trade Developed Economies Developing Economies
1980 1990 1995 2001 2003 2005 2006

97 103 105 101 103 102 100

Dr. S. Jain
117 101 102 98 98 105 107

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Reasons for Deterioration in Terms of Trade for Developing Countries International demand for export of manufactured goods by developed countries tends to increase at a much faster rate compared to demand for agricultural commodities and primary goods due to their higher income elasticity of demand.
Any productivity gain in manufactured goods by developed countries is generally passed on to its workers in the form of higher wages and income. Whereas, any such gains in productivity of agricultural commodities and primary products by developing countries are reflected in price decline. This leads to a consistent deterioration in the collective terms of trade of developing countries.
Indias Terms of Trade

Indias Unit Value Index for imports rose from 35.3 in 197071 to 608 in 200607 compared to corresponding rise in Unit Value Index of exports from 45 to 863 during the period. It implies that the rise in the value of imports grew much more than the quantity of goods imported which added to Indias financial burden. Factors responsible for this include relative inelasticity of Indias import demands for petroleum products, foodgrains, fertilizers, oilseeds, and capital goods constrained India in making any substantial cuts on imports.
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Trade Indices of Indias Foreign Trade (Base: 1978-79=100)

Years Gross 1970-71 1978-79 1980-81 1990-91 2000-01 2003-04 2004-05 2005-06 2006-07
Terms of trade Net 127.4 100.0 80.8 109.3 128.1 123.4 110.0 135.0 142.0 Income 75.2 100.0 87.3 212.2 732.0 943.5 991.0 1357.0 1653.0
37
113.9 100.0 127.6 122.5 122.1 126.9 124.0 164.0 176.0

Dr. S. Jain
Balance of Payments
(BoP)
The summary of all its economic transactions that have taken place between the countrys residents and the residents of other countries during a specified time period. It is used as an indicator of a countrys political and economic stability. A consistently positive BoP reflects more foreign investment and money coming into the country and not much of its currency being exported. On the other hand, adverse or negative BoP indicates more outflows of money compared to inflows.
Balance of Trade
The difference between the termed as Balance of Trade. value of exports and imports is
India had negative balance of trade over the years except during two financial years, i.e,. a positive trade balance of US$ 134 million 197273 and US$ 77 million in 199697. There has been a steep rise in trade deficit from US$ 5.98 billion in 200001 to US$ 80.39 billion in 200708 mainly due to the steep rise in its unit value prices of Indias import products, especially the petroleum products and fertilizers besides domestic demand
Indias Trade Balance

10000 0
-10000
-20000 US$ (Million)
-30000
-40000
-50000
-60000
-70000 Years
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Constraints in Indias Exports Growth

Adoption of import substitution rather than export promotion strategy Overprotection to Indian industry from external competition High import barriers High import tariff Inadequate infrastructure Complexity of trade procedures
Dr. S. Jain
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International Trade Pattern and Balance of payments

Sunday, December 9, 2012

Significance of International Trade Patterns

World Trade: An Overview

Sunday, December 9, 2012

Sunday, December 9, 2012

Sunday, December 9, 2012

Composition of World Trade (2007)

Sunday, December 9, 2012

Direction of World Trade

Sunday, December 9, 2012

Direction of World Exports

F.O.B. US$ Million

Years Developed Economies Developing Economies Economies in Transition

Sunday, December 9, 2012

Direction of World Merchandise Exports

CIS 3.7% M iddle East 5.3%

Africa 3.1 % Europe 42.5%

North America 1 3.7%

Sunday, December 9, 2012

Direction of World Merchandise Imports

Middle East 3.3%

North America 19.4%

Sunday, December 9, 2012

Composition of World Merchandise Trade

Patterns of World Merchandise Exports

Sunday, December 9, 2012

Composition of World Merchandise Exports

Autom otive products 9.8% Agricultural Produ cts 9.2%

Pharm aceuticals 3.0% Other sem Manufactures i 7.7%

Sunday, December 9, 2012

World Commercial Services Trade

Direction of World Commercial Services Exports (2007)

NorthAm erica 1 6.4% Europe 51 .0%

Sunday, December 9, 2012

Direction of World Commercial Services Imports (2007)

NorthAm erica 1 4.4%

Sunday, December 9, 2012

Composition of World Exports of Commercial Services (2007)

Other Commercial Services 50.8%

Sunday, December 9, 2012

Indias Foreign Trade: An Overview

Sunday, December 9, 2012

Composition of India's External Trade

Sunday, December 9, 2012

Direction of India's Trade : Exports

Sunday, December 9, 2012

Direction of India's Trade : Imports

Sunday, December 9, 2012

Composition of India's Export

Sunday, December 9, 2012

Composition of India's Imports

11.4 0.9 1.3

12.1 0.7 1.0

13.0 0.7 1.1

Sunday, December 9, 2012

Indias Services Trade

Sunday, December 9, 2012