MCom I Semester Business Environments Foreign Trade and Economic Growth Study Material Notes

MCom I Semester Business Environments Foreign Trade and Economic Growth Study Material Notes : Importance and Role of Foreign trade in Economic Development Defects of Feign Trade-In Economic Development Exercise Questions Long Answer Questions Short Answer Questions Objectives Questions :

CTET Paper Level 2 Language II Model paper in English

Foreign Trade and Economic Growth

After the Second World War most of the countries became independent. The independent countries planned for rapid economic development. India is one of such countries who adopted planned economic development since 1951. Generally economic development is defined as growth of national per capita incomes of a country. It implies an increases in net national product. But this definition is considered as inadequate and unsatisfactory. In fact, economic growth includes improvements in material welfare, especially for persons with the lowest incomes, eradication of mass poverty with its correlates of illiteracy, disease and early death, changes in the composition of inputs and outputs that generally include shifts in the underlying structure of production away from agricultural towards industrial activities and overall development of human beings.

Most developing countries are poor and their present rate of capital formation is hardly adequate. The low level of capital formation is due both to the weakness of the inducement to invest and to the low propensity to save. In such an economy the low level of per capita income limits the size of the market demand for manufactured output. The socio-economic characteristics of under-developed countries have been summarised as, low aggregate and per capita incomes, limited availability of land, natural and capital resources per head; hence low productivity of labour which explains low earnings of the workers, the meagreness of saving and capital formation, the dependence of the major part of the population on agriculture, poor yield of agriculture, great disparity in the distribution of income and wealth; very unsatisfactory living conditions, great density of population and high rates of population growth; high infant mortality rate, low standard of literacy, inadequate medical facilities, poor health standards and short span of life. The main obstacles in the path of development of underdeveloped countries are lack of technical knowledge, lack of entrepreneurship, lack of industrialisation, vicious circle of poverty, lack of infrastructure, orthodox and traditional social environment, imperfections of market, etc. Most of the countries of Asia and Africa have been at one time or another under an allied rule. The most important cause of poverty in India and its underdevelopment is its subjection to the British rule.

The objective of rapid economic development cannot be achieved without adopting an adequate strategy. It implies the most effective way of utilising the available resources of the country. The main elements in the plan are the pattern of investment, the allocation of investment among the various sectors of the economy, the techniqu monetary policies ar viewed internat development. the techniques of resources mobilisation, appropriate fiscal and y policies and extent of reliance on foreign aid and trade. Many economists a international trade as most beneficial and significant for economic elopment. The world trade had made tremendous contribution to the velopment of less developed countries. Prof. Davis Robertson has remarked. Trade is an engine of growth.”

IMPORTANCE AND ROLE OF FOREIGN TRADE IN ECONOMIC DEVELOPMENT

Trade has the following beneficial effects on the economic development of a country :

1 Stimulation to Industrialisation : If a developing country wants to do the economic development by rapid industrialisation, then it has to import for industrialisation. International trade provides an opportunity for importing capital goods and materials for developement purposes. The import of goods with high growth potential confers immense benefit or the developing countries.

2. Increase in national production : Exports and imports of goods can accelerate the rate of economic development. The underdeveloped countries can produce more of those goods in which they enjoy great advantage. Consequent increase in production, income and employment will lead to increase in demand. Increase in national product is the outcome of increase in foreign trade. Therefore, increase in foreign trade leads to increase in national production, national income and economic development.

3. Increase in employment and income from exports: Gradual increase in exports is the indicator of economic development of the country concerned. When the exports of a country are more than its imports, balance of payments of the country is favourable. More exports increase the national income of the country. Because of increase in income, rate of investment accelerates which in turn leads to increase in employment opportunities.

4. Helpful in capital formation : At the root of capital deficiency is the shortage of savings. The level of per capita income being quite low, most of it is spent in satisfying the bare necessities of life leaving a very low margin of income for capital accumulation. It is said that foreign trade helps to increase capital formation. The capacity to save increases as real income rises through the more efficient resources allocation associated with international trade. Foreign trade also provides stimulus for investment and thus it tends to raise the rate of capital formation.

5. Complete utilisation of resources: Foreign trade adds to the efficiency of production in underdeveloped economies. With the development of trade, use of latest and improved techniques of production become possible in agriculture and industrial fields. All this increases the efficiency in the utilisation of means of production. Similarly, many new industries come into being and some of them are meant for the production of goods for exports only. Efficient use of petroleum resources in Arab countries have become possible only on account of trade. As a result these countries have become richest in the world.

6. Modernisation of industries : Foreign trade makes available, the technology, innovations and latest inventions of developed countries to the underdeveloped countries. Use of new technology helps in reducing the cost of production and the country will have an easy access to the foreign markets as a result income and employment will increase and employment will increase and the process of economic development will accelerate .

7. Development of export related industries : Generally, balance of payments of developing countries is adverse as and eloping countries is adverse as underdeveloped countries lack capital, technical know-how, machinery, raw materials, equipments etc. 1 therefore, to borrow capital from abroad. All these developments tilt the balance of payments against the developing countries. A developing country must build up, of course, an export surplus to pay for constant pouring imports. It has to build up export industries. The exports of developing countries are traditional and limited. These countries may develop export related industries by importing necessary capital goods. In exchange they can export primary goods and mineral resources produced in their countries. The result is that developing countries can step up the pace of their development by engaging directly in productive activates.

8.Importance of education: Foreign trade brings the people of developing countries in contact with the people of developed countries. It has improved the standard of living, education, efficiency, organization, customs etc.. of the developing countries. In this way foreign trade has helped the developing countries in formation of human capital. It is generally maintained that international trade can serve as a vehicle for the dissemination of education and knowledge. A deficiency of knowledge can be a big handicap in the development of a country and this deficiency can be effectively removed through contact with more advanced countries which is made possible only by foreign trade.

9. Control on monopolies : The foreign trade helps an underdeveloped country indirectly by giving birth to healthy competition and checking inefficient monopolies. Healthy competition is essential for the development of the export sector of such economics for checking inefficient exploitative monopolies that are usually established on the grounds of infant industry protection. Protection creates monopolies. When foreign competition is removed, the home manufactures are tempted to combine to reap monopoly profits. Foreign trade encourages countries to have healthy competition in the production of different kinds of goods at lowest cost of production. The home monopoly firms generate lethargy which acts like an opiate. When foreign competition is removed, they do not try to make any improvement and technical progress comes to a stand still.

DEFECTS OF FOREIGN TRADE IN ECONOMIC DEVELOPMENT

Many economists were of the view that international trade had proved to be most beneficial for the developed countries but it had not made any noticable contribtuion for the developemnt of underdeveloped countries. Many eminent economists are of view that economic development of underdeveloped countries has not only slowed down but also is adversely affected, on account of foreign trade. Foreign trade may benefit the economic development of new countries to some extent but it has proved to be a hindrance in case of most of the underdeveloped countries. The following effects of foreign trade have proved to be harmful for the economic development of underdeveloped countries :

1 Wrong distribution of resources: Foreign trade accounts for lopsided development of underdeveloped countries. A small sector of the economies in which export industries have been established has developed, but a large sector remains poor and backward. Thus regional inequality in these countries has increased. Foreign capital led to lopsided pattern of growth in which production of primary products for export was carried on with the aid of substantial investment of foreign capital while the domestic economic development remained far less if not altogether primitive.

2. Losses by competition : Foreign trade encourages home industries to check out side competition and even dumping of foreign goods. Dumping tactics resorted to by advanced countries may harm the development of poor countries.

3. Difficulty in war period : Foreign trade leads to international dependence which proves harmful in times of war. The depression of 1930s became universalised because of the economic interdependence of the entire world brought about by international trade relations.

4. Difficulty of breaking into the world market: The underdeveloped countries have the difficulty to access the world market. The products of underdeveloped countries, due to lack of good techincal knowledge and modern technology, are unable to compete with the products of developed countries. The underdeveloped countries lack in competitive power.

5. Difficulty of trade incentives : The underdeveloped countries have some inherent problems of trade. The developed countries provide various facilities and incentives to the developing countries for the promotion of their trade. The developed countries provide help to the developing countries in the form of financial aid, concessions in duties, etc. but developing countries are not benefitted from their aids and help.

6. Use of harmful things : On account of foreign trade, the demands of the people of the underdeveloped countries get diverted towards the harmful things.

7. Problem of disposing goods : The another reason of the underdevelopment of countries is the misuse of resources owing to market imperfections. It is due to market imperfections that the productive efficiency in these countries is low. The manufacturers and the entrepreneurs are ignorant of the market trends in domestic and world markets. The industrialists and businessmen are blissfully ignorant of modern techniques and thus feel terribly handicapped in the economic race. Inadequacy of transport system has also contributed to economic backwardness.

8. Increase in corruption : There is a growing tendency of the developed countries to interfere directly or indirectly in the internal and other affairs of the developing countries. They have opened the doors of neo-imperialism and exploitation. To capture the markets of developing countries, they adopt all type of malpracties. They try to enrich themselves at the expense of poor countries.

RECENT TRENDS OF INDIA’S FOREIGN TRADE

In post independence period, economic planning was launched in the country in 1951 and its foreign trade went through a great deal of transformation. Salient point of trends of foreign trade of India are as follows:

1 Continuos increase in volume of foreign trade : The total value of India’s foreign trade in terms of the total value of exports and imports has been rising considerably since 1950-51. The total value of India’s international trade has gone from 1,214 croe in 1950-51 to 46,20,445 crore in 2013-14.

2. Global and diversified: In the pre-independence period, the direction of India’s foreign trade was mostly connected with Britain or its colonies or allies. After the sixty four years of planning the direction of India’s trade has already recorded a remarkable change. The directio diversified and has became global. Recently we export change. The direction of trade has been totally became global. Recently we exported more than 7,600 items to 140 countries and imported at least 7,000 items from 140 countries .

3. Change in Composition of foreign trade: The initiation of the planning process in the country in 1951-52 and more specifically the beginning of the second plan brought about a considerable change in the composition of foreign trade. Goods which were used to be exported from India previously e.g., cotton, food grains etc. now figured in its import and on the other hand, in the exports of the country, the share of finished goods of iron and steel, engineering goods etc. have increased a lot, in 1947-48, the items of imports were machinery, capital goods and other finished items, iron and steel etc. These imports together constituted more than 70% of all imports and exports constituted 80 percento raw materials and traditional items. As the industrial structure of the country got strengthened and diversified, new export opportunities opened up and the combined share of traditional items fell and the share of manufactured items has shown an upward trend. The Indian economy is being diversified and nontraditional items of exports are growing in importance.

4. Dependence on foreign shipping: At the time of India’s independence, there were only 42 ships with less than 1,00,000 tonnes of GRT. It was only after independence that India’s shipping became predominant in India’s coastal trade and got dominant share in foreign trade. Indian shipping companies carried only 2 percent of India’s overseas trade; all Indian foreign trade is being taken up by foreign shipping concerns which earn huge income by way of shipping charges. Indian shipping suffers from inadequate infrastructure support. The Indian government is fully aware of these difficulties and an attempt is being made to remove them.

5. Increasing share in world trade: As per World Trade Organization (WTO), India’s share in global exports and imports increased from 0.8 percent and 1.0 percent respectively in 2004 to 1.7 percent and 2.5 percent in 2013. Its ranking in terms of leading exporters and importers improved from 30 and 23 in 2004 to 19 and 12 respectively in 2013.

6. Increasing importance of public sector : Some public sector enterprises have done much to promote India’s export. The State Trading Corporations (STC) and the Minerals and Metals Trading Corporation (MMTC) have done a wonderful job of export promotion in all parts of the world, especially in the East European Countries. The measures have been due to the pioneering efforts of these organisations. Considerable success has been achieved in pushing up the exports of Indian Handicrafts, light engineering goods and many other new items of exports. Hindustan Steel Ltd., the Bharat Electronic Ltd., the Hindustan Machine Tools, etc. are some of the public enterprises which are exporting increasing proportion of their output and earning foreign exchange. For example, the HSL has made huge strides in the field of exports.

7. Excessive importance of few countries : Before independence, U.K was the principal partner for India, accounting 34 percent of India’s exports and 30 percent of India’s imports. Some countries possess excessive importance in India’s foreign trade. For example, U.K., America, Canada, France, Germany. Russia and Japan hold 50 percent of India’s total import. Similarly India’s more than 50% exports are directed towards U.S.A., Japan, U.K., Germany and Russia.

8. Few commodities are more important: Since 1960, under the impact of industrialization, exports of non-traditional items are gaining in importance tems consist of engineering goods, handicrafts, pearls, precious and semiprecious stones and jeweler, iron and steel, iron ore, chemicals, readymade mints. These goods constitute 50 percent of India’s exports. India’s imports elms include capital goods, mineral oils, edible oil, iron, fertilizers, iron and steel, and chemicals.

EXERCISE QUESTIONS

Long Answer Questions

1 Give a detailed account of recent trends in India’s foreign trade.

2. Explain the demerits of foreign trade with reference to the developing countries.

3. Explain the importance of foreign trade to the developing countries.

4. Explain the role of foreign trade in the economic development of the developing countries.

5. Discuss the importance of foreign trade and what are its main demerits?

Short Answer Questions

1 Discuss the importance of foreign trade.

2. Write the main demerits of foreign trade.

3. How foreign trade is an obstacle in the development of developing countries ?

Objective Questions

(I) Select the Correct Alternatives :

1 The volume of foreign trade increases national production and as a result its economic development:

(a) promotes

(b) rapid

(e) reduces

(d) all of above

2. Mostly India’s foreign trade depends on:

(a) railway

(b) trucks

(c) shipping

(d) none of these

3. The specific feature of India’s foreign trade are known as:

(a) symptoms

(b) modern trends

(c) characteristics

(d) none of these

4. Corruption increases from:

(a) foreign trade

(b) developed trade

(c) home trade

(d) none of these

5. Competitive strength of the developing country is :

(a) weak

(b) good

(c) rapid

(d) none of these

6. Foreign trade helps in:

(a) development

(b) extending market

(c) capital formation

(a) none of these

7. Industrialization is promoted by :

(a) foreign trade

(b) International trade

(c) home trade

(d) all of above

(Ans: 1. (a), 2 (c), 3. (b), 4. (a), 5. (a), 6. (a), 7. (a)]

(II) Write True or False :

1 Production capacity and national income of developing countries are very low.

2. Economic development is meant for growth in real production and per capita income.

3. Foreign trade does not give pace to economic development.

4. A developing country wants economic development through rapid industrialization.

[Ans: 1. True, 2. True, 3. False, 4. True)

(III) Fill in the blanks :

1 …………… increases the efficiency in the utilization of resources.

2. Foreign trade increases ……………. among producers.

3. Foreign trade increases the contact of the people of developing countries with the people of ……………..

4. Foreign trade extends ………….

[Ans: 1. Foreign trade, 2. competition, 3. developed countries, 4. market]