Gains from international trade-Terms of trade-Technical progress & trade -Balance of payment-Balance of trade-economic effects and trade restrictions-Bilateralism-OPEC & other International cartels

1. Ms. JISSY.C
Assistant Professor

2. Balance of trade
 It is a narrow term. It consider only merchandise
ie.,goods exports & imports. It mainly concentrated
visible items only. It does not take into account the
exchange of invisible items like services rendered
by shipping, banking & insurance sectors & payment
of salaries benefits etc.
Balance of payment
 It is a wider concept than balance of trade in its scope &
covers the export & import of all kinds of goods &
services ie, both invisible & visible items are covered
here

3.  Definition of Balance of Payment (BOP)
 Balance of Payment (BOP) of a country can be defined as a
systematic statement of all economic transactions of a country
with the rest of the world during a specific period usually one
year.
 The systematic accounting is done on the basis of double
entry book keeping (both sides of transactions credit and debit
are included). Economic transaction includes all such
transactions that involve the transfer of title or ownership of
goods and services, money and assets.
 The Balance of Payments (BOP) is the method countries use
to monitor all international monetary transactions at a specific
period of time. Usually, the BOP is calculated every quarter
and every calendar year. All trades conducted by both the
private and public sectors are accounted for in the BOP in
order to determine how much money is going in and out of a
country.

4. COMPONENTS OF BOP
Components
of BOP
Current
Account
Visible
Items
Invisible
items
Capital
account
Private
banking
Banking
Capital
Official
Capital
Unilateral
Payment
account
Official
settlement

5. Is Balance of Payment always in Equilibrium
In the accounting system ,the inflow &outflow of a transaction
are recorded on the credit & debit side respectively. Therefore
credit & debit side always balance .If there is a deficit in the
current account, it is offset by a matching surplus in the capital
account by borrowing from aboard or withdrawing out of its gold
& foreign exchange reserve,& vice versa
Measuring Deficit or Surplus In BOP
 Basic Balance
 Net liquidity Balance
 Official Settlement Balance

6. Disequilibrium of BOP
Causes:-
Short –term misfortunes
Trade Cycle
Secular trends in the economy
Structural Changes in the economy
Political Conditions
Sociological Factors

7. Correction of Disequilibrium in BOP
Measures to Correct Disequilibrium in BOP
Automatic
Correction
Planned Measures
Monetary
Measures
Non-Monetary
Measures

8. Monetary Measures
Non monetary Measures
Monetary
Measures
Deflation Devaluation
Exchange
Control
Exchange
Depreciation
Non monetary
Measures
Import Duties Import Quotas
Export Promotion
Policies &
Program
Import
Subsitution

9.  TERMS OF TRADE
 Terms of trade (TOT) is a measure of how much
imports an economy can get for a unit of exported
goods.
 Since, economies typically export and import many
goods, measuring the TOT requires defining price
indices for exported and imported goods and
comparing the two. A rise in the prices of exported
goods in international markets would increase the
TOT, while a rise in the prices of imported goods would
decrease it.
 A country’s terms of trade measures a country’s
export prices in relation to its import prices, and is
expressed as:
(Index of export price/ index of import price)×100

10. BREAKING DOWN ‘TERMS OF TRADE’
 Terms of trade, when used to help determine how
healthy a country’s economy is, can lead analysts to
draw the wrong conclusions.
 It is essential for analysts to know why exports
increase, in relation to imports, specifically because
terms of trade are impacted by the changes that
occur in the prices of exports and imports.
 Terms of trade measurements are often recorded in
an index so that economic monitoring can be
performed.

11. TYPES OF TERMS OF TRADE
1) Net barter or commodity terms of trade.
2) Gross barter terms of trade.
3) Income terms of trade.
4) Single factorial terms of trade.
5) Double factorial terms of trade.
6) Real costs terms of trade.
7) Utility terms of trade.

12. 1) Net barter or commodity terms of trade
 Commodity terms of trade are expressed in a
formula as
- TC=PX/pm
(Here, TC= commodity terms of trade; PX= index
of export prices; pm= index of import prices).
 Commodity terms of trade in different time period
can be measured by the following formula:
Px1/pm1 : pxo/pmo
 (Here, px1= index of export prices in the current
year, pm1=index of import price in the current year;
pxo=index of export price in the base; pmo=index
of import prices in the base year).

13.  2)GROSS BARTER TERMS OF TRADE
 Gross commodity terms of trade are expressed in a
formula as under:
TQ= qm/qx
 (Here, TQ= gross barter terms of trade;
qm=quality of imports; QX= quantity of exports.)
 Gross barter or commodity terms of trade in
different time periods can be measured as follows:
Qm1/QX1 : qmo/qxo
 (Here, qm1= index of quantity imported in the
current year; qx1=index of quantity exported in the
current year; qmo=index of quantity imported in the
base year; qxo= index of quantity exported in the
base year.)

14.  INCOME TERMS OF TRADE
 The income terms of trade is the ratio of index of the
prices of exports and index of prices of imports.
Ty= tcqx=pxqx/pm (tc=px/pm)
(Here, ty=income terms of trade; tc= commodity terms of
trade; px= index of prices of exports; qx=index of
quantity exported ; pm=index of prices imports.)
Income terms of trade are also called capacity to import.
It is so because, in the long-run, the value of total export
of a country is equal to the value of its total imports.
Pxqx= pmqm
(pxqx/pm =qm) [qm= quantity of imports]

15. SINGLE FACTORIAL TERMS OF TRADE
Factorial terms of trade depend upon the
productive efficiency of the factors of
production.
The single factorial terms of trade, commodity
terms of trade are multiplied by the index of
export productivity.
Ts= tc x fx= px/pm x fx (tc= px/pm)

16.  TWO FACTORIAL TERMS OF TRADE
 Double factorial terms of trade takes into account
the productivity of the factors of production in the
country’s exports as well as the productivity of the
foreign factors of production used in country’s
imports.
Td= tc x fx/fm = px/pm x fx/fm (td= px/pm)
(Here, td=double factorial terms of trade; tc=
commodity terms of trade; px= index of prices of
exports; fx=index of productivity of export goods
industries; pm=index of prices of imports; fm=
index of productivity of import goods industries.)

17.  REAL COST TERMS OF TRADE
 Import and export goods are compared according
to their utility. Real cost of both import and export is
worked out. Real cost terms of trade is calculated
by multiplying the single factorial terms of trade
with the index of the amount of disutility per unit of
productive resource used in producing exports.
 Tr= ts x rx = px/pm x fxx rx
 (Here, TR= real cost terms of trade; ts= single
factorial terms of trade; px=index of export prices;
pm=index of import prices; fx=index of productivity
of export goods industries; rx= sacrifice of utility
inherent in export.)

18. UTILITY TERMS OF TRADE
Utility terms of trade is the index of relative
utility of import and domestic commodities
foregone to produce exports.
Tu= tr x u = px/pm x fx x rx x u
(Here, tu=utility terms of trade; tr=real cost
terms of trade; px=index of export prices; •
Pm=index of import prices; fx=export
productivity; rx= utility foregone to exports.)

19.  FACTORS INFLUENCING TERMS OF TRADE
1. Elasticity of supply:
 Elasticity of supply has the following effect on terms of trade:
(a) The supply of export is less elastic terms of trade will be
unfavourable and if more elastic the same will be favourable.
(b) Supply of imports is less elastic, terms of trade will be
favourable and if supply of import is more elastic, terms of trade
will be unfavourable
2. Size of demand:
 With the increase in demand for the exports of a country, prices
of export will increase as against the prices of imports and hence,
terms of trade become favourable.
 If demand for imports increase, their prices will also increase as
against the prices of export and so the term of trade become
unfavorable.

20.  SIGNIFICANCE OF TERMS OF TRADE
 Standard Of Living:
Changes in the prices of the items we have to import.
Imported terms of trade might mean we are able to
import cheaper food.
 Prices Of Imported Technology:
Prices of imported technology affect relative prices of
capital inputs needed to sustain growth. A weak
exchange rate increases the price of import, worsens
the terms of trade and makes imports of new
technology more expensive.
 Balance Of Payments:
Export and import prices affect the value of trade flows.

21. TERMS OF TRADE TRENDS AND ECONOMIC GROWTH
 The most common view is that the terms of trade has
a positive impact on economic growth.
 An increase in export prices relative to import prices
allows a larger volume of imports to be purchased
with a given volume of exports.
 The implied increase in the real purchasing power of
domestic production is equivalent to a transfer of
income from the rest of the world and can have large
impacts on consumption, savings and investment.
 The terms of trade can also be thought of as a rate of
return on investment and therefore a secular
improvement in the terms of trade leads to an
increase in investment and hence economic growth.

22.  Changes in the terms of trade can have
different macroeconomic impacts depending on
the composition of the relative price movements.
 If a fall (rise) in the terms of trade is due to a
decrease (increase) in export prices, then this
will initially impact on exporters before indirectly
affecting households.
 However, if a fall (rise) in the terms of trade is a
result of an increase (decrease) in import prices
(for example, oil prices), this is likely to affect
households and businesses more directly and
the macroeconomic shock will be different.

23.  TECHNICAL PROGRESS OF A COUNTRY AND INTERNATIONAL
TRADE
 The modern world is a highly mechanized world. It is shaped by
technical progress. The rapid progress of modern economic societies
has become possible due to changes caused by technological and
scientific progress. It must, however, be recognized that, technical
progress can affect the volume and mode of international trade to a great
extent. As technical progress influences the composition of production
function, relative cost-price structure, demand pattern use of resources,
so on and so forth, its effect on foreign trade is also bound to be very
significant.
 Forms of Technical Progress :
 (i) Natural Technical Progress
 (ii) Labour-saving Technical Progress
 (iii) Capital-saving Technical Progress

25.  Organization Of Petroleum Exporting Countries –
OPEC
 About OPEC
 It is a permanent intergovernmental organization,
currently consisting of 12 oil producing and exporting
countries, spread across three continents America,
Asia and Africa
 Oil is the main marketable commodity and foreign
exchange earner. Thus, for these countries, oil is the
vital key to development – economic, social and
political. Their oil revenues are used not only to
expand their economic and industrial base, but also to
provide their people with jobs, education, health care
and a decent standard of living
 OPEC was formed at a meeting held on September
14, 1960 in Baghdad, Iraq, by five Founder Members:
Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.
OPEC was registered with the United Nations
Secretariat on November 6, 1962

26. OPEC’S Objectives
 To co-ordinate and unify the petroleum policies of the
Member Countries and to determine the best means for
safeguarding their individual and collective interests
 To seek ways and means of ensuring the stabilization of
prices in international oil markets, with a view to eliminating
harmful and unnecessary fluctuations
 To provide an efficient economic and regular supply of
petroleum to consuming nations and a fair return on capital
to those investing in the petroleum industry.

27. OPEC Conferences
 Meets every March & September.
 Unify policies to promote stability and harmony in
oil market.
 New member applications are discussed.
 Budgets are decided upon.
 Recommendations and reports are submitted

28.  INFLUENCING FACTORS FOR PRICERISE OF PETROL
IN INDIA:
 Cost of crude oil: Increase in crude oil prices in the international
market is one important factor responsible for increase in petrol
prices in Indian domestic market.
 Increased demand: Strong economic growth of India and other
developing countries in Asia have increased huge demand of
petrol and other related essential fuels resulted price hike in petrol
in India.
 Mismatch of supply and demand: Indian oil companies face
problem to meet demands of petrol with shortage of production
and supply from oil refineries due to high input cost in crude oil
price.
 Tax burden: Prices of petrol and other petroleum products varies
according to local government policies in imposing taxes on fuels.
Whenever government of India increases tax on fuels the oil
companies in India have no other alternative to increase the petrol
price to recover losses and maintaining marginal profits in oil
business in India.

29.  OPEC Challenges
 Uncertainty in Global Demand
 Structural shift in demand from developed world to
developing world.
 Non-OPEC oil-producing nations (Russia , Norway,
Canada, Mexico etc.) often increase production when
OPEC cuts it.
 Russia overtook Saudi Arabia as the world’s biggest
crude supplier in 2009.
 OPEC’s share of production has gone down.
 Problem of Member Cohesion within OPEC nations:-
Maintaining quota discipline within the cartel.
 Existence of factions within OPEC.
 Middle-Eastern Strife & Political instability in OPEC oil-
producing countries - Mostly authoritarian states that
use oil money as a means of sustaining political power.
 Future technological developments in areas of
renewable energy sources

30. Bilateralism
 Bilateralism is the conduct of political, economic, or
cultural relations between two sovereign states.It is in
contrast to unilateralism or multilateralism, which is
activity by a single state or jointly by multiple states,
respectively. When states recognize one another
as sovereign states and agree to develop diplomatic
relations, they exchange diplomatic agents such as
ambassadors to facilitate dialogues and co operations
that will be exchanged. It is an agreement that is
affecting or undertaken by two parties; a mutual
agreement.

31.  Economic agreements, such as free trade agreements (FTA)
or Foreign direct investment (FDI), signed by two states, are
a common example of bilateralism. Since most economic
agreements are signed according to the specific
characteristics of the contracting countries to give
preferential treatment to each other, not a generalized
principle but a situational differentiation is needed. Thus
through bilateralism, states can obtain more tailored
agreements and obligations that only apply to particular
contracting states.

32.  International cartels
 International cartels are agreements between producer
located in different countries or between governments of
countries to restrict competition. Examples include the
Organization of Petroleum Exporting Countries (OPEC) and
International Air Transport Association (IATA).
REASONS FOR FORMING AN INTERNATIONAL CARTEL
 The reasons for forming an international cartel are:
 Firstly, cut-throat competition among producers of a world-
traded commodity
 Second, the fear of fall in world prices in the event of
production of the commodity exceeding current demand
 Third, to have monopoly control in order to earn higher
profits.

33.  OBJECTIVES OF INTERNATIONAL CARTELS
 To fix the world price of the commodity above the
competitive price
 To earn high monopoly profits
 To restrict production and supply of the commodity as
per the quota allocation to each member
 To allocate a specific territory to each member for the
supply of the commodity in order to avoid competition
 To decide about the quality of the commodity
 To control technological research and development of
the commodity
 To adopt other measures to limit or alleviate competitive
pressure among members

34. OTHER INTERNATIONAL CARTELS
IATA
 The International Air Transport Association (IATA) is an international
industry trade group of airlines to develop cost effective, environment
friendly standards and procedure to facilitate the operation of
international air transport
 Formation - April 19, 1945 (66 years ago), Havana, Cuba
 Type - international trade association
 Purpose/focus- represent, lead, and serve airline industry
 Headquarters -Montreal, Canada
 Membership 290 airlines
 Member countries:120

35.  OBJECTIVES OF IATA
 i. To promote safe, regular and economical air
transport for the benefit of the people of the world, to
foster air commerce and, to study the problems
connected therewith;
 ii. To provide means for collaboration among the air
transport enterprises engaged directly or indirectly in
international air transport services;
 iii. To cooperate with the International Civil Aviation
Organization and other international organizations;
 iv. To provide a common platform for travel
agencies/tour operators’
 v. To promote and develop international tourism.

36. ORGANISATIONAL STRUCTURE
 Each air transport enterprise, irrespective of its size, and
operation, has a single vote in the IATA council. Thus, the main
source of authority in IATA is its annual general meeting, in which
all active members have an equal vote.
 Year round policy direction is provided by an elected Executive
Committee which is subsequently carried out by its Financial,
Legal, Technical, Traffic Advisory and Medical Committees.
 Negotiations of fares and rates agreement are carried out through
the IATA Traffic Conferences, with separate conferences as
regards passenger and cargo matters.
 Members of various IATA Committees are nominated by individual
airlines, but these serve as experts in the interests of the entire
industry. In the Traffic Conference(s), however, delegates act as
representatives of their individual companies.
 While the Executive Committee fixes the terms of reference of
these conferences, their decisions are subject only to the review
of governments and cannot be altered by any other part of IATA.

37.  The organizational structure of IATA is the formal network of performing
various types of activities and powers/duties associated with each role in
this network.
 IATA administration and management is carried out under a Director
General who is supported by other executive officers like Treasurer and
Financial Director, Secretary, Technical Director, and Traffic Director.
 The main IATA headquarter is in Montreal while Administrative
Headquarters of the IATA Traffic Conferences and IATA Clearing House
are located in Geneva. The IATA Enforcement Office is in New York and
the Regional Technical Offices in London, Singapore, Kenya, USA, and
Belgium.
 IATA activities are closely related with operation of the airlines, the
airlines charges to the public and the airlines desire to ensure maximum
possible convenience and safety to the passengers.

 Every year constant and progressive efforts are taken to simplify and
standardize devices, procedures and documentations, within the airlines
themselves, and by IATA to streamline growth and progress of airlines
business.

38. Phoebus cartel
The Phoebus cartel was a cartel of, among others, Osram,
Philips, and General Electric from December 23, 1924 until
1939 that existed to control the manufacture and sale of light
bulbs.
The cartel is an important step in the history of the global
economy because it engaged in large-scale planned
obsolescence. It reduced competition in the light bulb
industry for almost twenty years, and has been accused of
preventing technological advances that would have
produced longer-lasting light bulbs.

39.  Purpose
 The cartel was a convenient way to lower costs and worked to
standardise the life expectancy of light bulbs at 1000 hours, while at the
same time raising prices without fear of competition. Members' bulbs
were regularly tested and fines were levied for bulbs that lasted more
than 1000 hours. A 1929 table lists exactly how many Swiss francs had
to be paid, depending on the exceeding hours of lifetime. This was not
public knowledge at the time, and the cartel could point to
standardization of light bulbs as an alternative rationale for the
organization.
 The cartel claimed that 1000 hours was a reasonable optimum life
expectancy for most bulbs, and that a longer lifetime could be obtained
only at the expense of efficiency, since progressively more heat and less
light is obtained, resulting in wasted electricity.
 The Phoebus Cartel divided the world’s lamp markets into three
categories:
A. home territories, the home country of individual manufacturers
B. British overseas territories, under control of Associated Electrical
Industries, Osram, Philips, and Tungsram
C. common territory, the rest of the world

40. DE BEERS
 De Beers is a cartel of companies that dominate the diamond,
diamond mining, diamond shops, diamond trading and industrial
diamond manufacturing sectors. De Beers is currently active in
every category of industrial diamond mining: open-pit,
underground, large-scale alluvial, coastal and deep sea. Mining
takes place in Botswana, Namibia, South Africa and Canada.
 The company was founded in 1888 by British businessman Cecil
Rhodes, who was financed by the South African diamond
magnate Alfred Beit and the London-based N M Rothschild &
Sons bank. In 1927, Ernest Oppenheimer, a German immigrant to
Britain who had earlier founded mining giant Anglo American plc.
with American financier J.P. Morgan, took over De Beers. He built
and consolidated the company's global monopoly over the
diamond industry until his retirement. During this time, he was
involved in a number of controversies, including price fixing,
antitrust behaviour and an allegation of not releasing industrial
diamonds for the US war effort during World War II.

41.  Diamond Trading Company (DTC), part of the De
Beers family of companies, is the World’s largest
and most effective distributor of rough diamonds.
 We sort, value and sell around 40% (by value) of all
the uncut diamonds in the World through our offices
in London and Kimberley in South Africa.
 The DTC is also the world’s leading developer and
producer of diamond technology and operates a
dedicated Research and Development facility

42.  Created before life began on our planet, diamond
has always been a gemstone associated with
mystery, myth and magic.
 Southern Africa produces the majority of the world’s
diamonds, but there is also diamond production in
Russia, Canada, Australia, India, China and South
America
 Based on 2006 Kimberley Process production
statistics, Botswana is the world’s biggest producer
of diamonds by value, followed by Russia, Canada,
South Africa and Angola.

43. The 4Cs
Cut, Carat, Colour and Clarity.
4Cs classification enables the comparison
and valuation of diamonds. No one 'C' is
more significant than another, and none
will diminish in value over time .

44. History
 De Beers Société Anonyme (DBsa), has three
shareholders:
Anglo American (45%), Central Holdings (40% -
representing the Oppenheimer family) and the
Government of the Republic of Botswana
(15%).
 It is the holding company of what is regarded as
the De Beers Group or Family of Companies
 De Beers (the Company) was formally
incorporated in Luxembourg in November 2000.

45.  De Beers is managed and controlled from its
head office in Luxembourg. Its commercial
activities are carried out by several associated
subsidiaries and investments it finances in
different parts of the world.
 The Family of Companies is involved in most
parts of the diamond value chain. This includes
exploring for new deposits on four continents
and industrial mining in Botswana, Canada,
Namibia, South Africa and Tanzania. It also
includes the marketing of diamonds in 11 major
consumer markets