New Delhi: India's economy grew faster than expected in the March quarter, helped by strength in farm and services sectors that suggested Asia's third-largest economy has already turned the corner and may be set for an early recovery.
"The economy has clearly performed better than expectations despite very challenging credit conditions," said Han-Sia Yeo, currency and rates strategist at Australia and New Zealand Banking Group in Singapore.
The Indian economy grew 5.8 percent from a year earlier in January-March, matching the upwardly revised rate in the previous quarter, data showed on Friday. That was still the lowest in four years, but above analysts' forecast of a 5.2 percent annual expansion.
October-December growth was revised from 5.3 percent.
India does not publish seasonally-adjusted quarter-on-quarter growth figures, but analysts' estimates showed the economy grew 1.2 percent in the quarter compared with a stagnant reading in September-December.
In the whole of the 2008/09 fiscal year to March 31, India's economy grew 6.7 percent, its weakest in six years and well below rates of around 9 percent of the previous three years, but still faster than predicted by economists in a Reuters poll.
The data fanned hopes that India was already on the mend, unlike other major economies that suffered a disastrous January-March quarter and have yet to show hard evidence of improvement.
Unlike most Asian economies, which heavily rely on exports to sustain economic growth, India is driven by domestic demand. But it still suffered a sharp slowdown in late 2008 as job cuts at exporters and outsourcing firms as well as the drying up of investment flows soured consumer and business sentiment.
Dr.B.Mohammad Rafee M.A.M.Phil.,Ph.D. Researcher, Pedagogue Ph:+918951163373,9159615573 Email:basharafee@gmail.com Web:www.mohammad-rafee.blogspot.com
Sunday, May 31, 2009
Govt to talk to banks to cut rates: FM
New Delhi: Concerned over high credit cost and availability of funds, Finance Minister Pranab Mukherjee said he will ask banks for a "benign plan of action" while committing to stimulate economic growth by stepping up public expenditure and speeding up reforms.
"Industry and business have been hurt by the cost of finance and its easy availability... the cost and the speed with which finance can be accessed remains a matter of concern.
"One of the first steps I propose to take is to meet bankers and get them committed to a more benign plan of action," Mukherjee said at his first press conference since taking charge as Finance Minister earlier this week.
Listing out the concerns and constraints being faced by the economy, he said there was no alternative to pushing up growth in tandem with employment for which the government is willing to increase its borrowings.
"Let me say unambiguously that we are committed to restoring growth and employment and that would not have been possible without increased spending funded by incremental borrowing. This would need to be further continued in 2009-10.
"However, we are equally committed to the process of fiscal consolidation over a period of say 2 to 3 years," he said exuding confidence that early return to recent growth performance would help attain fiscal prudence.
"Industry and business have been hurt by the cost of finance and its easy availability... the cost and the speed with which finance can be accessed remains a matter of concern.
"One of the first steps I propose to take is to meet bankers and get them committed to a more benign plan of action," Mukherjee said at his first press conference since taking charge as Finance Minister earlier this week.
Listing out the concerns and constraints being faced by the economy, he said there was no alternative to pushing up growth in tandem with employment for which the government is willing to increase its borrowings.
"Let me say unambiguously that we are committed to restoring growth and employment and that would not have been possible without increased spending funded by incremental borrowing. This would need to be further continued in 2009-10.
"However, we are equally committed to the process of fiscal consolidation over a period of say 2 to 3 years," he said exuding confidence that early return to recent growth performance would help attain fiscal prudence.
World economy may shrink 2.6% in ’09: UN
New York: The United Nations has forecast the world economy to shrink 2.6 per cent in 2009, downgrading the already-pessimistic estimate made five months ago.
"The world economy is expected to shrink by 2.6 per cent in 2009, according to the pessimistic scenario of the forecast presented in January," the world body said in a mid-year report by UN Department of Economic and Social Affairs (DESA).
In January, the UN had forecast that the world economy would shrink 0.5 per cent this year.
Rob Vos, Director of DESA's Development Policy and Analysis Division, told a news conference on Wednesday that "We are less sanguine than some observers about possible green shoots emerging. If they are there they don't give much sign of being spring time. It is still very wintry landscape."
With its increasing impact both in scope and depth worldwide, the global financial crisis poses a significant threat to world economic and social development, including the fulfilment of the Millennium Development Goals and other internationally agreed development goals, according to DESA.
The report predicted that with a coordinated, development-oriented policy scenario, the world economy would recover to an annual growth of 4-5 per cent in 2010-2015, led by a robust growth of 7 per cent a year in developing nations.
"This is in contrast to the uncoordinated scenario in which developing countries would recover at only half that rate," DESA said.
Although the crisis originated in developed countries, "it is now evident that developing countries are being hit disproportionately hard through capital reversals, rising borrowing costs, collapsing world trade and commodity prices, and subsiding remittance flows", it stated.
During the first quarter of 2009, world trade dwindled at a "dramatic" annual rate of more than 40 per cent, with the deepest impact felt by the exporting countries of Asia.
Growth in Africa's gross domestic product is expected to slow to 0.9 per cent, down from 4.9 per cent in 2008. South American economies may shrink almost one per cent on an average in 2009, while Mexico and the Central America are projected to fall by more than 4 per cent.
The report estimated that 73-105 million more people will remain poor or fall into poverty in comparison with a situation in which pre-crisis growth would have continued.
"Most of this setback will be felt in East and South Asia, with between 56 and 80 million people likely to be affected, of whom about half are in India. The crisis could...New York: keep 12 to 16 million more people in poverty in Africa... 4 million in Latin America and the Caribbean," it said.
The report added at present the stimulus is unbalanced.
"Eighty per cent of the stimulus is concentrated in developed countries, while most developing countries lack the fiscal space to provide social protection and counteract the consequences of the crisis. In a more balanced global response, about USD 500 billion in additional development finance would be made available for countercyclical responses by developing countries."...
"The world economy is expected to shrink by 2.6 per cent in 2009, according to the pessimistic scenario of the forecast presented in January," the world body said in a mid-year report by UN Department of Economic and Social Affairs (DESA).
In January, the UN had forecast that the world economy would shrink 0.5 per cent this year.
Rob Vos, Director of DESA's Development Policy and Analysis Division, told a news conference on Wednesday that "We are less sanguine than some observers about possible green shoots emerging. If they are there they don't give much sign of being spring time. It is still very wintry landscape."
With its increasing impact both in scope and depth worldwide, the global financial crisis poses a significant threat to world economic and social development, including the fulfilment of the Millennium Development Goals and other internationally agreed development goals, according to DESA.
The report predicted that with a coordinated, development-oriented policy scenario, the world economy would recover to an annual growth of 4-5 per cent in 2010-2015, led by a robust growth of 7 per cent a year in developing nations.
"This is in contrast to the uncoordinated scenario in which developing countries would recover at only half that rate," DESA said.
Although the crisis originated in developed countries, "it is now evident that developing countries are being hit disproportionately hard through capital reversals, rising borrowing costs, collapsing world trade and commodity prices, and subsiding remittance flows", it stated.
During the first quarter of 2009, world trade dwindled at a "dramatic" annual rate of more than 40 per cent, with the deepest impact felt by the exporting countries of Asia.
Growth in Africa's gross domestic product is expected to slow to 0.9 per cent, down from 4.9 per cent in 2008. South American economies may shrink almost one per cent on an average in 2009, while Mexico and the Central America are projected to fall by more than 4 per cent.
The report estimated that 73-105 million more people will remain poor or fall into poverty in comparison with a situation in which pre-crisis growth would have continued.
"Most of this setback will be felt in East and South Asia, with between 56 and 80 million people likely to be affected, of whom about half are in India. The crisis could...New York: keep 12 to 16 million more people in poverty in Africa... 4 million in Latin America and the Caribbean," it said.
The report added at present the stimulus is unbalanced.
"Eighty per cent of the stimulus is concentrated in developed countries, while most developing countries lack the fiscal space to provide social protection and counteract the consequences of the crisis. In a more balanced global response, about USD 500 billion in additional development finance would be made available for countercyclical responses by developing countries."...
UBS raises India's GDP forecast to 6.2 pct
Mumbai: India's economy may grow 6.2 per cent in 2009/10, UBS said in a report, revising its estimate from 5.2 per cent, citing lower interest rates, smaller excess capacity and a fall in risk aversion.
The central bank has forecast growth at about 6 per cent.
"The main reason for this is a more resilient consumer," UBS economist Philip Wyatt said in a research note.
"A full-blooded recovery in fixed investment would need stronger profits, whereas consumption can benefit earlier from lower interest rates once confidence recovers," he wrote.
Industrial output could pick up in a limited way to 5-8 per cent in the fiscal year ending in March 2010, from 2.4 per cent in the past year but move decisively above 10 per cent in 2010/11, UBS said.
Exports may remain slow for most of 2009/10 and said the global economic growth would act as a "speed limit" for a return to 9 per cent gross domestic product (GDP), UBS said.
"We see 2009/10 as a stabilisation year for real GDP, followed by a return closer to potential growth of 7-8 per cent growth in 2010 as global economic activity picks up," it said.
The central bank projected GDP growth to be 6.5-6.7 per cent for the 2008/09 fiscal year. In the previous three fiscal years, the economy expanded at or more than 9 per cent.
The central bank has forecast growth at about 6 per cent.
"The main reason for this is a more resilient consumer," UBS economist Philip Wyatt said in a research note.
"A full-blooded recovery in fixed investment would need stronger profits, whereas consumption can benefit earlier from lower interest rates once confidence recovers," he wrote.
Industrial output could pick up in a limited way to 5-8 per cent in the fiscal year ending in March 2010, from 2.4 per cent in the past year but move decisively above 10 per cent in 2010/11, UBS said.
Exports may remain slow for most of 2009/10 and said the global economic growth would act as a "speed limit" for a return to 9 per cent gross domestic product (GDP), UBS said.
"We see 2009/10 as a stabilisation year for real GDP, followed by a return closer to potential growth of 7-8 per cent growth in 2010 as global economic activity picks up," it said.
The central bank projected GDP growth to be 6.5-6.7 per cent for the 2008/09 fiscal year. In the previous three fiscal years, the economy expanded at or more than 9 per cent.
Economists see recession end in '09: Survey
Washington: More than 90 per cent of economists predict the recession will end this year, although the recovery is likely to be bumpy.
That assessment came from leading forecasters in a survey by the National Association for Business Economics to be released Wednesday. It is generally in line with the outlook from Federal Reserve Chairman Ben Bernanke and his colleagues.
About 74 per cent of the forecasters expect the recession - which started in December 2007 and is the longest since World War II - to end in the third quarter. Another 19 per cent predict the turning point will come in the final three months of this year, and the remaining 7 per cent believe the recession will end in the first quarter of 2010.
"While the overall tone remains soft, there are emerging signs that the economy is stabilizing," said NABE president Chris Varvares, head of Macroeconomic Advisers. "The economic recovery is likely to be considerably more moderate than those typically experienced following steep declines."
One of the major forces that plunged the economy into a recession was the financial crisis that struck with force last fall and was the worst since the 1930s. Economists say recoveries after financial crises tend to be slower.
Against that backdrop, unemployment will climb this year even if the economy is rebounding, the NABE forecasters predict. Companies won't be in a rush to hire until they feel certain any recovery is firmly rooted.
For all of this year, the forecasters said the unemployment rate should average 9.1 per cent, a big jump from 5.8 per cent last year and up from its current quarter-century peak of 8.9 per cent. If NABE forecasters are right, it would be the highest since a 9.6 per cent rate in 1983, when the country was struggling to recover from a severe recession.
Some forecasters thought the unemployment rate could rise as high as 10.7 per cent in the second quarter of next year. The NABE outlook from 45 economists was conducted April 27 through May 11.
General Motors Corp., chemical company DuPont and Clear Channel Communications Inc. were among the companies announcing mass layoffs during the survey period.
With joblessness rising, consumers - major shapers of overall economic activity - likely will stay cautious, making for a tepid turnaround. And given the big bite the recession has taken out of household wealth, notably the values of homes and investment portfolios, consumers probably will stay subdued for...Washington: some time.
Seventy-one per cent of the forecasters believe a more-thrifty consumer will be around for at least the next five years. Americans' personal savings rate edged up to 4.2 per cent in March, marking the first time in a decade that the savings rate has been above 4 per cent for three straight months.
Even as the NABE forecasters believe the country will emerge from recession later this year, they also predict the economy's overall performance in 2009 will be rotten.
The economy should contract by 2.8 per cent this year, the forecasters said in updated projections. That's worse than the 1.9 per cent drop they forecast in late February. If they are right, it would mark the worst annual contraction since 1946, when economic activity fell by 11 per cent.
Still, the forecasters believe the worst is already behind the country in terms of lost economic activity.
The economy shrank at a 6.1 per cent annualized pace in the first three months of this year, on top of a 6.3 per cent decline in the final three months of last year, the worst six-month performance in 50 years.
For the current April-June quarter, the NABE forecasters believe the economy will shrink at a pace of 1.8 per cent. After that, the economy should start growing again - at a 0.7 per cent pace in the third quarter and a 1.8 per cent pace in the fourth quarter.
NABE's growth projections for the third and fourth quarters are lower than those made in late February. The downgrade was based on the expectation that businesses, whose profits and sales were hit hard by the recession, will remain wary of ramping up investment.
President Barack Obama's $787 billion stimulus package of increased government spending and tax cuts, near-zero interest rates ordered by the Fed and government programs to get banks to lend more freely again all factor into the expected economic revival. Many forecasters also predict that home sales will hit bottom by the middle of this year, another stabilizing factor for the economy. A report on sales of previously owned homes will be released Wednesday, and data on new-home sales is due Thursday.
Next year, the economy should grow by 2 per cent, the forecasters said. That was lower than the 2.4 per cent growth projected in February.
With a lethargic recovery expected, forecasters predict the Fed won't start boosting interest rates until the second quarter of next year.
Because Fed...Washington: policymakers expect credit and financial problems to ebb slowly, "the pace of the recovery would continue to be damped in 2010," they said last week..
That assessment came from leading forecasters in a survey by the National Association for Business Economics to be released Wednesday. It is generally in line with the outlook from Federal Reserve Chairman Ben Bernanke and his colleagues.
About 74 per cent of the forecasters expect the recession - which started in December 2007 and is the longest since World War II - to end in the third quarter. Another 19 per cent predict the turning point will come in the final three months of this year, and the remaining 7 per cent believe the recession will end in the first quarter of 2010.
"While the overall tone remains soft, there are emerging signs that the economy is stabilizing," said NABE president Chris Varvares, head of Macroeconomic Advisers. "The economic recovery is likely to be considerably more moderate than those typically experienced following steep declines."
One of the major forces that plunged the economy into a recession was the financial crisis that struck with force last fall and was the worst since the 1930s. Economists say recoveries after financial crises tend to be slower.
Against that backdrop, unemployment will climb this year even if the economy is rebounding, the NABE forecasters predict. Companies won't be in a rush to hire until they feel certain any recovery is firmly rooted.
For all of this year, the forecasters said the unemployment rate should average 9.1 per cent, a big jump from 5.8 per cent last year and up from its current quarter-century peak of 8.9 per cent. If NABE forecasters are right, it would be the highest since a 9.6 per cent rate in 1983, when the country was struggling to recover from a severe recession.
Some forecasters thought the unemployment rate could rise as high as 10.7 per cent in the second quarter of next year. The NABE outlook from 45 economists was conducted April 27 through May 11.
General Motors Corp., chemical company DuPont and Clear Channel Communications Inc. were among the companies announcing mass layoffs during the survey period.
With joblessness rising, consumers - major shapers of overall economic activity - likely will stay cautious, making for a tepid turnaround. And given the big bite the recession has taken out of household wealth, notably the values of homes and investment portfolios, consumers probably will stay subdued for...Washington: some time.
Seventy-one per cent of the forecasters believe a more-thrifty consumer will be around for at least the next five years. Americans' personal savings rate edged up to 4.2 per cent in March, marking the first time in a decade that the savings rate has been above 4 per cent for three straight months.
Even as the NABE forecasters believe the country will emerge from recession later this year, they also predict the economy's overall performance in 2009 will be rotten.
The economy should contract by 2.8 per cent this year, the forecasters said in updated projections. That's worse than the 1.9 per cent drop they forecast in late February. If they are right, it would mark the worst annual contraction since 1946, when economic activity fell by 11 per cent.
Still, the forecasters believe the worst is already behind the country in terms of lost economic activity.
The economy shrank at a 6.1 per cent annualized pace in the first three months of this year, on top of a 6.3 per cent decline in the final three months of last year, the worst six-month performance in 50 years.
For the current April-June quarter, the NABE forecasters believe the economy will shrink at a pace of 1.8 per cent. After that, the economy should start growing again - at a 0.7 per cent pace in the third quarter and a 1.8 per cent pace in the fourth quarter.
NABE's growth projections for the third and fourth quarters are lower than those made in late February. The downgrade was based on the expectation that businesses, whose profits and sales were hit hard by the recession, will remain wary of ramping up investment.
President Barack Obama's $787 billion stimulus package of increased government spending and tax cuts, near-zero interest rates ordered by the Fed and government programs to get banks to lend more freely again all factor into the expected economic revival. Many forecasters also predict that home sales will hit bottom by the middle of this year, another stabilizing factor for the economy. A report on sales of previously owned homes will be released Wednesday, and data on new-home sales is due Thursday.
Next year, the economy should grow by 2 per cent, the forecasters said. That was lower than the 2.4 per cent growth projected in February.
With a lethargic recovery expected, forecasters predict the Fed won't start boosting interest rates until the second quarter of next year.
Because Fed...Washington: policymakers expect credit and financial problems to ebb slowly, "the pace of the recovery would continue to be damped in 2010," they said last week..
Priority is growth, fiscal prudence: FM
New Delhi: Maintaining India's growth momentum and fiscal prudence will be priorities of the government following its election win, Finance Minister Pranab Mukherjee told a television channel on Tuesday.
The government will release its 2009/10 budget in the first week of July, and it would address some of the problems faced by the economy, he said.
He said the goal of the government would be to put the economy on the growth path, even though there were no signs of recovery in the United States and Europe.
The government's earlier stimulus packages have started working, he said.
Exports :New Delhi: India's exports may have fallen by a third in April as a world-wide slump continued to hurt overseas demand for local goods, the head of exporters' body said on Wednesday.
Job losses in the export sector may have reached 5 million in the year that ended on March 31, said A. Sakthivel, president of the Federation of Indian Export Organisations (FIEO), adding that the body will seek government relief in the forthcoming budget.
"Indian exports are estimated to be down by 33 per cent in April mainly due to the continuing impact of global recession," he said in an interview.
"Exports can grow by 15 per cent this fiscal if the government provides necessary support in the budget," he added.
Earlier this month, government data showed India's exports declined by a third in March, its sixth straight fall, dragging down the full year's growth to a paltry 3.4 per cent at $168.7 billion during 2008/09.
Exports contribute close to a fifth of India's gross domestic produce, and its contraction have impacted factory output and the overall economic growth.
Since October, the central bank has aggressively lowered its lending rate by 425 basis points while government offered interest subsidies to help ease the pain of exporting firms.
But Sakthivel said FIEO would soon meet finance ministry officials and seek more incentives for exporters.
"We expect relief in income tax, more interest subsidy on bank loans and enhanced input tax credit in the budget," he said.
On Tuesday, India's new Finance Minister Pranab Mukherjee said the government was considering more relief measures for sectors like textiles, leather, gems and jewellery.
Policy makers fear worsening of economic situation in the United States and Europe may continue to slash India's exports.
The World Bank has forecast global trade to shrink 6.1 per cent this year as a result of the crisis while World Trade Organisation forecast a 9 per cent contraction.
The government will release its 2009/10 budget in the first week of July, and it would address some of the problems faced by the economy, he said.
He said the goal of the government would be to put the economy on the growth path, even though there were no signs of recovery in the United States and Europe.
The government's earlier stimulus packages have started working, he said.
Exports :New Delhi: India's exports may have fallen by a third in April as a world-wide slump continued to hurt overseas demand for local goods, the head of exporters' body said on Wednesday.
Job losses in the export sector may have reached 5 million in the year that ended on March 31, said A. Sakthivel, president of the Federation of Indian Export Organisations (FIEO), adding that the body will seek government relief in the forthcoming budget.
"Indian exports are estimated to be down by 33 per cent in April mainly due to the continuing impact of global recession," he said in an interview.
"Exports can grow by 15 per cent this fiscal if the government provides necessary support in the budget," he added.
Earlier this month, government data showed India's exports declined by a third in March, its sixth straight fall, dragging down the full year's growth to a paltry 3.4 per cent at $168.7 billion during 2008/09.
Exports contribute close to a fifth of India's gross domestic produce, and its contraction have impacted factory output and the overall economic growth.
Since October, the central bank has aggressively lowered its lending rate by 425 basis points while government offered interest subsidies to help ease the pain of exporting firms.
But Sakthivel said FIEO would soon meet finance ministry officials and seek more incentives for exporters.
"We expect relief in income tax, more interest subsidy on bank loans and enhanced input tax credit in the budget," he said.
On Tuesday, India's new Finance Minister Pranab Mukherjee said the government was considering more relief measures for sectors like textiles, leather, gems and jewellery.
Policy makers fear worsening of economic situation in the United States and Europe may continue to slash India's exports.
The World Bank has forecast global trade to shrink 6.1 per cent this year as a result of the crisis while World Trade Organisation forecast a 9 per cent contraction.
Govt to present budget in first week of July: FM
New Delhi: Finance Minister Pranab Mukherjee said that budget for 2009-10 that will spell out policies and priorities of the new UPA government will be presented in the first week of July.
"I would not like to have a second batch of vote on account... the Budget will be presented in the first week of July," he told a television channel.
The minister further said that the issues and concerns about the economy raised by him in the interim budget, especially with regard to the sectors which are hit badly by the global financial crisis, would be addressed in the budget.
The government is required to get the budget passed by July 31, the date when the vote on account approved by Parliament allowing government to withdraw money from the Consolidated Fund of India expires.
In case the budget is not approved before July 31, the government will have to seek another vote on account.
"I would not like to have a second batch of vote on account... the Budget will be presented in the first week of July," he told a television channel.
The minister further said that the issues and concerns about the economy raised by him in the interim budget, especially with regard to the sectors which are hit badly by the global financial crisis, would be addressed in the budget.
The government is required to get the budget passed by July 31, the date when the vote on account approved by Parliament allowing government to withdraw money from the Consolidated Fund of India expires.
In case the budget is not approved before July 31, the government will have to seek another vote on account.
Capital inflows likely to turn positive in Q4: CMIE
Mumbai: Capital flows into the country are likely to turn positive in the March quarter of FY 09, an economic think-tank forecast in its report.
"We expect the capital account of the balance of payments (BoP) of the country to experience a net flow of USD 3,740 million in the March 2009 quarter as against an outflow of USD 3,683 million in the December 2008 quarter," Centre for
Monitoring Indian Economy (CMIE) said in its monthly report on the state of the Indian economy.
Along with a higher net flow, the report also projected that the foreign direct investment into the country would continue to surge, with Q4 of the last fiscal expected to record an inflow of USD 3,900 million on this account.
According to the report, the official BoP data for the December quarter of the last fiscal showed an outflow of USD 3.7-billion.
It is for the first time in a decade that the capital account of the country's BoPs showed an outflow on net basis, it said.
"However, we believe that this phenomenon will not repeat itself in the March 2009 quarter," CMIE said in its report.
"We expect the capital account of the balance of payments (BoP) of the country to experience a net flow of USD 3,740 million in the March 2009 quarter as against an outflow of USD 3,683 million in the December 2008 quarter," Centre for
Monitoring Indian Economy (CMIE) said in its monthly report on the state of the Indian economy.
Along with a higher net flow, the report also projected that the foreign direct investment into the country would continue to surge, with Q4 of the last fiscal expected to record an inflow of USD 3,900 million on this account.
According to the report, the official BoP data for the December quarter of the last fiscal showed an outflow of USD 3.7-billion.
It is for the first time in a decade that the capital account of the country's BoPs showed an outflow on net basis, it said.
"However, we believe that this phenomenon will not repeat itself in the March 2009 quarter," CMIE said in its report.
Maintaining growth key challenge: RBI
Mumbai: The key challenge facing India's new ruling coalition is to maintain a strong growth rate, which has suffered in the face of the global financial crisis, the Reserve Bank of India’s deputy governor said on Monday.
"We have to observe that uncertainty in the world is still very high and we cannot ignore the fact that we are more integrated to the world than we used to be," Rakesh Mohan told reporters.
The RBI expects the economy to expand about 6 per cent in the current fiscal year ending March 31, 2010, lower from the previous year's estimate of 6.5-6.7 per cent.
In the previous three fiscal years, Asia's third largest economy grew at 9 per cent or more.
Mohan said while India's economy would continue to do well, expectations have to be realistic as the country cannot decouple with the rest of the world.
Merchandise exports contribute less than 15 per cent of India's gross domestic product, reflecting the fact that the country is far less dependent on external demand for spurring growth than other Asian countries.
Still, the economy has been hit by the crisis much more than expected due to large services exports and increased integration of the financial sector, analysts say.
The government and the RBI have taken aggressive steps to revive the economy after the collapse of Lehman Brothers last year hurt sentiment across the world and depressed demand.
"We have to observe that uncertainty in the world is still very high and we cannot ignore the fact that we are more integrated to the world than we used to be," Rakesh Mohan told reporters.
The RBI expects the economy to expand about 6 per cent in the current fiscal year ending March 31, 2010, lower from the previous year's estimate of 6.5-6.7 per cent.
In the previous three fiscal years, Asia's third largest economy grew at 9 per cent or more.
Mohan said while India's economy would continue to do well, expectations have to be realistic as the country cannot decouple with the rest of the world.
Merchandise exports contribute less than 15 per cent of India's gross domestic product, reflecting the fact that the country is far less dependent on external demand for spurring growth than other Asian countries.
Still, the economy has been hit by the crisis much more than expected due to large services exports and increased integration of the financial sector, analysts say.
The government and the RBI have taken aggressive steps to revive the economy after the collapse of Lehman Brothers last year hurt sentiment across the world and depressed demand.
Finmin Pranab vows to protect economy
New Delhi: India's new finance minister Pranab Mukherjee said on Saturday he would take steps to protect the economy from the adverse impacts of the global slump and promised to return the country to a high growth path.
Growth is expected to slow to less than 7 percent in the year to April 2009 from rates of 9 percent or more in the previous three years. It is seen slowing further to about 6 percent in 2009/10.
"Major economic issues have to be addressed, and various efforts will be made to insulate the economy from the adverse impact of the financial meltdown," Mukherjee told reporters outside his house after he was appointed finance minister.
He gave no details but he said in February spending might have to be increased to shield the economy from a global slump and stem job losses.
India's Congress-led coalition government led by Prime Minister Manmohan Singh was sworn in on Friday after winning a decisive mandate in a geneRal Election this month.
Besides Mukherjee, Singh named Somanahalli Mallaiah Krishna, another Congress party stalwart, to be the new foreign minister at a time of mounting instability in neighbouring Pakistan.
The Congress-led coalition has a stronger Parliamentary majority than the previous administration, meaning the government could last its full five-year term and focus on policy issues without the pressures of a fragile coalition.
Unfettered by its former leftist allies, Congress is likely to push reforms such as raising the foreign investment limit in insurance and opening up the pension sector to spur growth in Asia's third-largest economy.
Growth is expected to slow to less than 7 percent in the year to April 2009 from rates of 9 percent or more in the previous three years. It is seen slowing further to about 6 percent in 2009/10.
"Major economic issues have to be addressed, and various efforts will be made to insulate the economy from the adverse impact of the financial meltdown," Mukherjee told reporters outside his house after he was appointed finance minister.
He gave no details but he said in February spending might have to be increased to shield the economy from a global slump and stem job losses.
India's Congress-led coalition government led by Prime Minister Manmohan Singh was sworn in on Friday after winning a decisive mandate in a geneRal Election this month.
Besides Mukherjee, Singh named Somanahalli Mallaiah Krishna, another Congress party stalwart, to be the new foreign minister at a time of mounting instability in neighbouring Pakistan.
The Congress-led coalition has a stronger Parliamentary majority than the previous administration, meaning the government could last its full five-year term and focus on policy issues without the pressures of a fragile coalition.
Unfettered by its former leftist allies, Congress is likely to push reforms such as raising the foreign investment limit in insurance and opening up the pension sector to spur growth in Asia's third-largest economy.
FDI policy change a continuous process: Nath
New Delhi: Senior Cabinet Minister Kamal Nath said "new things would be thrown up" as the Government fine-tunes the foreign direct investment policy.
"This is a continuous process and new things would be thrown up as we move on," Nath said in New Delhi.
Earlier, Nath, who held the Commerce and Industry portfolio in the previous government, said the Centre would be ready to remove procedural bottlenecks for foreign investors.
However, allowing FDI in multi-brand retail would not be on the immediate agenda, he had said.
India attracted about USD 25 billion for April-February 2008-09. The Government had announced changes in the FDI policy in February which led to confusion among investors.
With these changes, FDI caps and entry rules became meaningless as investors could enter sectors like retail through circuitous routes.
On the resumption of talks between Bharti group and MTN for acquisition of a controlling stake in the South African telecom major, Nath said the business cooperation would help improve engagement between India and Africa.
"We have been devoting South-South cooperation and that has been the cornerstone of the policy." he said.
"This is a continuous process and new things would be thrown up as we move on," Nath said in New Delhi.
Earlier, Nath, who held the Commerce and Industry portfolio in the previous government, said the Centre would be ready to remove procedural bottlenecks for foreign investors.
However, allowing FDI in multi-brand retail would not be on the immediate agenda, he had said.
India attracted about USD 25 billion for April-February 2008-09. The Government had announced changes in the FDI policy in February which led to confusion among investors.
With these changes, FDI caps and entry rules became meaningless as investors could enter sectors like retail through circuitous routes.
On the resumption of talks between Bharti group and MTN for acquisition of a controlling stake in the South African telecom major, Nath said the business cooperation would help improve engagement between India and Africa.
"We have been devoting South-South cooperation and that has been the cornerstone of the policy." he said.
Thursday, May 28, 2009
scholarships to Economics Graduates
FORD FOUNDATION POST-DOCTORAL RESEARCH FELLOWSHIPS IN ECONOMICS
These Overseas Post-doctoral Research Fellowships in Economics (Maximum non-extendable duration of 12 months) are tenable at prominent foreign universities or economics research institutions and are intended to strengthen research and teaching capabilities in India in Macroeconomics, International Economics, Public Economic and provide opportunities for Indian scholars to improve their skills in these areas through course work. Proposals of both empirical and theoretical research in these and also other wothwhile areas such as environmental economic and economics of finance will be considered.
Eligibility: Indian citizens permanently employed in Indian universities, colleges or research institutions, with a Ph.D. in economics and below 40 years of age as on the last date prescribed for receipt of completed applications, are eligible for these research fellowships. Other things being equal, preference is given to candidates teaching in university or college. However, no one who has already been abroad for professional research/ training for a period of more than four months is considered for the fellowship. Only persons holding permanent positions are eligible to apply. The fellowships are admisistered in India by the National Institute of Public Finance and Policy.
Value: Scholars who are awarded fellowships may be given, on their return home, financial assistance to follow up research which they would be taking up during the tenure of their fellowships.
Last date: August .
Contact
The Associate (Admin & Fin), National Institute of Public Finance and Policy, 18/2 Satsang Vihar Marg, Special Institutional Area, New Delhi 110 017.
INSTITUTE FOR SOCIAL AND ECONOMIC CHANGE
Ph.D. Fellowships
Field of Study: Humanities (Economics and related studies)
Eligibility: 55% marks in the Master's Degree.
Age limit: Below 28 years (for SC/ST candidates 33 years). A pass in NET/JRF Is essential for ICSSR fellowships.
Value:3000-5000/- per month plus contingent grants.
Selection: Based on an entrance test and interview.
Commencement: January.
Last Date: September.
Note: Fellowships will be available to the selected candidates from the Indian Council of Social Science Research (ICSSR), R.B.I, and ISEC. One Fellowship is available for an employed scholar below 35 years for two years.
Contact
Institute of Social and Economic Change Nagarabhavi, Bangalore.
POPULATION COUNCIL
Fellowships in the Social Sciences
Field of Study: Population Studies (including Biostatistics and Demography) or Population Studies combined with a social Science discipline e.g. Anthropology, Economics, Geography, Public Health and Sociology
Number: 20
Duration: One year
Level: Research, Specialist training (Diploma, Certificate or Master's degree programme).
Eligibility: Fifteen awards for those who have made considerable progress towards PhD or equivalent degree (i.e. who are at the dissertation-writing stage), approximately three to four awards to candidates seeking funding for postdoctoral training or research. Applicants from developing countries who have a firm commitment to return to their home country on completion of study are given strong preference.
Value: Monthly stipend, tuition and related fees, transportation expenses and health insurance. Some research-related costs may also be awarded.
Last date: 2 January of the year of award
Contact
The Manager, Fellowship Programme, The Population Council, One Dag Hammarskjold Plaza, New York NY 10017, USA.
THE QUEEN'S UNIVERSITY OF BELFAST
Visiting Fellowships -Arts
Subject: Arts-based areas Arts, Social Science, Law, Education, Theology, Business, Finance.
Level: Postdoctoral research
Duration: One year.
Eligibility: Doctoral degree or research of an equivalent standard. Those who are presently doing research in the University or have done research within the past five years are not eligible.
Value: £ 17,007 per annum, depending on qualification and experience.
Last date: 1 December of the previous year of award.
Contact
The Secretary to Academic Council, The Queen's University of Belfast, Belfast BT7 INN, Northern Ireland.
WORLD BANK ECONOMIC DEVELOPMENT INSTITUTE ROBERTS MCNAMARA
Fellowship Programme
Field of Study: Economics
Duration: One year
Eligibility: Postgraduates in the subject
Age: Less than 35 years.
Contact
Robert S McNamara Fellowships Program, Room M4010,
World Bank Headquarters 1818 H Street. NW, Washington DC 20433 USA .
These Overseas Post-doctoral Research Fellowships in Economics (Maximum non-extendable duration of 12 months) are tenable at prominent foreign universities or economics research institutions and are intended to strengthen research and teaching capabilities in India in Macroeconomics, International Economics, Public Economic and provide opportunities for Indian scholars to improve their skills in these areas through course work. Proposals of both empirical and theoretical research in these and also other wothwhile areas such as environmental economic and economics of finance will be considered.
Eligibility: Indian citizens permanently employed in Indian universities, colleges or research institutions, with a Ph.D. in economics and below 40 years of age as on the last date prescribed for receipt of completed applications, are eligible for these research fellowships. Other things being equal, preference is given to candidates teaching in university or college. However, no one who has already been abroad for professional research/ training for a period of more than four months is considered for the fellowship. Only persons holding permanent positions are eligible to apply. The fellowships are admisistered in India by the National Institute of Public Finance and Policy.
Value: Scholars who are awarded fellowships may be given, on their return home, financial assistance to follow up research which they would be taking up during the tenure of their fellowships.
Last date: August .
Contact
The Associate (Admin & Fin), National Institute of Public Finance and Policy, 18/2 Satsang Vihar Marg, Special Institutional Area, New Delhi 110 017.
INSTITUTE FOR SOCIAL AND ECONOMIC CHANGE
Ph.D. Fellowships
Field of Study: Humanities (Economics and related studies)
Eligibility: 55% marks in the Master's Degree.
Age limit: Below 28 years (for SC/ST candidates 33 years). A pass in NET/JRF Is essential for ICSSR fellowships.
Value:3000-5000/- per month plus contingent grants.
Selection: Based on an entrance test and interview.
Commencement: January.
Last Date: September.
Note: Fellowships will be available to the selected candidates from the Indian Council of Social Science Research (ICSSR), R.B.I, and ISEC. One Fellowship is available for an employed scholar below 35 years for two years.
Contact
Institute of Social and Economic Change Nagarabhavi, Bangalore.
POPULATION COUNCIL
Fellowships in the Social Sciences
Field of Study: Population Studies (including Biostatistics and Demography) or Population Studies combined with a social Science discipline e.g. Anthropology, Economics, Geography, Public Health and Sociology
Number: 20
Duration: One year
Level: Research, Specialist training (Diploma, Certificate or Master's degree programme).
Eligibility: Fifteen awards for those who have made considerable progress towards PhD or equivalent degree (i.e. who are at the dissertation-writing stage), approximately three to four awards to candidates seeking funding for postdoctoral training or research. Applicants from developing countries who have a firm commitment to return to their home country on completion of study are given strong preference.
Value: Monthly stipend, tuition and related fees, transportation expenses and health insurance. Some research-related costs may also be awarded.
Last date: 2 January of the year of award
Contact
The Manager, Fellowship Programme, The Population Council, One Dag Hammarskjold Plaza, New York NY 10017, USA.
THE QUEEN'S UNIVERSITY OF BELFAST
Visiting Fellowships -Arts
Subject: Arts-based areas Arts, Social Science, Law, Education, Theology, Business, Finance.
Level: Postdoctoral research
Duration: One year.
Eligibility: Doctoral degree or research of an equivalent standard. Those who are presently doing research in the University or have done research within the past five years are not eligible.
Value: £ 17,007 per annum, depending on qualification and experience.
Last date: 1 December of the previous year of award.
Contact
The Secretary to Academic Council, The Queen's University of Belfast, Belfast BT7 INN, Northern Ireland.
WORLD BANK ECONOMIC DEVELOPMENT INSTITUTE ROBERTS MCNAMARA
Fellowship Programme
Field of Study: Economics
Duration: One year
Eligibility: Postgraduates in the subject
Age: Less than 35 years.
Contact
Robert S McNamara Fellowships Program, Room M4010,
World Bank Headquarters 1818 H Street. NW, Washington DC 20433 USA .
Sunday, May 24, 2009
Mamata to head Railway ministry
New Delhi: Mamata Banerjee returns to the cash-rich Railway ministry after a gap of ten years brimming with new ideas to help the unorganised sector, vendors and students but faces numerous challenges of modernisation, security and fallout of global recession.
The second time Railway Minister also has a tough job at hand of ensuring flow of funds for ambitious projects, implementation of some of which have been delayed but given the character that personifies her, mandarins at Rail Board are convinced she can deliver the goods.
Virtually written off by poll pundits five years back, the wheel has turned full circle for the Trinamool Congress chief.
From just one seat in Lok Sabha poll five years ago to the portals of power in Delhi with 19 seats, Banerjee has not only silenced her critics but has also charted a new course in her political graph.
She has promised "economic freedom" for marginalized sections to travel by rail and modernise the rail network with a human face.
Monthly passes for unorganised labour, vendors, domestic workers and landless labourers besides students would be her priority in the ministry. "It is a social obligation we have to fulfill for the humanity. We will try to give economy freedom to these sections for train travel," Banerjee told reporters hours after she was given the railway portfolio.
The second time Railway Minister also has a tough job at hand of ensuring flow of funds for ambitious projects, implementation of some of which have been delayed but given the character that personifies her, mandarins at Rail Board are convinced she can deliver the goods.
Virtually written off by poll pundits five years back, the wheel has turned full circle for the Trinamool Congress chief.
From just one seat in Lok Sabha poll five years ago to the portals of power in Delhi with 19 seats, Banerjee has not only silenced her critics but has also charted a new course in her political graph.
She has promised "economic freedom" for marginalized sections to travel by rail and modernise the rail network with a human face.
Monthly passes for unorganised labour, vendors, domestic workers and landless labourers besides students would be her priority in the ministry. "It is a social obligation we have to fulfill for the humanity. We will try to give economy freedom to these sections for train travel," Banerjee told reporters hours after she was given the railway portfolio.
Gold maintains its upward trend
New Delhi: Rising for the fourth straight day, gold prices inched up by Rs 30 to close at Rs 14,720 per ten gram in the bullion market here on sustained buying in tandem with a firming global trend.
Marketmen said sustained buying by stockists and jewellery fabricators sparked by firming global trend mainly led to rise in gold prices.
Buying activity in gold continued to pick up as the metal prices surged to 2-month high in overseas markets on weakening dollar.
The dollar-denominated precious metal, which normally moves in opposite direction to the dollar, shot up to 963.10 dollar an ounce on the New York Exchange last night.
The dollar fell against euro and other leading currencies in forex and touched its lowest level since December 29.
Standard gold and ornaments retained their rising streak for the fourth day adding another Rs 30 each to Rs 14,720 and Rs 14,570 per ten gram respectively. Sovereign remained flat at Rs 12,400 per piece of eight gram in limited deals.
In line with a firming general trend, silver ready rose by Rs 200 to Rs 22,500 per kg and weekly-based delivery by Rs 230 to Rs 22,680 per kg respectively. Silver coins also gained Rs 100 to Rs 29,100 for buying and Rs 29,200 for selling of 100 pieces.
Marketmen said sustained buying by stockists and jewellery fabricators sparked by firming global trend mainly led to rise in gold prices.
Buying activity in gold continued to pick up as the metal prices surged to 2-month high in overseas markets on weakening dollar.
The dollar-denominated precious metal, which normally moves in opposite direction to the dollar, shot up to 963.10 dollar an ounce on the New York Exchange last night.
The dollar fell against euro and other leading currencies in forex and touched its lowest level since December 29.
Standard gold and ornaments retained their rising streak for the fourth day adding another Rs 30 each to Rs 14,720 and Rs 14,570 per ten gram respectively. Sovereign remained flat at Rs 12,400 per piece of eight gram in limited deals.
In line with a firming general trend, silver ready rose by Rs 200 to Rs 22,500 per kg and weekly-based delivery by Rs 230 to Rs 22,680 per kg respectively. Silver coins also gained Rs 100 to Rs 29,100 for buying and Rs 29,200 for selling of 100 pieces.
Economy may recover late this year: RBI
Mumbai: Reserve Bank said Indian economy is likely to recover from the impact of the financial meltdown later this year as stability gets restored in world markets.
"As the monetary and fiscal steps takes way through, and the calm restored in the global markets, we can see an economic turnaround later this year," Reserve Bank Governor D Subbarao said at a financial management summit in Mumbai.
India's less dependence on merchandise exports and its smooth functioning financial system, comfortable forex reserves and modest inflation will help for a swift recovery from the slow down, Subbarao said.
Cautioning the policy makers about "challenges" in the domestic economy to manage the recovery, Subbarao said, the "unwinding" of measures taken during crisis time will be less painful for India than in other countries.
"While risks from global markets persist, there are challenges in the domestic market (as to) how we manage the recovery in the next six-to-nine-months," Subbarao said.
The central bank was confident of achieving a six per cent real GDP growth in 2009-10 as it had projected earlier.
Subbarao said that if global factors favour an early recovery in the domestic market and the already-taken stimulus measures yield results, then it could lessen the need for further stimulus measures.
"As the monetary and fiscal steps takes way through, and the calm restored in the global markets, we can see an economic turnaround later this year," Reserve Bank Governor D Subbarao said at a financial management summit in Mumbai.
India's less dependence on merchandise exports and its smooth functioning financial system, comfortable forex reserves and modest inflation will help for a swift recovery from the slow down, Subbarao said.
Cautioning the policy makers about "challenges" in the domestic economy to manage the recovery, Subbarao said, the "unwinding" of measures taken during crisis time will be less painful for India than in other countries.
"While risks from global markets persist, there are challenges in the domestic market (as to) how we manage the recovery in the next six-to-nine-months," Subbarao said.
The central bank was confident of achieving a six per cent real GDP growth in 2009-10 as it had projected earlier.
Subbarao said that if global factors favour an early recovery in the domestic market and the already-taken stimulus measures yield results, then it could lessen the need for further stimulus measures.
Friday, May 22, 2009
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The International Economy
International economics is growing in importance as a field of study because of the rapid integration of international economic markets. More and more, businesses, consumers and governments realize that their lives are increasingly affected, not just by what goes on in their own town, state or country, but by what is happening around the world. Consumers can buy goods and services from all over the world in their local shops. Local businesses must compete with these foreign products. However, these same businesses also have new opportunities to expand their markets by selling in a multitude of other countries. The advance of telecommunications is rapidly reducing the cost of providing services internationally and the internet will assuredly change the nature of many products and services as it expands markets even further than today.
Markets have been going global, and everyone knows it.
One simple way to see this is to look at the growth of exports in the world during the past 50+ years. The following figure shows overall annual exports measured in billions of US dollars from 1948 to 2005. Recognizing that one country's exports are another country's imports, one can see the exponential growth in trade during the past 50 years.
However, rapid growth in the value of exports does not necessarily indicate that trade is becoming more important. Instead, one needs to look at the share of traded goods in relation to the size of the world economy. The adjoining figure shows world exports as a percentage of world GDP for the years 1970 to 2005. It shows a steady increase in trade as a share of the size of the world economy. World exports grew from just over 10% of GDP in 1970 to almost 30% by 2005. Thus, trade is not only rising rapidly in absolute terms, it is becoming relatively more important too.
One other indicator of world interconnectedness can be seen in changes in the amount of foreign direct investment (FDI). FDI is foreign ownership of productive activities and thus is another way in which foreign economic influence can affect a country. The adjoining figure shows the stock, or the sum total value, of FDI around the world taken as a percentage of world GDP between 1980 and 2004. It gives an indication of the importance of foreign ownership and influence around the world. As can be seen, the share of FDI has grown dramatically from around 5% of world GDP in 1980 to over 20% of GDP just 25 years later.
The growth of international trade and investment has been stimulated partly by the steady decline of trade barriers since the Great Depression of the 1930s. In the post World War II era the General Agreement on Tariffs and Trade, or GATT, was an agreement that prompted regular negotiations among a growing body of members to reduce tariffs (import taxes) on imported goods on a reciprocal basis. During each of these regular negotiations, (eight of these rounds were completed between 1948 and 1994), countries promised to reduce their tariffs on imports in exchange for concessions, or tariffs reductions, by other GATT members. When the most recent completed round was finished in 1994, the member countries succeeded in extending the agreement to include liberalization promises in a much larger sphere of influence. Now countries would not only lower tariffs on goods trade, but would begin to liberalize agriculture and services market. They would eliminate the many quota systems - like the multi-fiber agreement in clothing - that had sprouted up in previous decades. And they would agree to adhere to certain minimum standards to protect intellectual property rights such as patents, trademarks and copyrights. The WTO was created to manage this system of new agreements, to provide a forum for regular discussion of trade matters and to implement a well-defined process for settling trade disputes that might arise among countries.
As of 2006, 149 countries were members of the WTO "trade liberalization club" and many more countries were still negotiating entry. As the club grows to include more members, and if the latest round of trade liberalization discussion called the Doha round concludes with an agreement, world markets will become increasingly open to trade and investment. [Note: the Doha round of discussions was begun in 2001 and remains uncompleted as of 2006]
Another international push for trade liberalization has come in the form of regional free trade agreements. Over 200 regional trade agreements around the world have been notified, or announced, to the WTO. Many countries have negotiated these with neighboring countries or major trading partners, to promote even faster trade liberalization. In part these have arisen because of the slow, plodding pace of liberalization under the GATT/WTO. In part it has occurred because countries have wished to promote interdependence and connectedness with important economic or strategic trade partners. In any case, the phenomenon serves to open international markets even further than achieved in the WTO.
These changes in economic patterns and the trend towards ever increasing openness are an important aspect of the more exhaustive phenomenon known as globalization. Globalization more formally refers to the economic, social, cultural or environmental changes that tend to interconnect peoples around the world. Since the economic aspects of globalization are certainly one of the most pervasive of these changes, it is increasingly important to understand the implications of a global marketplace on consumers, businesses and governments. That is where the study of international economics begins. What is International Economics?
International economics is a field of study which assesses the implications of international trade in goods and services and international investment.
There are two broad sub-fields within international economics: international trade and international finance.
International trade is a field in economics that applies microeconomic models to help understand the international economy. Its content includes the same tools that are introduced in microeconomics courses, including supply and demand analysis, firm and consumer behavior, perfectly competitive, oligopolistic and monopolistic market structures, and the effects of market distortions. The typical course describes economic relationships between consumers, firms, factor owners, and the government.
The objective of an international trade course is to understand the effects on individuals and businesses because of international trade itself, because of changes in trade policies and due to changes in other economic conditions. The course will develop arguments that support a free trade policy as well as arguments that support various types of protectionist policies. By the end of the course, students should better understand the centuries-old controversy between free trade and protectionism.
International finance applies macroeconomic models to help understand the international economy. Its focus is on the interrelationships between aggregate economic variables such as GDP, unemployment rates, inflation rates, trade balances, exchange rates, interest rates, etc. This field expands macroeconomics to include international exchanges. Its focus is on the significance of trade imbalances, the determinants of exchange rates and the aggregate effects of government monetary and fiscal policies. Among the most important issues addressed are the pros and cons of fixed versus floating exchange rate systems. [Note: A separate collection of web materials on international finance is available at The International Finance Webtext]. he course is divided into four distinct sections.
1. International Trade History and Current Issues
* The Terminology of International Trade
* Trade Policy Instruments
* Trade History
* Current Trade Issues
2. The Effects of International Trade
In this section a variety of models are developed which highlight the following five basic reasons that trade occurs.
* differences in technology
* differences in resource endowments
* differences in consumer demand
* existence of economics of scale in production
* existence of government policies
The models address the effects that trade has on the prices of goods and services, the profits of firms, the well-being of consumers, the wages of workers, and the return to other factors of production.
3. The Effects of Trade Policies
These models address the effects that trade policies have on the prices of goods and services, the profits of firms, the well-being of consumers, the wages of workers, the return to other factors of production and the implications for the government budget. This section is divided according to the following assumptions on market structure.
1. Perfect Competition
2. Market Imperfections and Distortions
4. Evaluating the Controversy: Free Trade or Protectionism?
This final section reviews the results of the course by applying them to the premier controversy in international trade: whether to follow a policy of free trade or selected protectionism. Using trade theory results, we develop the arguments that support a policy of free trade and the arguments that support a policy of selected protectionism. We also provide the counter-arguments or caveats that can be used against each of the arguments supporting a particular position. In the end, the section does not reach a definitive conclusion. It is left to the reader to decide which arguments carry the greatest validity. However, the argument does "tilt" in the direction of free trade. Some Trade Terminology
In trade policy discussions terms such as protectionism, free trade, and trade liberalization are used repeatedly. It is worthwhile to define these terms at the beginning. One other term is commonly used in the analysis of trade models, namely national autarky, or just autarky.
Two extreme states or conditions could potentially be created by national government policies. At one extreme, a government could pursue a "laissez faire" policy with respect to trade and thus impose no regulation whatsoever that would impede (or encourage) the free voluntary exchange of goods between nations. We define this condition as free trade. At the other extreme, a government could impose such restrictive regulations on trade as to eliminate all incentive for international trade. We define this condition in which no international trade occurs as national autarky. Autarky represents a state of isolationism. (See Figure).
Probably, a pure state of free trade or autarky has never existed in the real world. All nations impose some form of trade policies. And probably no government has ever had such complete control over economic activity as to eliminate cross-border trade entirely. The real world, instead, consists of countries that fall somewhere between these two extremes. Some countries, such as Singapore and (formerly) Hong Kong, are considered to be highly free trade oriented. Others, like North Korea and Cuba, have long been relatively closed economies and thus are closer to the state of autarky. The rest of the world lies somewhere in between.
Most policy discussions are not about whether governments should pursue one of these two extremes. Instead, discussions focus on which direction a country should move along the trade spectrum. Since every country today is somewhere in the middle, discussions focus on whether policies should move the nation in the direction of free trade or in the direction of autarky.
A movement in the direction of autarky occurs whenever a new trade policy is implemented if it further restricts the free flow of goods and services between countries. Since new trade policies invariably benefit domestic industries by reducing international competition, it is also referred to as protectionism.
A movement in the direction of free trade occurs when regulations on trade are removed. Since the elimination of trade policies will generally increase the amount of international trade, it is referred to as trade liberalization.
Trade policy discussions typically focus, then, on whether the country should increase protectionism or whether it should pursue trade liberalization.
Note that, according to this definition of protectionism, even policies that encourage trade, such as export subsidies, are considered protectionist since they alter the pattern of trade that would have prevailed in the absence of government intervention. This implies that protectionism is much more complex than can be represented along a single dimension (as suggested in the above diagram) since protection can both increase and decrease trade flows. Nevertheless, the representation of the trade spectrum is useful in a number of ways. Valuable Lessons of International Trade Theory
In this section some of the most important lessons in international trade theory are briefly presented. Often, the lessons that are most interesting and valuable are those that teach something either counterintuitive, or at least contrary to popular opinions. A number of these are represented below. Each explanation also provides links to the pages where the arguments are more fully explained. (Note: For most students, following the links initially may be more confusing than helpful. However, once reading through many of the chapters, review of these lessons may help reinforce them).
1. The main support for free trade arises because free trade can raise aggregate economic efficiency.
2. Trade theory shows that some people will suffer losses in free trade.
3. A country may benefit from free trade even if it is less efficient than all other countries in every industry.
4. A domestic firm may lose out in international competition even if it is the lowest-cost producer in the world.
5. Protection may be beneficial for a country.
6.
Although protection can be beneficial, the case for free trade remains strong. The main support for free trade arises because free trade can raise aggregate economic efficiency.
In most models of trade there is an improvement in aggregate efficiency when an economy moves from autarky to free trade. This is the same as an increase in national welfare. Efficiency improvements can be decomposed into two separate effects: production efficiency and consumption efficiency. An improvement in production efficiency means that countries can produce more goods and services with the same amount of resources. In other words, productivity rises for the given resource endowments available for use in production. Consumption efficiency improvements mean, in essence, that consumers will have a more satisfying collection of goods and services from which to choose.
Many economists define the objective of the economics discipline as seeking to identify the best way to use scarce resources to satisfy the needs and wants of the people of a country. Economic efficiency is the term economists use to formally measure this objective. Since free trade tends to promote economic efficiency is so many models, this is one of the strongest arguments in support of free trade.
This result is formally demonstrated in the Ricardian model (see page 40-9b), the Immobile Factor model (see page 70-15), the Specific Factor model, the Heckscher-Ohlin model (see page 60-10), the Demand Difference model, the simple Economies of Scale model, (see page 80-3) and the Monopolistic Competition model (see page 80-5e). It can also be demonstrated when a small country reduces barriers to trade (Consider the analysis on page 90-11 in reverse). Each of these models shows that a country can have a larger national output (i.e. GDP) and superior choices available in consumption as a result of free trade.Lesson 5B
Trade theory shows that some people will suffer losses in free trade.
A common misperception about international economics is that it teaches that everyone will benefit from free trade. One often hears that voluntary exchange, whether between individuals or between nations, must benefit both parties to the transaction, otherwise the transaction would not occur. Although this argument is valid for exchange between two people, the conclusion changes when one considers two countries made up of multiple individuals. (See pages 30-3 through 30-5)
Economists themselves often espouse the position that free trade is beneficial to all, albeit often with the caveat, "... at least in the long run". In the short run, factors of production may be relatively immobile across industries (see pages 70-1 and 70-2). In the presence of immobility, it can be shown that while export industries would gain from free trade, import-competing industries would lose (see page 70-17). Thus, in the short run, resource adjustment problems can explain losses to some groups.
In the long run, once all resources can move to alternative industries, some models (e.g. Ricardian) suggest that everyone in the economy would benefit from free trade (See page 40-9a). Other models (e.g. Heckscher-Ohlin), however, suggest that some groups may continue to lose even in the long run (See page 60-12).
Another complication is that not everyone will make it to the long run. As John Maynard Keynes once remarked, "In the long run, we are all dead." If not dead, it is surely true that some individuals will retire from the labor force before the long run arrives. These individuals may be unfortunate enough to experience only the negative short-run losses to an industry. Upon retirement, their short-term losses may carry over to long-run losses.
Economists will often dismiss concerns about potential losses from trade liberalization by proposing that compensation be provided. The "compensation principle" suggests that some of the gains could be taken away from the winners and given to the losers such that everyone becomes better off as a result of free trade. Although the principle is valid conceptually, effective implementation of it seems unlikely (See discussion on page 60-13). Lesson 5C
A country may benefit from free trade even if it is less efficient than all other countries in every industry.
It makes sense that one firm would be more successful than another firm in a local market if it could produce its output more efficiently - that is at lower cost - than the second firm. If the two firms produce identical products, then the less efficient firm is likely to be driven out of business, generating losses. If we extend this example to an international market then it would also make sense that a more efficient foreign firm would absorb business from a less efficient domestic firm. Finally, suppose all firms in all industries domestically were less efficient than all firms in all industries in the foreign countries. It would then seem logically impossible for any domestic firms to succeed in competition in the international market with the foreign firms. International competition would seemingly have only negative effects upon the less efficient domestic firms and the domestic country.
This seemingly logical conclusion is refuted by the Ricardian model of comparative advantage. Ricardo demonstrated the surprising result that less efficient firms in a country can indeed compete with foreign firms in international markets. In addition, by moving to free trade, the less efficient country can generate welfare improvements for everybody in the country. Free trade can even benefit a country that is less efficient at producing everything (See page 40-9).
What's more, in a free market system, differences in prices and profit-seeking behavior are all that is needed to induce countries to produce and export the "right" goods and trade to their national benefit. (see especially 40-8)Lesson 5D
A domestic firm may lose out in international competition even if it is the lowest-cost producer in the world.
This result is a corollary of Lesson 3. As argued there, it seems reasonable to think that a more efficient firm (i.e., one who produces at lower cost) would drive its less efficient competitors out of business. The same would seem to follow if the two firms are domestic and foreign and the two firms compete in international markets.
However, the Ricardian model of comparative advantage argues that a firm in one country, even if it is the lowest-cost producer in the world, may be forced out of business once the country liberalizes trade with the rest of the world. Even more surprising, despite the decline of this industry, the move to free trade can generate welfare improvements for everybody in the country. In other words, losing production in a highly efficient industry can be consistent with an improvement in welfare for everyone. This contradicts the logic above which would suggest that more efficient (lower-cost) firms should always win (See page 40-9).
It is important to note that this result does not imply that every decline of an efficient industry will improve welfare. Instead, the model merely suggests that one should not jump to the conclusion that the loss of an efficient industry will have negative effects for the country as a whole. Lesson 5E
Protection may be beneficial for a country.
Sometimes the support for free trade by economists seems so strong that one might think there is very little evidence to suggest that protection could be beneficial. In actuality, there are numerous examples in the trade literature which show that protection can be beneficial for a country. The examples fall into two categories.
The first category contains trade policies which raise domestic national welfare, but which reduce aggregate world welfare at the same time. These type of policies are sometimes called "beggar-thy-neighbor" policies since benefits to one country can only arise by forcing losses upon its trading partners. The most notable example is the terms of trade argument for protection which is valid whenever a country is either a large importer or a large exporter of a product in international markets (See page 90-9). A second type of beggar-thy-neighbor policy is strategic trade policy. These policies benefit the domestic country by shifting profit away from either foreign firms or foreign consumers (See pages 100-5).
The second category of beneficial trade policies are those which not only raise domestic welfare but raise world welfare as well. Some trade policies may act to correct prevailing market imperfections or distortions. If the welfare improvement caused by correcting the imperfection or distortion exceeds any additional distortion caused by the trade policy, then world welfare may rise. Many well-known justifications for protection, including the potential for unemployment (see page 100-3), infant industries (see page 100-4), the presence of foreign monopolies, (see page 100-5) and concern for national security (see page 100-7), arise because of the assumption of market imperfections or distortions.
Lesson 5F
Athough protection can be beneficial, the case for free trade remains strong.
The argument in support of free trade is often different depending on whether the speaker is in a political setting or an academic setting. In a political setting, political realities will often force the speaker to emphasize all of the positive aspects of free trade and to hardly even mention any negative aspects. The reason for this is thattalking of the negative effects of free trade will offer up ammunition to one's opponents who may then use these statements against him in future debates.
Since most people will have learned the argument for free trade by listening to political and public policy debates in the news media, they are likely to believe that economics teaches that free trade is good for all people, in all countries, at all times. This belief may lead people, especially those obviously hurt by freer trade policies, to doubt whether economics has anything useful to say about the real world.
However, the academic argument for free trade, is much more sophisticated than the typical political argument. As readers of this site will learn, free trade will cause harm to some (see 5-5b), as well as good to others. Furthermore, certain selected protectionist policies can be good for individuals, and for the nation (see 5-5e), but they will also cause harm as well.
Thus, the choice between free trade and selected protection is not as simple as typically presented by political advocates on one side or the other. In essence, one must choose between the good and bad that comes with free trade, and the good and bad that comes with selected protectionism. In weighing the alternatives, economists often conclude that free trade is the more pragmatic choice, dominating, for a variety of reasons, selected protectionist policies.
This more sophisticated argument for free trade is the topic of Chapter 120. The chapter highlights both the positive and negative aspects of free trade policies and refers readers back via hyperlinks to many sections in the main text to support each argument. Chapter 120 is useful to read at the beginning of your studies to see where the course is going. It is even more important to read at the end, to see how everything covered in the text fits into the argument supporting free trade. During this second reading, the hyperlinks will become especially useful.
International economics is growing in importance as a field of study because of the rapid integration of international economic markets. More and more, businesses, consumers and governments realize that their lives are increasingly affected, not just by what goes on in their own town, state or country, but by what is happening around the world. Consumers can buy goods and services from all over the world in their local shops. Local businesses must compete with these foreign products. However, these same businesses also have new opportunities to expand their markets by selling in a multitude of other countries. The advance of telecommunications is rapidly reducing the cost of providing services internationally and the internet will assuredly change the nature of many products and services as it expands markets even further than today.
Markets have been going global, and everyone knows it.
One simple way to see this is to look at the growth of exports in the world during the past 50+ years. The following figure shows overall annual exports measured in billions of US dollars from 1948 to 2005. Recognizing that one country's exports are another country's imports, one can see the exponential growth in trade during the past 50 years.
However, rapid growth in the value of exports does not necessarily indicate that trade is becoming more important. Instead, one needs to look at the share of traded goods in relation to the size of the world economy. The adjoining figure shows world exports as a percentage of world GDP for the years 1970 to 2005. It shows a steady increase in trade as a share of the size of the world economy. World exports grew from just over 10% of GDP in 1970 to almost 30% by 2005. Thus, trade is not only rising rapidly in absolute terms, it is becoming relatively more important too.
One other indicator of world interconnectedness can be seen in changes in the amount of foreign direct investment (FDI). FDI is foreign ownership of productive activities and thus is another way in which foreign economic influence can affect a country. The adjoining figure shows the stock, or the sum total value, of FDI around the world taken as a percentage of world GDP between 1980 and 2004. It gives an indication of the importance of foreign ownership and influence around the world. As can be seen, the share of FDI has grown dramatically from around 5% of world GDP in 1980 to over 20% of GDP just 25 years later.
The growth of international trade and investment has been stimulated partly by the steady decline of trade barriers since the Great Depression of the 1930s. In the post World War II era the General Agreement on Tariffs and Trade, or GATT, was an agreement that prompted regular negotiations among a growing body of members to reduce tariffs (import taxes) on imported goods on a reciprocal basis. During each of these regular negotiations, (eight of these rounds were completed between 1948 and 1994), countries promised to reduce their tariffs on imports in exchange for concessions, or tariffs reductions, by other GATT members. When the most recent completed round was finished in 1994, the member countries succeeded in extending the agreement to include liberalization promises in a much larger sphere of influence. Now countries would not only lower tariffs on goods trade, but would begin to liberalize agriculture and services market. They would eliminate the many quota systems - like the multi-fiber agreement in clothing - that had sprouted up in previous decades. And they would agree to adhere to certain minimum standards to protect intellectual property rights such as patents, trademarks and copyrights. The WTO was created to manage this system of new agreements, to provide a forum for regular discussion of trade matters and to implement a well-defined process for settling trade disputes that might arise among countries.
As of 2006, 149 countries were members of the WTO "trade liberalization club" and many more countries were still negotiating entry. As the club grows to include more members, and if the latest round of trade liberalization discussion called the Doha round concludes with an agreement, world markets will become increasingly open to trade and investment. [Note: the Doha round of discussions was begun in 2001 and remains uncompleted as of 2006]
Another international push for trade liberalization has come in the form of regional free trade agreements. Over 200 regional trade agreements around the world have been notified, or announced, to the WTO. Many countries have negotiated these with neighboring countries or major trading partners, to promote even faster trade liberalization. In part these have arisen because of the slow, plodding pace of liberalization under the GATT/WTO. In part it has occurred because countries have wished to promote interdependence and connectedness with important economic or strategic trade partners. In any case, the phenomenon serves to open international markets even further than achieved in the WTO.
These changes in economic patterns and the trend towards ever increasing openness are an important aspect of the more exhaustive phenomenon known as globalization. Globalization more formally refers to the economic, social, cultural or environmental changes that tend to interconnect peoples around the world. Since the economic aspects of globalization are certainly one of the most pervasive of these changes, it is increasingly important to understand the implications of a global marketplace on consumers, businesses and governments. That is where the study of international economics begins. What is International Economics?
International economics is a field of study which assesses the implications of international trade in goods and services and international investment.
There are two broad sub-fields within international economics: international trade and international finance.
International trade is a field in economics that applies microeconomic models to help understand the international economy. Its content includes the same tools that are introduced in microeconomics courses, including supply and demand analysis, firm and consumer behavior, perfectly competitive, oligopolistic and monopolistic market structures, and the effects of market distortions. The typical course describes economic relationships between consumers, firms, factor owners, and the government.
The objective of an international trade course is to understand the effects on individuals and businesses because of international trade itself, because of changes in trade policies and due to changes in other economic conditions. The course will develop arguments that support a free trade policy as well as arguments that support various types of protectionist policies. By the end of the course, students should better understand the centuries-old controversy between free trade and protectionism.
International finance applies macroeconomic models to help understand the international economy. Its focus is on the interrelationships between aggregate economic variables such as GDP, unemployment rates, inflation rates, trade balances, exchange rates, interest rates, etc. This field expands macroeconomics to include international exchanges. Its focus is on the significance of trade imbalances, the determinants of exchange rates and the aggregate effects of government monetary and fiscal policies. Among the most important issues addressed are the pros and cons of fixed versus floating exchange rate systems. [Note: A separate collection of web materials on international finance is available at The International Finance Webtext]. he course is divided into four distinct sections.
1. International Trade History and Current Issues
* The Terminology of International Trade
* Trade Policy Instruments
* Trade History
* Current Trade Issues
2. The Effects of International Trade
In this section a variety of models are developed which highlight the following five basic reasons that trade occurs.
* differences in technology
* differences in resource endowments
* differences in consumer demand
* existence of economics of scale in production
* existence of government policies
The models address the effects that trade has on the prices of goods and services, the profits of firms, the well-being of consumers, the wages of workers, and the return to other factors of production.
3. The Effects of Trade Policies
These models address the effects that trade policies have on the prices of goods and services, the profits of firms, the well-being of consumers, the wages of workers, the return to other factors of production and the implications for the government budget. This section is divided according to the following assumptions on market structure.
1. Perfect Competition
2. Market Imperfections and Distortions
4. Evaluating the Controversy: Free Trade or Protectionism?
This final section reviews the results of the course by applying them to the premier controversy in international trade: whether to follow a policy of free trade or selected protectionism. Using trade theory results, we develop the arguments that support a policy of free trade and the arguments that support a policy of selected protectionism. We also provide the counter-arguments or caveats that can be used against each of the arguments supporting a particular position. In the end, the section does not reach a definitive conclusion. It is left to the reader to decide which arguments carry the greatest validity. However, the argument does "tilt" in the direction of free trade. Some Trade Terminology
In trade policy discussions terms such as protectionism, free trade, and trade liberalization are used repeatedly. It is worthwhile to define these terms at the beginning. One other term is commonly used in the analysis of trade models, namely national autarky, or just autarky.
Two extreme states or conditions could potentially be created by national government policies. At one extreme, a government could pursue a "laissez faire" policy with respect to trade and thus impose no regulation whatsoever that would impede (or encourage) the free voluntary exchange of goods between nations. We define this condition as free trade. At the other extreme, a government could impose such restrictive regulations on trade as to eliminate all incentive for international trade. We define this condition in which no international trade occurs as national autarky. Autarky represents a state of isolationism. (See Figure).
Probably, a pure state of free trade or autarky has never existed in the real world. All nations impose some form of trade policies. And probably no government has ever had such complete control over economic activity as to eliminate cross-border trade entirely. The real world, instead, consists of countries that fall somewhere between these two extremes. Some countries, such as Singapore and (formerly) Hong Kong, are considered to be highly free trade oriented. Others, like North Korea and Cuba, have long been relatively closed economies and thus are closer to the state of autarky. The rest of the world lies somewhere in between.
Most policy discussions are not about whether governments should pursue one of these two extremes. Instead, discussions focus on which direction a country should move along the trade spectrum. Since every country today is somewhere in the middle, discussions focus on whether policies should move the nation in the direction of free trade or in the direction of autarky.
A movement in the direction of autarky occurs whenever a new trade policy is implemented if it further restricts the free flow of goods and services between countries. Since new trade policies invariably benefit domestic industries by reducing international competition, it is also referred to as protectionism.
A movement in the direction of free trade occurs when regulations on trade are removed. Since the elimination of trade policies will generally increase the amount of international trade, it is referred to as trade liberalization.
Trade policy discussions typically focus, then, on whether the country should increase protectionism or whether it should pursue trade liberalization.
Note that, according to this definition of protectionism, even policies that encourage trade, such as export subsidies, are considered protectionist since they alter the pattern of trade that would have prevailed in the absence of government intervention. This implies that protectionism is much more complex than can be represented along a single dimension (as suggested in the above diagram) since protection can both increase and decrease trade flows. Nevertheless, the representation of the trade spectrum is useful in a number of ways. Valuable Lessons of International Trade Theory
In this section some of the most important lessons in international trade theory are briefly presented. Often, the lessons that are most interesting and valuable are those that teach something either counterintuitive, or at least contrary to popular opinions. A number of these are represented below. Each explanation also provides links to the pages where the arguments are more fully explained. (Note: For most students, following the links initially may be more confusing than helpful. However, once reading through many of the chapters, review of these lessons may help reinforce them).
1. The main support for free trade arises because free trade can raise aggregate economic efficiency.
2. Trade theory shows that some people will suffer losses in free trade.
3. A country may benefit from free trade even if it is less efficient than all other countries in every industry.
4. A domestic firm may lose out in international competition even if it is the lowest-cost producer in the world.
5. Protection may be beneficial for a country.
6.
Although protection can be beneficial, the case for free trade remains strong. The main support for free trade arises because free trade can raise aggregate economic efficiency.
In most models of trade there is an improvement in aggregate efficiency when an economy moves from autarky to free trade. This is the same as an increase in national welfare. Efficiency improvements can be decomposed into two separate effects: production efficiency and consumption efficiency. An improvement in production efficiency means that countries can produce more goods and services with the same amount of resources. In other words, productivity rises for the given resource endowments available for use in production. Consumption efficiency improvements mean, in essence, that consumers will have a more satisfying collection of goods and services from which to choose.
Many economists define the objective of the economics discipline as seeking to identify the best way to use scarce resources to satisfy the needs and wants of the people of a country. Economic efficiency is the term economists use to formally measure this objective. Since free trade tends to promote economic efficiency is so many models, this is one of the strongest arguments in support of free trade.
This result is formally demonstrated in the Ricardian model (see page 40-9b), the Immobile Factor model (see page 70-15), the Specific Factor model, the Heckscher-Ohlin model (see page 60-10), the Demand Difference model, the simple Economies of Scale model, (see page 80-3) and the Monopolistic Competition model (see page 80-5e). It can also be demonstrated when a small country reduces barriers to trade (Consider the analysis on page 90-11 in reverse). Each of these models shows that a country can have a larger national output (i.e. GDP) and superior choices available in consumption as a result of free trade.Lesson 5B
Trade theory shows that some people will suffer losses in free trade.
A common misperception about international economics is that it teaches that everyone will benefit from free trade. One often hears that voluntary exchange, whether between individuals or between nations, must benefit both parties to the transaction, otherwise the transaction would not occur. Although this argument is valid for exchange between two people, the conclusion changes when one considers two countries made up of multiple individuals. (See pages 30-3 through 30-5)
Economists themselves often espouse the position that free trade is beneficial to all, albeit often with the caveat, "... at least in the long run". In the short run, factors of production may be relatively immobile across industries (see pages 70-1 and 70-2). In the presence of immobility, it can be shown that while export industries would gain from free trade, import-competing industries would lose (see page 70-17). Thus, in the short run, resource adjustment problems can explain losses to some groups.
In the long run, once all resources can move to alternative industries, some models (e.g. Ricardian) suggest that everyone in the economy would benefit from free trade (See page 40-9a). Other models (e.g. Heckscher-Ohlin), however, suggest that some groups may continue to lose even in the long run (See page 60-12).
Another complication is that not everyone will make it to the long run. As John Maynard Keynes once remarked, "In the long run, we are all dead." If not dead, it is surely true that some individuals will retire from the labor force before the long run arrives. These individuals may be unfortunate enough to experience only the negative short-run losses to an industry. Upon retirement, their short-term losses may carry over to long-run losses.
Economists will often dismiss concerns about potential losses from trade liberalization by proposing that compensation be provided. The "compensation principle" suggests that some of the gains could be taken away from the winners and given to the losers such that everyone becomes better off as a result of free trade. Although the principle is valid conceptually, effective implementation of it seems unlikely (See discussion on page 60-13). Lesson 5C
A country may benefit from free trade even if it is less efficient than all other countries in every industry.
It makes sense that one firm would be more successful than another firm in a local market if it could produce its output more efficiently - that is at lower cost - than the second firm. If the two firms produce identical products, then the less efficient firm is likely to be driven out of business, generating losses. If we extend this example to an international market then it would also make sense that a more efficient foreign firm would absorb business from a less efficient domestic firm. Finally, suppose all firms in all industries domestically were less efficient than all firms in all industries in the foreign countries. It would then seem logically impossible for any domestic firms to succeed in competition in the international market with the foreign firms. International competition would seemingly have only negative effects upon the less efficient domestic firms and the domestic country.
This seemingly logical conclusion is refuted by the Ricardian model of comparative advantage. Ricardo demonstrated the surprising result that less efficient firms in a country can indeed compete with foreign firms in international markets. In addition, by moving to free trade, the less efficient country can generate welfare improvements for everybody in the country. Free trade can even benefit a country that is less efficient at producing everything (See page 40-9).
What's more, in a free market system, differences in prices and profit-seeking behavior are all that is needed to induce countries to produce and export the "right" goods and trade to their national benefit. (see especially 40-8)Lesson 5D
A domestic firm may lose out in international competition even if it is the lowest-cost producer in the world.
This result is a corollary of Lesson 3. As argued there, it seems reasonable to think that a more efficient firm (i.e., one who produces at lower cost) would drive its less efficient competitors out of business. The same would seem to follow if the two firms are domestic and foreign and the two firms compete in international markets.
However, the Ricardian model of comparative advantage argues that a firm in one country, even if it is the lowest-cost producer in the world, may be forced out of business once the country liberalizes trade with the rest of the world. Even more surprising, despite the decline of this industry, the move to free trade can generate welfare improvements for everybody in the country. In other words, losing production in a highly efficient industry can be consistent with an improvement in welfare for everyone. This contradicts the logic above which would suggest that more efficient (lower-cost) firms should always win (See page 40-9).
It is important to note that this result does not imply that every decline of an efficient industry will improve welfare. Instead, the model merely suggests that one should not jump to the conclusion that the loss of an efficient industry will have negative effects for the country as a whole. Lesson 5E
Protection may be beneficial for a country.
Sometimes the support for free trade by economists seems so strong that one might think there is very little evidence to suggest that protection could be beneficial. In actuality, there are numerous examples in the trade literature which show that protection can be beneficial for a country. The examples fall into two categories.
The first category contains trade policies which raise domestic national welfare, but which reduce aggregate world welfare at the same time. These type of policies are sometimes called "beggar-thy-neighbor" policies since benefits to one country can only arise by forcing losses upon its trading partners. The most notable example is the terms of trade argument for protection which is valid whenever a country is either a large importer or a large exporter of a product in international markets (See page 90-9). A second type of beggar-thy-neighbor policy is strategic trade policy. These policies benefit the domestic country by shifting profit away from either foreign firms or foreign consumers (See pages 100-5).
The second category of beneficial trade policies are those which not only raise domestic welfare but raise world welfare as well. Some trade policies may act to correct prevailing market imperfections or distortions. If the welfare improvement caused by correcting the imperfection or distortion exceeds any additional distortion caused by the trade policy, then world welfare may rise. Many well-known justifications for protection, including the potential for unemployment (see page 100-3), infant industries (see page 100-4), the presence of foreign monopolies, (see page 100-5) and concern for national security (see page 100-7), arise because of the assumption of market imperfections or distortions.
Lesson 5F
Athough protection can be beneficial, the case for free trade remains strong.
The argument in support of free trade is often different depending on whether the speaker is in a political setting or an academic setting. In a political setting, political realities will often force the speaker to emphasize all of the positive aspects of free trade and to hardly even mention any negative aspects. The reason for this is thattalking of the negative effects of free trade will offer up ammunition to one's opponents who may then use these statements against him in future debates.
Since most people will have learned the argument for free trade by listening to political and public policy debates in the news media, they are likely to believe that economics teaches that free trade is good for all people, in all countries, at all times. This belief may lead people, especially those obviously hurt by freer trade policies, to doubt whether economics has anything useful to say about the real world.
However, the academic argument for free trade, is much more sophisticated than the typical political argument. As readers of this site will learn, free trade will cause harm to some (see 5-5b), as well as good to others. Furthermore, certain selected protectionist policies can be good for individuals, and for the nation (see 5-5e), but they will also cause harm as well.
Thus, the choice between free trade and selected protection is not as simple as typically presented by political advocates on one side or the other. In essence, one must choose between the good and bad that comes with free trade, and the good and bad that comes with selected protectionism. In weighing the alternatives, economists often conclude that free trade is the more pragmatic choice, dominating, for a variety of reasons, selected protectionist policies.
This more sophisticated argument for free trade is the topic of Chapter 120. The chapter highlights both the positive and negative aspects of free trade policies and refers readers back via hyperlinks to many sections in the main text to support each argument. Chapter 120 is useful to read at the beginning of your studies to see where the course is going. It is even more important to read at the end, to see how everything covered in the text fits into the argument supporting free trade. During this second reading, the hyperlinks will become especially useful.
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he International Economy
International economics is growing in importance as a field of study because of the rapid integration of international economic markets. More and more, businesses, consumers and governments realize that their lives are increasingly affected, not just by what goes on in their own town, state or country, but by what is happening around the world. Consumers can buy goods and services from all over the world in their local shops. Local businesses must compete with these foreign products. However, these same businesses also have new opportunities to expand their markets by selling in a multitude of other countries. The advance of telecommunications is rapidly reducing the cost of providing services internationally and the internet will assuredly change the nature of many products and services as it expands markets even further than today.
Markets have been going global, and everyone knows it.
One simple way to see this is to look at the growth of exports in the world during the past 50+ years. The following figure shows overall annual exports measured in billions of US dollars from 1948 to 2005. Recognizing that one country's exports are another country's imports, one can see the exponential growth in trade during the past 50 years.
However, rapid growth in the value of exports does not necessarily indicate that trade is becoming more important. Instead, one needs to look at the share of traded goods in relation to the size of the world economy. The adjoining figure shows world exports as a percentage of world GDP for the years 1970 to 2005. It shows a steady increase in trade as a share of the size of the world economy. World exports grew from just over 10% of GDP in 1970 to almost 30% by 2005. Thus, trade is not only rising rapidly in absolute terms, it is becoming relatively more important too.
One other indicator of world interconnectedness can be seen in changes in the amount of foreign direct investment (FDI). FDI is foreign ownership of productive activities and thus is another way in which foreign economic influence can affect a country. The adjoining figure shows the stock, or the sum total value, of FDI around the world taken as a percentage of world GDP between 1980 and 2004. It gives an indication of the importance of foreign ownership and influence around the world. As can be seen, the share of FDI has grown dramatically from around 5% of world GDP in 1980 to over 20% of GDP just 25 years later.
The growth of international trade and investment has been stimulated partly by the steady decline of trade barriers since the Great Depression of the 1930s. In the post World War II era the General Agreement on Tariffs and Trade, or GATT, was an agreement that prompted regular negotiations among a growing body of members to reduce tariffs (import taxes) on imported goods on a reciprocal basis. During each of these regular negotiations, (eight of these rounds were completed between 1948 and 1994), countries promised to reduce their tariffs on imports in exchange for concessions, or tariffs reductions, by other GATT members. When the most recent completed round was finished in 1994, the member countries succeeded in extending the agreement to include liberalization promises in a much larger sphere of influence. Now countries would not only lower tariffs on goods trade, but would begin to liberalize agriculture and services market. They would eliminate the many quota systems - like the multi-fiber agreement in clothing - that had sprouted up in previous decades. And they would agree to adhere to certain minimum standards to protect intellectual property rights such as patents, trademarks and copyrights. The WTO was created to manage this system of new agreements, to provide a forum for regular discussion of trade matters and to implement a well-defined process for settling trade disputes that might arise among countries.
As of 2006, 149 countries were members of the WTO "trade liberalization club" and many more countries were still negotiating entry. As the club grows to include more members, and if the latest round of trade liberalization discussion called the Doha round concludes with an agreement, world markets will become increasingly open to trade and investment. [Note: the Doha round of discussions was begun in 2001 and remains uncompleted as of 2006]
Another international push for trade liberalization has come in the form of regional free trade agreements. Over 200 regional trade agreements around the world have been notified, or announced, to the WTO. Many countries have negotiated these with neighboring countries or major trading partners, to promote even faster trade liberalization. In part these have arisen because of the slow, plodding pace of liberalization under the GATT/WTO. In part it has occurred because countries have wished to promote interdependence and connectedness with important economic or strategic trade partners. In any case, the phenomenon serves to open international markets even further than achieved in the WTO.
These changes in economic patterns and the trend towards ever increasing openness are an important aspect of the more exhaustive phenomenon known as globalization. Globalization more formally refers to the economic, social, cultural or environmental changes that tend to interconnect peoples around the world. Since the economic aspects of globalization are certainly one of the most pervasive of these changes, it is increasingly important to understand the implications of a global marketplace on consumers, businesses and governments. That is where the study of international economics begins. What is International Economics?
International economics is a field of study which assesses the implications of international trade in goods and services and international investment.
There are two broad sub-fields within international economics: international trade and international finance.
International trade is a field in economics that applies microeconomic models to help understand the international economy. Its content includes the same tools that are introduced in microeconomics courses, including supply and demand analysis, firm and consumer behavior, perfectly competitive, oligopolistic and monopolistic market structures, and the effects of market distortions. The typical course describes economic relationships between consumers, firms, factor owners, and the government.
The objective of an international trade course is to understand the effects on individuals and businesses because of international trade itself, because of changes in trade policies and due to changes in other economic conditions. The course will develop arguments that support a free trade policy as well as arguments that support various types of protectionist policies. By the end of the course, students should better understand the centuries-old controversy between free trade and protectionism.
International finance applies macroeconomic models to help understand the international economy. Its focus is on the interrelationships between aggregate economic variables such as GDP, unemployment rates, inflation rates, trade balances, exchange rates, interest rates, etc. This field expands macroeconomics to include international exchanges. Its focus is on the significance of trade imbalances, the determinants of exchange rates and the aggregate effects of government monetary and fiscal policies. Among the most important issues addressed are the pros and cons of fixed versus floating exchange rate systems. [Note: A separate collection of web materials on international finance is available at The International Finance Webtext]. he course is divided into four distinct sections.
1. International Trade History and Current Issues
* The Terminology of International Trade
* Trade Policy Instruments
* Trade History
* Current Trade Issues
2. The Effects of International Trade
In this section a variety of models are developed which highlight the following five basic reasons that trade occurs.
* differences in technology
* differences in resource endowments
* differences in consumer demand
* existence of economics of scale in production
* existence of government policies
The models address the effects that trade has on the prices of goods and services, the profits of firms, the well-being of consumers, the wages of workers, and the return to other factors of production.
3. The Effects of Trade Policies
These models address the effects that trade policies have on the prices of goods and services, the profits of firms, the well-being of consumers, the wages of workers, the return to other factors of production and the implications for the government budget. This section is divided according to the following assumptions on market structure.
1. Perfect Competition
2. Market Imperfections and Distortions
4. Evaluating the Controversy: Free Trade or Protectionism?
This final section reviews the results of the course by applying them to the premier controversy in international trade: whether to follow a policy of free trade or selected protectionism. Using trade theory results, we develop the arguments that support a policy of free trade and the arguments that support a policy of selected protectionism. We also provide the counter-arguments or caveats that can be used against each of the arguments supporting a particular position. In the end, the section does not reach a definitive conclusion. It is left to the reader to decide which arguments carry the greatest validity. However, the argument does "tilt" in the direction of free trade. Some Trade Terminology
In trade policy discussions terms such as protectionism, free trade, and trade liberalization are used repeatedly. It is worthwhile to define these terms at the beginning. One other term is commonly used in the analysis of trade models, namely national autarky, or just autarky.
Two extreme states or conditions could potentially be created by national government policies. At one extreme, a government could pursue a "laissez faire" policy with respect to trade and thus impose no regulation whatsoever that would impede (or encourage) the free voluntary exchange of goods between nations. We define this condition as free trade. At the other extreme, a government could impose such restrictive regulations on trade as to eliminate all incentive for international trade. We define this condition in which no international trade occurs as national autarky. Autarky represents a state of isolationism. (See Figure).
Probably, a pure state of free trade or autarky has never existed in the real world. All nations impose some form of trade policies. And probably no government has ever had such complete control over economic activity as to eliminate cross-border trade entirely. The real world, instead, consists of countries that fall somewhere between these two extremes. Some countries, such as Singapore and (formerly) Hong Kong, are considered to be highly free trade oriented. Others, like North Korea and Cuba, have long been relatively closed economies and thus are closer to the state of autarky. The rest of the world lies somewhere in between.
Most policy discussions are not about whether governments should pursue one of these two extremes. Instead, discussions focus on which direction a country should move along the trade spectrum. Since every country today is somewhere in the middle, discussions focus on whether policies should move the nation in the direction of free trade or in the direction of autarky.
A movement in the direction of autarky occurs whenever a new trade policy is implemented if it further restricts the free flow of goods and services between countries. Since new trade policies invariably benefit domestic industries by reducing international competition, it is also referred to as protectionism.
A movement in the direction of free trade occurs when regulations on trade are removed. Since the elimination of trade policies will generally increase the amount of international trade, it is referred to as trade liberalization.
Trade policy discussions typically focus, then, on whether the country should increase protectionism or whether it should pursue trade liberalization.
Note that, according to this definition of protectionism, even policies that encourage trade, such as export subsidies, are considered protectionist since they alter the pattern of trade that would have prevailed in the absence of government intervention. This implies that protectionism is much more complex than can be represented along a single dimension (as suggested in the above diagram) since protection can both increase and decrease trade flows. Nevertheless, the representation of the trade spectrum is useful in a number of ways. Valuable Lessons of International Trade Theory
In this section some of the most important lessons in international trade theory are briefly presented. Often, the lessons that are most interesting and valuable are those that teach something either counterintuitive, or at least contrary to popular opinions. A number of these are represented below. Each explanation also provides links to the pages where the arguments are more fully explained. (Note: For most students, following the links initially may be more confusing than helpful. However, once reading through many of the chapters, review of these lessons may help reinforce them).
1. The main support for free trade arises because free trade can raise aggregate economic efficiency.
2. Trade theory shows that some people will suffer losses in free trade.
3. A country may benefit from free trade even if it is less efficient than all other countries in every industry.
4. A domestic firm may lose out in international competition even if it is the lowest-cost producer in the world.
5. Protection may be beneficial for a country.
6.
Although protection can be beneficial, the case for free trade remains strong. The main support for free trade arises because free trade can raise aggregate economic efficiency.
In most models of trade there is an improvement in aggregate efficiency when an economy moves from autarky to free trade. This is the same as an increase in national welfare. Efficiency improvements can be decomposed into two separate effects: production efficiency and consumption efficiency. An improvement in production efficiency means that countries can produce more goods and services with the same amount of resources. In other words, productivity rises for the given resource endowments available for use in production. Consumption efficiency improvements mean, in essence, that consumers will have a more satisfying collection of goods and services from which to choose.
Many economists define the objective of the economics discipline as seeking to identify the best way to use scarce resources to satisfy the needs and wants of the people of a country. Economic efficiency is the term economists use to formally measure this objective. Since free trade tends to promote economic efficiency is so many models, this is one of the strongest arguments in support of free trade.
This result is formally demonstrated in the Ricardian model (see page 40-9b), the Immobile Factor model (see page 70-15), the Specific Factor model, the Heckscher-Ohlin model (see page 60-10), the Demand Difference model, the simple Economies of Scale model, (see page 80-3) and the Monopolistic Competition model (see page 80-5e). It can also be demonstrated when a small country reduces barriers to trade (Consider the analysis on page 90-11 in reverse). Each of these models shows that a country can have a larger national output (i.e. GDP) and superior choices available in consumption as a result of free trade.Lesson 5B
Trade theory shows that some people will suffer losses in free trade.
A common misperception about international economics is that it teaches that everyone will benefit from free trade. One often hears that voluntary exchange, whether between individuals or between nations, must benefit both parties to the transaction, otherwise the transaction would not occur. Although this argument is valid for exchange between two people, the conclusion changes when one considers two countries made up of multiple individuals. (See pages 30-3 through 30-5)
Economists themselves often espouse the position that free trade is beneficial to all, albeit often with the caveat, "... at least in the long run". In the short run, factors of production may be relatively immobile across industries (see pages 70-1 and 70-2). In the presence of immobility, it can be shown that while export industries would gain from free trade, import-competing industries would lose (see page 70-17). Thus, in the short run, resource adjustment problems can explain losses to some groups.
In the long run, once all resources can move to alternative industries, some models (e.g. Ricardian) suggest that everyone in the economy would benefit from free trade (See page 40-9a). Other models (e.g. Heckscher-Ohlin), however, suggest that some groups may continue to lose even in the long run (See page 60-12).
Another complication is that not everyone will make it to the long run. As John Maynard Keynes once remarked, "In the long run, we are all dead." If not dead, it is surely true that some individuals will retire from the labor force before the long run arrives. These individuals may be unfortunate enough to experience only the negative short-run losses to an industry. Upon retirement, their short-term losses may carry over to long-run losses.
Economists will often dismiss concerns about potential losses from trade liberalization by proposing that compensation be provided. The "compensation principle" suggests that some of the gains could be taken away from the winners and given to the losers such that everyone becomes better off as a result of free trade. Although the principle is valid conceptually, effective implementation of it seems unlikely (See discussion on page 60-13). Lesson 5C
A country may benefit from free trade even if it is less efficient than all other countries in every industry.
It makes sense that one firm would be more successful than another firm in a local market if it could produce its output more efficiently - that is at lower cost - than the second firm. If the two firms produce identical products, then the less efficient firm is likely to be driven out of business, generating losses. If we extend this example to an international market then it would also make sense that a more efficient foreign firm would absorb business from a less efficient domestic firm. Finally, suppose all firms in all industries domestically were less efficient than all firms in all industries in the foreign countries. It would then seem logically impossible for any domestic firms to succeed in competition in the international market with the foreign firms. International competition would seemingly have only negative effects upon the less efficient domestic firms and the domestic country.
This seemingly logical conclusion is refuted by the Ricardian model of comparative advantage. Ricardo demonstrated the surprising result that less efficient firms in a country can indeed compete with foreign firms in international markets. In addition, by moving to free trade, the less efficient country can generate welfare improvements for everybody in the country. Free trade can even benefit a country that is less efficient at producing everything (See page 40-9).
What's more, in a free market system, differences in prices and profit-seeking behavior are all that is needed to induce countries to produce and export the "right" goods and trade to their national benefit. (see especially 40-8)Lesson 5D
A domestic firm may lose out in international competition even if it is the lowest-cost producer in the world.
This result is a corollary of Lesson 3. As argued there, it seems reasonable to think that a more efficient firm (i.e., one who produces at lower cost) would drive its less efficient competitors out of business. The same would seem to follow if the two firms are domestic and foreign and the two firms compete in international markets.
However, the Ricardian model of comparative advantage argues that a firm in one country, even if it is the lowest-cost producer in the world, may be forced out of business once the country liberalizes trade with the rest of the world. Even more surprising, despite the decline of this industry, the move to free trade can generate welfare improvements for everybody in the country. In other words, losing production in a highly efficient industry can be consistent with an improvement in welfare for everyone. This contradicts the logic above which would suggest that more efficient (lower-cost) firms should always win (See page 40-9).
It is important to note that this result does not imply that every decline of an efficient industry will improve welfare. Instead, the model merely suggests that one should not jump to the conclusion that the loss of an efficient industry will have negative effects for the country as a whole. Lesson 5E
Protection may be beneficial for a country.
Sometimes the support for free trade by economists seems so strong that one might think there is very little evidence to suggest that protection could be beneficial. In actuality, there are numerous examples in the trade literature which show that protection can be beneficial for a country. The examples fall into two categories.
The first category contains trade policies which raise domestic national welfare, but which reduce aggregate world welfare at the same time. These type of policies are sometimes called "beggar-thy-neighbor" policies since benefits to one country can only arise by forcing losses upon its trading partners. The most notable example is the terms of trade argument for protection which is valid whenever a country is either a large importer or a large exporter of a product in international markets (See page 90-9). A second type of beggar-thy-neighbor policy is strategic trade policy. These policies benefit the domestic country by shifting profit away from either foreign firms or foreign consumers (See pages 100-5).
The second category of beneficial trade policies are those which not only raise domestic welfare but raise world welfare as well. Some trade policies may act to correct prevailing market imperfections or distortions. If the welfare improvement caused by correcting the imperfection or distortion exceeds any additional distortion caused by the trade policy, then world welfare may rise. Many well-known justifications for protection, including the potential for unemployment (see page 100-3), infant industries (see page 100-4), the presence of foreign monopolies, (see page 100-5) and concern for national security (see page 100-7), arise because of the assumption of market imperfections or distortions.
Lesson 5F
Athough protection can be beneficial, the case for free trade remains strong.
The argument in support of free trade is often different depending on whether the speaker is in a political setting or an academic setting. In a political setting, political realities will often force the speaker to emphasize all of the positive aspects of free trade and to hardly even mention any negative aspects. The reason for this is thattalking of the negative effects of free trade will offer up ammunition to one's opponents who may then use these statements against him in future debates.
Since most people will have learned the argument for free trade by listening to political and public policy debates in the news media, they are likely to believe that economics teaches that free trade is good for all people, in all countries, at all times. This belief may lead people, especially those obviously hurt by freer trade policies, to doubt whether economics has anything useful to say about the real world.
However, the academic argument for free trade, is much more sophisticated than the typical political argument. As readers of this site will learn, free trade will cause harm to some (see 5-5b), as well as good to others. Furthermore, certain selected protectionist policies can be good for individuals, and for the nation (see 5-5e), but they will also cause harm as well.
Thus, the choice between free trade and selected protection is not as simple as typically presented by political advocates on one side or the other. In essence, one must choose between the good and bad that comes with free trade, and the good and bad that comes with selected protectionism. In weighing the alternatives, economists often conclude that free trade is the more pragmatic choice, dominating, for a variety of reasons, selected protectionist policies.
This more sophisticated argument for free trade is the topic of Chapter 120. The chapter highlights both the positive and negative aspects of free trade policies and refers readers back via hyperlinks to many sections in the main text to support each argument. Chapter 120 is useful to read at the beginning of your studies to see where the course is going. It is even more important to read at the end, to see how everything covered in the text fits into the argument supporting free trade. During this second reading, the hyperlinks will become especially useful.
International economics is growing in importance as a field of study because of the rapid integration of international economic markets. More and more, businesses, consumers and governments realize that their lives are increasingly affected, not just by what goes on in their own town, state or country, but by what is happening around the world. Consumers can buy goods and services from all over the world in their local shops. Local businesses must compete with these foreign products. However, these same businesses also have new opportunities to expand their markets by selling in a multitude of other countries. The advance of telecommunications is rapidly reducing the cost of providing services internationally and the internet will assuredly change the nature of many products and services as it expands markets even further than today.
Markets have been going global, and everyone knows it.
One simple way to see this is to look at the growth of exports in the world during the past 50+ years. The following figure shows overall annual exports measured in billions of US dollars from 1948 to 2005. Recognizing that one country's exports are another country's imports, one can see the exponential growth in trade during the past 50 years.
However, rapid growth in the value of exports does not necessarily indicate that trade is becoming more important. Instead, one needs to look at the share of traded goods in relation to the size of the world economy. The adjoining figure shows world exports as a percentage of world GDP for the years 1970 to 2005. It shows a steady increase in trade as a share of the size of the world economy. World exports grew from just over 10% of GDP in 1970 to almost 30% by 2005. Thus, trade is not only rising rapidly in absolute terms, it is becoming relatively more important too.
One other indicator of world interconnectedness can be seen in changes in the amount of foreign direct investment (FDI). FDI is foreign ownership of productive activities and thus is another way in which foreign economic influence can affect a country. The adjoining figure shows the stock, or the sum total value, of FDI around the world taken as a percentage of world GDP between 1980 and 2004. It gives an indication of the importance of foreign ownership and influence around the world. As can be seen, the share of FDI has grown dramatically from around 5% of world GDP in 1980 to over 20% of GDP just 25 years later.
The growth of international trade and investment has been stimulated partly by the steady decline of trade barriers since the Great Depression of the 1930s. In the post World War II era the General Agreement on Tariffs and Trade, or GATT, was an agreement that prompted regular negotiations among a growing body of members to reduce tariffs (import taxes) on imported goods on a reciprocal basis. During each of these regular negotiations, (eight of these rounds were completed between 1948 and 1994), countries promised to reduce their tariffs on imports in exchange for concessions, or tariffs reductions, by other GATT members. When the most recent completed round was finished in 1994, the member countries succeeded in extending the agreement to include liberalization promises in a much larger sphere of influence. Now countries would not only lower tariffs on goods trade, but would begin to liberalize agriculture and services market. They would eliminate the many quota systems - like the multi-fiber agreement in clothing - that had sprouted up in previous decades. And they would agree to adhere to certain minimum standards to protect intellectual property rights such as patents, trademarks and copyrights. The WTO was created to manage this system of new agreements, to provide a forum for regular discussion of trade matters and to implement a well-defined process for settling trade disputes that might arise among countries.
As of 2006, 149 countries were members of the WTO "trade liberalization club" and many more countries were still negotiating entry. As the club grows to include more members, and if the latest round of trade liberalization discussion called the Doha round concludes with an agreement, world markets will become increasingly open to trade and investment. [Note: the Doha round of discussions was begun in 2001 and remains uncompleted as of 2006]
Another international push for trade liberalization has come in the form of regional free trade agreements. Over 200 regional trade agreements around the world have been notified, or announced, to the WTO. Many countries have negotiated these with neighboring countries or major trading partners, to promote even faster trade liberalization. In part these have arisen because of the slow, plodding pace of liberalization under the GATT/WTO. In part it has occurred because countries have wished to promote interdependence and connectedness with important economic or strategic trade partners. In any case, the phenomenon serves to open international markets even further than achieved in the WTO.
These changes in economic patterns and the trend towards ever increasing openness are an important aspect of the more exhaustive phenomenon known as globalization. Globalization more formally refers to the economic, social, cultural or environmental changes that tend to interconnect peoples around the world. Since the economic aspects of globalization are certainly one of the most pervasive of these changes, it is increasingly important to understand the implications of a global marketplace on consumers, businesses and governments. That is where the study of international economics begins. What is International Economics?
International economics is a field of study which assesses the implications of international trade in goods and services and international investment.
There are two broad sub-fields within international economics: international trade and international finance.
International trade is a field in economics that applies microeconomic models to help understand the international economy. Its content includes the same tools that are introduced in microeconomics courses, including supply and demand analysis, firm and consumer behavior, perfectly competitive, oligopolistic and monopolistic market structures, and the effects of market distortions. The typical course describes economic relationships between consumers, firms, factor owners, and the government.
The objective of an international trade course is to understand the effects on individuals and businesses because of international trade itself, because of changes in trade policies and due to changes in other economic conditions. The course will develop arguments that support a free trade policy as well as arguments that support various types of protectionist policies. By the end of the course, students should better understand the centuries-old controversy between free trade and protectionism.
International finance applies macroeconomic models to help understand the international economy. Its focus is on the interrelationships between aggregate economic variables such as GDP, unemployment rates, inflation rates, trade balances, exchange rates, interest rates, etc. This field expands macroeconomics to include international exchanges. Its focus is on the significance of trade imbalances, the determinants of exchange rates and the aggregate effects of government monetary and fiscal policies. Among the most important issues addressed are the pros and cons of fixed versus floating exchange rate systems. [Note: A separate collection of web materials on international finance is available at The International Finance Webtext]. he course is divided into four distinct sections.
1. International Trade History and Current Issues
* The Terminology of International Trade
* Trade Policy Instruments
* Trade History
* Current Trade Issues
2. The Effects of International Trade
In this section a variety of models are developed which highlight the following five basic reasons that trade occurs.
* differences in technology
* differences in resource endowments
* differences in consumer demand
* existence of economics of scale in production
* existence of government policies
The models address the effects that trade has on the prices of goods and services, the profits of firms, the well-being of consumers, the wages of workers, and the return to other factors of production.
3. The Effects of Trade Policies
These models address the effects that trade policies have on the prices of goods and services, the profits of firms, the well-being of consumers, the wages of workers, the return to other factors of production and the implications for the government budget. This section is divided according to the following assumptions on market structure.
1. Perfect Competition
2. Market Imperfections and Distortions
4. Evaluating the Controversy: Free Trade or Protectionism?
This final section reviews the results of the course by applying them to the premier controversy in international trade: whether to follow a policy of free trade or selected protectionism. Using trade theory results, we develop the arguments that support a policy of free trade and the arguments that support a policy of selected protectionism. We also provide the counter-arguments or caveats that can be used against each of the arguments supporting a particular position. In the end, the section does not reach a definitive conclusion. It is left to the reader to decide which arguments carry the greatest validity. However, the argument does "tilt" in the direction of free trade. Some Trade Terminology
In trade policy discussions terms such as protectionism, free trade, and trade liberalization are used repeatedly. It is worthwhile to define these terms at the beginning. One other term is commonly used in the analysis of trade models, namely national autarky, or just autarky.
Two extreme states or conditions could potentially be created by national government policies. At one extreme, a government could pursue a "laissez faire" policy with respect to trade and thus impose no regulation whatsoever that would impede (or encourage) the free voluntary exchange of goods between nations. We define this condition as free trade. At the other extreme, a government could impose such restrictive regulations on trade as to eliminate all incentive for international trade. We define this condition in which no international trade occurs as national autarky. Autarky represents a state of isolationism. (See Figure).
Probably, a pure state of free trade or autarky has never existed in the real world. All nations impose some form of trade policies. And probably no government has ever had such complete control over economic activity as to eliminate cross-border trade entirely. The real world, instead, consists of countries that fall somewhere between these two extremes. Some countries, such as Singapore and (formerly) Hong Kong, are considered to be highly free trade oriented. Others, like North Korea and Cuba, have long been relatively closed economies and thus are closer to the state of autarky. The rest of the world lies somewhere in between.
Most policy discussions are not about whether governments should pursue one of these two extremes. Instead, discussions focus on which direction a country should move along the trade spectrum. Since every country today is somewhere in the middle, discussions focus on whether policies should move the nation in the direction of free trade or in the direction of autarky.
A movement in the direction of autarky occurs whenever a new trade policy is implemented if it further restricts the free flow of goods and services between countries. Since new trade policies invariably benefit domestic industries by reducing international competition, it is also referred to as protectionism.
A movement in the direction of free trade occurs when regulations on trade are removed. Since the elimination of trade policies will generally increase the amount of international trade, it is referred to as trade liberalization.
Trade policy discussions typically focus, then, on whether the country should increase protectionism or whether it should pursue trade liberalization.
Note that, according to this definition of protectionism, even policies that encourage trade, such as export subsidies, are considered protectionist since they alter the pattern of trade that would have prevailed in the absence of government intervention. This implies that protectionism is much more complex than can be represented along a single dimension (as suggested in the above diagram) since protection can both increase and decrease trade flows. Nevertheless, the representation of the trade spectrum is useful in a number of ways. Valuable Lessons of International Trade Theory
In this section some of the most important lessons in international trade theory are briefly presented. Often, the lessons that are most interesting and valuable are those that teach something either counterintuitive, or at least contrary to popular opinions. A number of these are represented below. Each explanation also provides links to the pages where the arguments are more fully explained. (Note: For most students, following the links initially may be more confusing than helpful. However, once reading through many of the chapters, review of these lessons may help reinforce them).
1. The main support for free trade arises because free trade can raise aggregate economic efficiency.
2. Trade theory shows that some people will suffer losses in free trade.
3. A country may benefit from free trade even if it is less efficient than all other countries in every industry.
4. A domestic firm may lose out in international competition even if it is the lowest-cost producer in the world.
5. Protection may be beneficial for a country.
6.
Although protection can be beneficial, the case for free trade remains strong. The main support for free trade arises because free trade can raise aggregate economic efficiency.
In most models of trade there is an improvement in aggregate efficiency when an economy moves from autarky to free trade. This is the same as an increase in national welfare. Efficiency improvements can be decomposed into two separate effects: production efficiency and consumption efficiency. An improvement in production efficiency means that countries can produce more goods and services with the same amount of resources. In other words, productivity rises for the given resource endowments available for use in production. Consumption efficiency improvements mean, in essence, that consumers will have a more satisfying collection of goods and services from which to choose.
Many economists define the objective of the economics discipline as seeking to identify the best way to use scarce resources to satisfy the needs and wants of the people of a country. Economic efficiency is the term economists use to formally measure this objective. Since free trade tends to promote economic efficiency is so many models, this is one of the strongest arguments in support of free trade.
This result is formally demonstrated in the Ricardian model (see page 40-9b), the Immobile Factor model (see page 70-15), the Specific Factor model, the Heckscher-Ohlin model (see page 60-10), the Demand Difference model, the simple Economies of Scale model, (see page 80-3) and the Monopolistic Competition model (see page 80-5e). It can also be demonstrated when a small country reduces barriers to trade (Consider the analysis on page 90-11 in reverse). Each of these models shows that a country can have a larger national output (i.e. GDP) and superior choices available in consumption as a result of free trade.Lesson 5B
Trade theory shows that some people will suffer losses in free trade.
A common misperception about international economics is that it teaches that everyone will benefit from free trade. One often hears that voluntary exchange, whether between individuals or between nations, must benefit both parties to the transaction, otherwise the transaction would not occur. Although this argument is valid for exchange between two people, the conclusion changes when one considers two countries made up of multiple individuals. (See pages 30-3 through 30-5)
Economists themselves often espouse the position that free trade is beneficial to all, albeit often with the caveat, "... at least in the long run". In the short run, factors of production may be relatively immobile across industries (see pages 70-1 and 70-2). In the presence of immobility, it can be shown that while export industries would gain from free trade, import-competing industries would lose (see page 70-17). Thus, in the short run, resource adjustment problems can explain losses to some groups.
In the long run, once all resources can move to alternative industries, some models (e.g. Ricardian) suggest that everyone in the economy would benefit from free trade (See page 40-9a). Other models (e.g. Heckscher-Ohlin), however, suggest that some groups may continue to lose even in the long run (See page 60-12).
Another complication is that not everyone will make it to the long run. As John Maynard Keynes once remarked, "In the long run, we are all dead." If not dead, it is surely true that some individuals will retire from the labor force before the long run arrives. These individuals may be unfortunate enough to experience only the negative short-run losses to an industry. Upon retirement, their short-term losses may carry over to long-run losses.
Economists will often dismiss concerns about potential losses from trade liberalization by proposing that compensation be provided. The "compensation principle" suggests that some of the gains could be taken away from the winners and given to the losers such that everyone becomes better off as a result of free trade. Although the principle is valid conceptually, effective implementation of it seems unlikely (See discussion on page 60-13). Lesson 5C
A country may benefit from free trade even if it is less efficient than all other countries in every industry.
It makes sense that one firm would be more successful than another firm in a local market if it could produce its output more efficiently - that is at lower cost - than the second firm. If the two firms produce identical products, then the less efficient firm is likely to be driven out of business, generating losses. If we extend this example to an international market then it would also make sense that a more efficient foreign firm would absorb business from a less efficient domestic firm. Finally, suppose all firms in all industries domestically were less efficient than all firms in all industries in the foreign countries. It would then seem logically impossible for any domestic firms to succeed in competition in the international market with the foreign firms. International competition would seemingly have only negative effects upon the less efficient domestic firms and the domestic country.
This seemingly logical conclusion is refuted by the Ricardian model of comparative advantage. Ricardo demonstrated the surprising result that less efficient firms in a country can indeed compete with foreign firms in international markets. In addition, by moving to free trade, the less efficient country can generate welfare improvements for everybody in the country. Free trade can even benefit a country that is less efficient at producing everything (See page 40-9).
What's more, in a free market system, differences in prices and profit-seeking behavior are all that is needed to induce countries to produce and export the "right" goods and trade to their national benefit. (see especially 40-8)Lesson 5D
A domestic firm may lose out in international competition even if it is the lowest-cost producer in the world.
This result is a corollary of Lesson 3. As argued there, it seems reasonable to think that a more efficient firm (i.e., one who produces at lower cost) would drive its less efficient competitors out of business. The same would seem to follow if the two firms are domestic and foreign and the two firms compete in international markets.
However, the Ricardian model of comparative advantage argues that a firm in one country, even if it is the lowest-cost producer in the world, may be forced out of business once the country liberalizes trade with the rest of the world. Even more surprising, despite the decline of this industry, the move to free trade can generate welfare improvements for everybody in the country. In other words, losing production in a highly efficient industry can be consistent with an improvement in welfare for everyone. This contradicts the logic above which would suggest that more efficient (lower-cost) firms should always win (See page 40-9).
It is important to note that this result does not imply that every decline of an efficient industry will improve welfare. Instead, the model merely suggests that one should not jump to the conclusion that the loss of an efficient industry will have negative effects for the country as a whole. Lesson 5E
Protection may be beneficial for a country.
Sometimes the support for free trade by economists seems so strong that one might think there is very little evidence to suggest that protection could be beneficial. In actuality, there are numerous examples in the trade literature which show that protection can be beneficial for a country. The examples fall into two categories.
The first category contains trade policies which raise domestic national welfare, but which reduce aggregate world welfare at the same time. These type of policies are sometimes called "beggar-thy-neighbor" policies since benefits to one country can only arise by forcing losses upon its trading partners. The most notable example is the terms of trade argument for protection which is valid whenever a country is either a large importer or a large exporter of a product in international markets (See page 90-9). A second type of beggar-thy-neighbor policy is strategic trade policy. These policies benefit the domestic country by shifting profit away from either foreign firms or foreign consumers (See pages 100-5).
The second category of beneficial trade policies are those which not only raise domestic welfare but raise world welfare as well. Some trade policies may act to correct prevailing market imperfections or distortions. If the welfare improvement caused by correcting the imperfection or distortion exceeds any additional distortion caused by the trade policy, then world welfare may rise. Many well-known justifications for protection, including the potential for unemployment (see page 100-3), infant industries (see page 100-4), the presence of foreign monopolies, (see page 100-5) and concern for national security (see page 100-7), arise because of the assumption of market imperfections or distortions.
Lesson 5F
Athough protection can be beneficial, the case for free trade remains strong.
The argument in support of free trade is often different depending on whether the speaker is in a political setting or an academic setting. In a political setting, political realities will often force the speaker to emphasize all of the positive aspects of free trade and to hardly even mention any negative aspects. The reason for this is thattalking of the negative effects of free trade will offer up ammunition to one's opponents who may then use these statements against him in future debates.
Since most people will have learned the argument for free trade by listening to political and public policy debates in the news media, they are likely to believe that economics teaches that free trade is good for all people, in all countries, at all times. This belief may lead people, especially those obviously hurt by freer trade policies, to doubt whether economics has anything useful to say about the real world.
However, the academic argument for free trade, is much more sophisticated than the typical political argument. As readers of this site will learn, free trade will cause harm to some (see 5-5b), as well as good to others. Furthermore, certain selected protectionist policies can be good for individuals, and for the nation (see 5-5e), but they will also cause harm as well.
Thus, the choice between free trade and selected protection is not as simple as typically presented by political advocates on one side or the other. In essence, one must choose between the good and bad that comes with free trade, and the good and bad that comes with selected protectionism. In weighing the alternatives, economists often conclude that free trade is the more pragmatic choice, dominating, for a variety of reasons, selected protectionist policies.
This more sophisticated argument for free trade is the topic of Chapter 120. The chapter highlights both the positive and negative aspects of free trade policies and refers readers back via hyperlinks to many sections in the main text to support each argument. Chapter 120 is useful to read at the beginning of your studies to see where the course is going. It is even more important to read at the end, to see how everything covered in the text fits into the argument supporting free trade. During this second reading, the hyperlinks will become especially useful.
Mamata likely to settle for Rly ministry, five MoS berths
NEW DELHI: Having arrived in Parliament with a bloc of 20 MPs, including one from Suci tagging on, Mamata Banerjee's Trinamool Congress has
Mamata Banerjee
Mamata Banerjee
settled for a single Cabinet berth, which she will keep for herself. Initially, the offer from Congress negotiators Pranab Mukherjee and Ahmed Patel was for two Cabinet and three minister of state portfolios, according to highly placed sources.
Unless there is a last moment twist, Congress has agreed to Banerjee's demand for the railway ministry, it is learnt.
The offer to Banerjee, who met Sonia Gandhi on Wednesday and was in touch with Patel and Mukherjee over phone through Thursday, was made in two packages. The first offered two Cabinet and three MoS berths while the second package offered one Cabinet and five MoS slots.
Banerjee decided to settle for the second offer since she saw a possibility of accommodating one more MP as minister.
The more important reason, however, is not unknown to those who have followed Banerjee's brand of politics. In a party that she runs single-handedly, she is apprehensive of allowing any other colleague to emerge at par with her or develop their independent relations with the higher-ups.
The probables likely to make it as ministers of state from Trinamool Congress are Saugata Ray, Dinesh Tribedi, Sultan Ahmed, Sisir Adhikari and in all probability, TMC's Rajya Sabha member Mukul Roy. While Sultan Ahmed is the Muslim face of the party, Sudip Bandopadhyay missed the bus as the TMC chief is cut up with him for refusing to be chief whip of the party in Parliament. Gobinda Nashkar, an SC MP, has been made deputy leader of the parliamentary party. Two other members, including Chaudhury Mohan Jatua, are likely to be made chairmen of standing committees that will come the TMC's way.
The ministries she is looking at are those she feels can impact the lives of the poor and the rural populace in West Bengal, with her target being the assembly polls in 2011. With that in mind, Banerjee has given her preferences for health, rural development, urban development, tourism and I&B/culture.
Her idea for not going in for "attractive" ministries is also that there would be less chances of allegations of corruption against her team before assembly polls in Bengal.
Mamata had asked for one seat more than DMK, that is a total of seven ministers including herself, as she got 19 plus one that is 20 members while DMK comes to the House with 18. But now that DMK has decided on outside support to the government, there is pressure on Mamata from her party to get more ministerial berths.
QnA: Should the Congress induct more young MPs in the cabinet?
Should the Congress allot ministerial posts to the new allies or reserve them only for Congress party members?
Mamata Banerjee
Mamata Banerjee
settled for a single Cabinet berth, which she will keep for herself. Initially, the offer from Congress negotiators Pranab Mukherjee and Ahmed Patel was for two Cabinet and three minister of state portfolios, according to highly placed sources.
Unless there is a last moment twist, Congress has agreed to Banerjee's demand for the railway ministry, it is learnt.
The offer to Banerjee, who met Sonia Gandhi on Wednesday and was in touch with Patel and Mukherjee over phone through Thursday, was made in two packages. The first offered two Cabinet and three MoS berths while the second package offered one Cabinet and five MoS slots.
Banerjee decided to settle for the second offer since she saw a possibility of accommodating one more MP as minister.
The more important reason, however, is not unknown to those who have followed Banerjee's brand of politics. In a party that she runs single-handedly, she is apprehensive of allowing any other colleague to emerge at par with her or develop their independent relations with the higher-ups.
The probables likely to make it as ministers of state from Trinamool Congress are Saugata Ray, Dinesh Tribedi, Sultan Ahmed, Sisir Adhikari and in all probability, TMC's Rajya Sabha member Mukul Roy. While Sultan Ahmed is the Muslim face of the party, Sudip Bandopadhyay missed the bus as the TMC chief is cut up with him for refusing to be chief whip of the party in Parliament. Gobinda Nashkar, an SC MP, has been made deputy leader of the parliamentary party. Two other members, including Chaudhury Mohan Jatua, are likely to be made chairmen of standing committees that will come the TMC's way.
The ministries she is looking at are those she feels can impact the lives of the poor and the rural populace in West Bengal, with her target being the assembly polls in 2011. With that in mind, Banerjee has given her preferences for health, rural development, urban development, tourism and I&B/culture.
Her idea for not going in for "attractive" ministries is also that there would be less chances of allegations of corruption against her team before assembly polls in Bengal.
Mamata had asked for one seat more than DMK, that is a total of seven ministers including herself, as she got 19 plus one that is 20 members while DMK comes to the House with 18. But now that DMK has decided on outside support to the government, there is pressure on Mamata from her party to get more ministerial berths.
QnA: Should the Congress induct more young MPs in the cabinet?
Should the Congress allot ministerial posts to the new allies or reserve them only for Congress party members?
Six cabinet ministers are 'non-believers'!
NEW DELHI: Six cabinet ministers of Prime Minister Manmohan Singh's new team are 'non-believers'. These ministers "solemnly affirmed" that they
would bear true faith and allegiance to the Constitution while taking oath today.
The Prime Minister and 13 of his ministers took the oath in the name of God.
This who didn’t, are A K Antony, P Chidambaram, Sushilkumar Shinde, M Veerappa Moily, S Jaipal Reddy and C P Joshi, a first-timer in the cabinet.
The other ministers who took oath in the name of God include Pranab Mukherjee, Sharad Pawar, Mamata Banerjee, Vayalar Ravi, S M Krishna, Ghulam Nabi Azad, Kamal Nath, Meira Kumar, Murli Deora, Kapil Sibal, Ambika Soni, B K Handique and Anand Sharma.
would bear true faith and allegiance to the Constitution while taking oath today.
The Prime Minister and 13 of his ministers took the oath in the name of God.
This who didn’t, are A K Antony, P Chidambaram, Sushilkumar Shinde, M Veerappa Moily, S Jaipal Reddy and C P Joshi, a first-timer in the cabinet.
The other ministers who took oath in the name of God include Pranab Mukherjee, Sharad Pawar, Mamata Banerjee, Vayalar Ravi, S M Krishna, Ghulam Nabi Azad, Kamal Nath, Meira Kumar, Murli Deora, Kapil Sibal, Ambika Soni, B K Handique and Anand Sharma.
Manmohan Singh takes oath as PM for 2nd term
NEW DELHI: Prime Minister Manmohan Singh on Friday took oath along with 19 Cabinet colleagues to begin his second five-year term at the head of a
Manmohan Singh
Manmohan Singh (PTI). Click to see pictures of his cabinet ministers.
More Pictures
multi-party government
in which his Congress party is the overwhelmingly dominant partner after a sweeping win in general elections.
There were four new faces in the first edition of the Union Cabinet that is expected to be followed up by another expansion of the Council of Ministers in the next few days. All the others were in the outgoing Cabinet. All but two were from the Congress party.
Overseen by President Pratibha Patil, Manmohan Singh, 76, was the first to take oath at a simple and brief function at the Rashtrapati Bhavan. This is the first time she has administered the oath of office.
Among the new entrants in the Cabinet were Mamata Banerjee, the Trinamool Congress leader who trounced the Communists in West Bengal, Rajasthan Congress unit president CP Joshi, Congress general secretary M Veerappa Moily, and former Karnataka chief minister S M Krishna.
The portfolios were not announced but speculation centred around two names as the next foreign minister -- Kamal Nath, who has been a successful commerce and industry minister and who led the developing nations' charge in the WTO negotiations; and Krishna, who was in many ways responsible for making Bangalore the country's IT capital.
Pranab Mukherjee, who was external affairs minister in the last Cabinet, is widely tipped to become finance minister, a portfolio he held 25 years ago, while Chidambaram and Antony are likely to retain their respective portfolios of home and defence.
The prime minister's A-team comprises Pranab Mukherjee, Chidambaram, Antony, Krishna, Ghulam Nabi Azad, Sushil Kumar Shinde, Veerappa Moily, S. Jaipal Reddy, Kamal Nath, Vayalar Ravi, Meira Kumar, Murli Deora, Kapil Sibal, Ambika Soni, B.K. Handique, Anand Sharma and Joshi.
Besides Mamata Banerjee, the other non-Congress leader who found Cabinet berth was Nationalist Congress Party (NCP) chief Sharad Pawar.
The oath taking ceremony in the Rashtrapati Bhavan was attended among others by Vice President Hamid Ansari, UPA chairperson Sonia Gandhi and BJP leader L K Advani. Rahul Gandhi and Priyanka Gandhi, former Vice President Bhairon Singh Shekhawat, Lalu Prasad, Ram Vilas Paswan and service chiefs were also present.
Performance, experience and continuity have been the important criteria that have gone into the making of Manmohan Singh's new Cabinet, say party insiders. The Prime Minister has already chalked out a 100-day action plan for his government.
"In the case of Moily and Ghulam Nabi Azad, they served the party well and were also instrumental in notching up impressive victories in key states," said a senior Congress functionary.
The Prime Minister's Office (PMO) said the second round of oath taking will cover include Cabinet ministers, ministers of state with independent charge and ministers of state with representation given to allies.
Anand Sharma, who earlier was a minister of state for external affairs and also held independent charge of the information and broadcasting ministry after Priya Ranjan Dasmunsi was hospitalised with a stroke, was promoted to Cabinet rank.
So was Bijoy Krishna Handique, who is from Assam and was the minister of state for chemicals and fertilisers and parliamentary affairs.
Heavyweight Arjun Singh has been dropped from the Cabinet, and not just because of his poor health. Some of his decisions as human resource development minister have been questioned and he has been accused of sitting over important decisions in the field of higher education, a subject close to the Prime Minister's heart. Arjun Singh is likely to be made a state governor.
Mamata Banerjee is likely to get railways, a portfolio she has held earlier in the Cabinet of Prime Minister Atal Bihari Vajpayee, while Pawar is set to retain his food and agriculture portfolio.
"I am happy that both the Prime Minister and the Congress president have recognised my work and that I discharged my work creditably," said Vayalar Ravi, who held both parliamentary affairs and the overseas Indian affairs ministries.
Joshi, who turned the fortunes around for the Congress in the Lok Sabha elections in Rajasthan by leading the praty to victory in 19 of its 25 seats, admitted he was surprised to get a cabinet berth. "I am humbled and thank the party leadership for reposing faith in me."
After the failure of talks with the DMK on the distribution of ministerial portfolios, crisis managers in the Congress thought it would be best to go ahead with the first round of oath taking where sure-shot Cabinet ministers would be included.
With the DMK insisting on seven ministerial berths - three Cabinet, two ministers of state (MoS) with independent charge and two other MoS - Congress managers decided they would engage in another round of discussions to arrive at a compromise formula.
The DMK is making a bid for key ministries including surface transport, railways, IT and communications and tourism.
"By this weekend we will sort out matters on berth allocation with DMK. And in the next round we also have to include the youth brigade," said a senior official in the Prime Minister's Office.
Those expected to be inducted in the second round include Salman Khurshid, Jairam Ramesh, Girija Vyas, Vilas Muttemwar and National Conference patron Farooq Abdullah.
Manmohan Singh will retain the portfolios he was planning to allocate to DMK nominees till differences with the key ally are sorted out.
Manmohan Singh
Manmohan Singh (PTI). Click to see pictures of his cabinet ministers.
More Pictures
multi-party government
in which his Congress party is the overwhelmingly dominant partner after a sweeping win in general elections.
There were four new faces in the first edition of the Union Cabinet that is expected to be followed up by another expansion of the Council of Ministers in the next few days. All the others were in the outgoing Cabinet. All but two were from the Congress party.
Overseen by President Pratibha Patil, Manmohan Singh, 76, was the first to take oath at a simple and brief function at the Rashtrapati Bhavan. This is the first time she has administered the oath of office.
Among the new entrants in the Cabinet were Mamata Banerjee, the Trinamool Congress leader who trounced the Communists in West Bengal, Rajasthan Congress unit president CP Joshi, Congress general secretary M Veerappa Moily, and former Karnataka chief minister S M Krishna.
The portfolios were not announced but speculation centred around two names as the next foreign minister -- Kamal Nath, who has been a successful commerce and industry minister and who led the developing nations' charge in the WTO negotiations; and Krishna, who was in many ways responsible for making Bangalore the country's IT capital.
Pranab Mukherjee, who was external affairs minister in the last Cabinet, is widely tipped to become finance minister, a portfolio he held 25 years ago, while Chidambaram and Antony are likely to retain their respective portfolios of home and defence.
The prime minister's A-team comprises Pranab Mukherjee, Chidambaram, Antony, Krishna, Ghulam Nabi Azad, Sushil Kumar Shinde, Veerappa Moily, S. Jaipal Reddy, Kamal Nath, Vayalar Ravi, Meira Kumar, Murli Deora, Kapil Sibal, Ambika Soni, B.K. Handique, Anand Sharma and Joshi.
Besides Mamata Banerjee, the other non-Congress leader who found Cabinet berth was Nationalist Congress Party (NCP) chief Sharad Pawar.
The oath taking ceremony in the Rashtrapati Bhavan was attended among others by Vice President Hamid Ansari, UPA chairperson Sonia Gandhi and BJP leader L K Advani. Rahul Gandhi and Priyanka Gandhi, former Vice President Bhairon Singh Shekhawat, Lalu Prasad, Ram Vilas Paswan and service chiefs were also present.
Performance, experience and continuity have been the important criteria that have gone into the making of Manmohan Singh's new Cabinet, say party insiders. The Prime Minister has already chalked out a 100-day action plan for his government.
"In the case of Moily and Ghulam Nabi Azad, they served the party well and were also instrumental in notching up impressive victories in key states," said a senior Congress functionary.
The Prime Minister's Office (PMO) said the second round of oath taking will cover include Cabinet ministers, ministers of state with independent charge and ministers of state with representation given to allies.
Anand Sharma, who earlier was a minister of state for external affairs and also held independent charge of the information and broadcasting ministry after Priya Ranjan Dasmunsi was hospitalised with a stroke, was promoted to Cabinet rank.
So was Bijoy Krishna Handique, who is from Assam and was the minister of state for chemicals and fertilisers and parliamentary affairs.
Heavyweight Arjun Singh has been dropped from the Cabinet, and not just because of his poor health. Some of his decisions as human resource development minister have been questioned and he has been accused of sitting over important decisions in the field of higher education, a subject close to the Prime Minister's heart. Arjun Singh is likely to be made a state governor.
Mamata Banerjee is likely to get railways, a portfolio she has held earlier in the Cabinet of Prime Minister Atal Bihari Vajpayee, while Pawar is set to retain his food and agriculture portfolio.
"I am happy that both the Prime Minister and the Congress president have recognised my work and that I discharged my work creditably," said Vayalar Ravi, who held both parliamentary affairs and the overseas Indian affairs ministries.
Joshi, who turned the fortunes around for the Congress in the Lok Sabha elections in Rajasthan by leading the praty to victory in 19 of its 25 seats, admitted he was surprised to get a cabinet berth. "I am humbled and thank the party leadership for reposing faith in me."
After the failure of talks with the DMK on the distribution of ministerial portfolios, crisis managers in the Congress thought it would be best to go ahead with the first round of oath taking where sure-shot Cabinet ministers would be included.
With the DMK insisting on seven ministerial berths - three Cabinet, two ministers of state (MoS) with independent charge and two other MoS - Congress managers decided they would engage in another round of discussions to arrive at a compromise formula.
The DMK is making a bid for key ministries including surface transport, railways, IT and communications and tourism.
"By this weekend we will sort out matters on berth allocation with DMK. And in the next round we also have to include the youth brigade," said a senior official in the Prime Minister's Office.
Those expected to be inducted in the second round include Salman Khurshid, Jairam Ramesh, Girija Vyas, Vilas Muttemwar and National Conference patron Farooq Abdullah.
Manmohan Singh will retain the portfolios he was planning to allocate to DMK nominees till differences with the key ally are sorted out.
PM's 100-day timeline is our mantra, say new ministers
NEW DELHI: Brimming with confidence, the ministers in the new Union Cabinet, some of whom are Congress heavyweights serving a second straight
term, on Friday spoke of getting down to business quickly to work on the 100-day timeline set by Prime Minister Manmohan Singh.
The ministers said they were not aware of the portfolios they would get but voiced their commitment to provide an "honest, transparent and well meaning leadership" and work on setting targets and goals for various programmes in 100 days.
"The momentum of the government starts from day one and the action plan to be framed by each ministry sets the tone of the government," stressed Kamal Nath, who said he would be "happy" in any portfolio. "I am looking forward to serve again with honesty and purpose," said the former commerce minister.
Kapil Sibal and Ambika Soni, who had looked after Science and Technology and Culture Departments respectively in the outgoing Cabinet, said the strong mandate given to the Congress and the UPA was an opportunity to bear the responsibility of providing good governance.
Possibly sensing that Environment may come under his wing, Sibal spoke of how India is ready to meet challenges posed by global warming and how it was framing sound policies at the national and global level.
Soni said the Manmohan Singh government in its first five-year term fulfilled all "promises" and the roadmap in the first 100 days in its second term will be a sound platform to vigorously push new policies.
term, on Friday spoke of getting down to business quickly to work on the 100-day timeline set by Prime Minister Manmohan Singh.
The ministers said they were not aware of the portfolios they would get but voiced their commitment to provide an "honest, transparent and well meaning leadership" and work on setting targets and goals for various programmes in 100 days.
"The momentum of the government starts from day one and the action plan to be framed by each ministry sets the tone of the government," stressed Kamal Nath, who said he would be "happy" in any portfolio. "I am looking forward to serve again with honesty and purpose," said the former commerce minister.
Kapil Sibal and Ambika Soni, who had looked after Science and Technology and Culture Departments respectively in the outgoing Cabinet, said the strong mandate given to the Congress and the UPA was an opportunity to bear the responsibility of providing good governance.
Possibly sensing that Environment may come under his wing, Sibal spoke of how India is ready to meet challenges posed by global warming and how it was framing sound policies at the national and global level.
Soni said the Manmohan Singh government in its first five-year term fulfilled all "promises" and the roadmap in the first 100 days in its second term will be a sound platform to vigorously push new policies.
Impact of crude oil prices on Indian Economy since 1971-2005 by Mohammad Rafee
Impact of crude oil prices on Indian Economy since 1971-2005 by Mohammad Rafee
In order to produce this one trillion dollar worth of output,
International oil price assumed to affect the domestic prices. However in
Statement of the problem :- international oil price how it affects whole sale price index of India, exchange rage or rupee to dollar, growth rate of India, forex reserves of India, oil and non-oil trade balance.
Objective of the study:-
- To analyse trend in oil price
- To study the relationship between oil prices & inflation, exchange rate of rupee to dollar, growth rate of
- To offer policy suggestions.
Hypothesis’:- * there is no difference between explanatory powers of international oil prices per barrel in dollar & annual percentage change in international oil price variation in explaining the change in the selected macro economic impacting variables.
Methodology:- the study relies exclusively on secondary data, pertaining to international oil price, growth rate of India, exchange rate of India, forex reserves of India, inflation & oil and non-oil trade balance. The data of oil downloaded from forbes.com. Data related to other variables were downloaded from RBI website.
Tools used:- annual percentage change has been calculated to analyse the trend behavior. Multiple linear regression models has been fitted to assess the impact of oil prices on the selected variables.
Limitations:-
- The impact has been assumed with regard to the selected variables alone. So the impact assessment would be partial. Because oil prices can penetrate all the sectors of the economy.
- The public sector oil companies and consumers have shared the burden of oil price increase. Public sector companies, backed by the government support. Ultimate burden shifted to people whole in the form of taxes.
Significance of the study: - Energy is the driver of economic growth. Energy from the oil is the largest source of energy supply. However significance of the oil prices has not been put into through explanation. A study that addresses the nuances of consequences of oil prices hike may guide government of world countries in policy formulation.
Period of study:-
From 1971-72 to 2005 on the study period there was energy crisis in 1973 and in 1979 and a gulf war in 1990. In 1991
About crude oil:-
Crude oil is a naturally occurring liquid composed mostly of hydrogen and carbon. It is believed to have been formed from very small plants & animals that lived in ancient seas and oceans a very long time ago. As these plants and animals die, they sink to the bottom of the sea. When thy mix with mud, sand and clay.
This mixture of mud & organic (once living) material is rich in hydrogen & carbon. Over millions of years this layer of organic rich mud becomes buried thousands of feet deep in the earth.
The temperature of the earth becomes hotter as you go deeper in to the earth. The combination of increasing temperature & pressure on the organic mixture causes change in to crude oil. If the temperature increases further crude oil can be changed in to natural gas.
Crude oil prices:
Inflation firmed up in the second half of 2005 in a no. of economies with a movement in international crude oil prices with oil price reaching record high of us $ 70.88 $ a barrel in august 2005. With that advanced countries like US, UK & European Union experienced inflation at the rate of 4.7, 2.6, and 2.5 respectively.
Crude oil price rose to US $ 70.88 a barrel on august 30, 2005 in the immediate after math of hurricane Katrina. Prices in the subsequent months moderated to below US $ 60 a barrel during November-December 2005. Reflected supply augmenting efforts by the IEA and the OPEC slowing of oil demand growth and a relative warmer weather in the
OPEC:-
Organization of Petroliam exporting countries. Members include
Oil Crisis:-
Price increase of 2004-06 oil price was $ 25 per barrel in sep 2003.but by august 11, 2005 it had rises to over $60 per barrel & a record price of $ 78.40 per barrel on July 14, 2006. Experts attributed spike in prices to a variety of factors, including
Testing of Hypothesis:-
** There is no difference between explanatory powers of international oil prices per barrel in dollar & annual percent change variation in oil price in explaining the change in the selected variables.
In the analysis the relationship between the oil price variation & selected variables has been showing a negative relationship. Therefore the Null hypothesis is rejected.
Findings:-
There is no significant relationship between inflation & oil prices. International oil price behaved more erratically in 1980’s. While inflation was erratic in 1970’s.
Similar behavior is found in case of inflation. The volatility of exchange rate behavior has intensified during the study period. The variance of dollar- rupee exchange rate of 1980’s is higher than 1970’s and in 1990’s.how ever the regression results suggests that international oil prices is not a significant variable in determining the exchange rate of rupee.
Growth rate of
There is seemed to prevail negative relation ship between annual percentages in oil price the growth rate reduced to 0.1 percentages.
Every unit increase in annual percentage change of international oil price can deplete 63 million of forex reserves.
The oil price is not significant variable in explaining the change in non oil trade balance of
The oil trade balance of
Conclusion:-
The study concludes that international oil price does not affect the domestic prices of a country significantly. Similarly the oil prices do not exert a strong influence on the economic growth of
The multiple regression co-efficient of determination R2 in the case of above variables is worked found meager 10 percent of the variation in all the above macro economic impacted variables.
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