IB

1
International Business
Rakesh Mohan Joshi
Professor & Chairperson, IIFT New Delhi
Copyright @ Oxford University Press Intern

ational Business
R. M. Joshi
Chapter 3: International Trade Patterns

and Balance of Payments
Chapter 3
INTERNATIONAL TRADE
PATTERNS
AND
BALANCE OF PAYMENTS
Copyright @ Oxford University Press Intern
ational Business
R. M. Joshi

Learning Objectives
To explain the significance of international trade

patterns
To provide an overview of world trade
To evaluate Indias international trade
To outline the concept of terms of trade
To explicate balance of payments
To highlight key issues in Indias foreign trade
Copyright @ Oxford Univers

ity Press International Bu

Significance of International Trade Patterns

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

World Trade: An Overview

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


Composition of World Trade (2007)


Direction of World Trade

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


Direction of World Exports


Direction of World Merchandise Exports

(2007)


Direction of World Merchandise Imports

(2007)


Composition of World Merchandise Trade

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

Patterns of World Merchandise Exports


Composition of World Merchandise Exports

(2006)


World Commercial Services Trade

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

Direction of World Commercial

Services Exports (2007)


Direction of World Commercial

Services Imports (2007)


Composition of World Exports of

Commercial Services (2007)


Indias Foreign Trade: An Overview

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

India's Foreign Trade


Composition of India's External Trade

(2006-07)


Direction of India's Trade : Exports


Direction of India's Trade : Imports


Composition of India's Export


Composition of India's Imports


Indias Services Trade

The services sector in India has grown remarkably and account
for over 55 per cent of Indias GDP making it the most
significant component of the countrys economy.
Indias
services exports have significantly grown from a meager US$

295 million in 197071 to US$ 76.2 billion in 200607 with a
growth of 32.1 per cent over the previous year.


Composition of Indias Service Exports

(2007-08)
**
** Provisional, * Excluding Software Services

G.N.I.E- Government Not Included Elsewhere


Gains from International Trade

Trade indices are widely-used instruments to measure
the benefits derived by a nation from international trade.
These facilitate in assessing the impact of trade volume
and / or unit value realization on a countrys gains from
trade.


Terms of Trade
The terms of trade is a measure of relative changes in export and
import prices of a nation. It reflects the quantity of imports that a
given quantity of exports can buy.
The terms of trade refers to ratio of the price of its export
commodity to the price of its import commodity.
In case of a hypothetical assumption of a two-nation world, the
export of a country equals its trade partners imports wherein the
terms of trade of a country are equal to the inverse of the terms of
trade of its trade partner.

Types of Terms of Trade

Net terms of trade: It implies unit value index of exports
expressed as a percentage of unit value index of imports.
Net value terms of trade:
(N) = Unit value index of exports (Px)
Unit value index of imports (Pm)

X 100

Gross terms of trade: It implies volume index of imports

expressed as a percentage of volume index of exports
Gross terms of trade = Volume index of imports (Qm)

Volume index of exports (Qx)

X 100

Income terms of trade: It implies the product of net terms

of trade and volume index of exports expressed as a
percentage. It reflects a nations capacity to import.
Income Terms of Trade (I) =
Net terms of trade (Px/Pm)*volume index of exports( Qx) *100


Single factorial terms of trade: Net barter terms of

trade adjusted for changes in productivity of exports
Double factorial terms of trade: Net barter terms of

trade adjusted for changes both in productivity of
exports and imports


Trade Indices : Developed vs. Developing

Economies (Base Year 2000=100)
Terms of Trade
Year
Developed
Economies
Developing
Economies
1980
97
117
1990
103
101
1995
105
102
2001
101
98
2003
103
98
2005
102
105
2006
100
107


Reasons for Deterioration in Terms of Trade

for Developing Countries
International demand for export of manufactured goods by
developed countries tends to increase at a much faster rate
compared to demand for agricultural commodities and
primary goods due to their higher income elasticity of
demand.
Any productivity gain in manufactured goods by

developed countries is generally passed on to its workers in
the form of higher wages and income. Whereas, any such
gains in productivity of agricultural commodities and
primary products by developing countries are reflected in
price decline. This leads to a consistent deterioration in the
collective terms of trade of developing countries.


Indias Terms of Trade

Indias Unit Value Index for imports, as shown in Table 3.13 rose
from 35.3 in 197071 to 608 in 200607 compared to
corresponding rise in Unit Value Index of exports from 45 to 863
during the period.
It implies that the rise in the value of imports grew much more
than the quantity of goods imported which added to Indias
financial burden.
Factors responsible for this include relative inelasticity of Indias
import demands for petroleum products, foodgrains, fertilizers,
oilseeds, and capital goods constrained India in making any
substantial cuts on imports.

Trade Indices of Indias Foreign Trade

(Base: 1978-79=100)
Years
Terms of trade
Gross
Net
Income
1970-71
113.9
127.4
75.2
1978-79
100.0
100.0
100.0
1980-81
127.6
80.8
87.3
1990-91
122.5
109.3
212.2
2000-01
122.1
128.1
732.0
2003-04
126.9
123.4
943.5
2004-05
124.0
110.0
991.0
2005-06
164.0
135.0
1357.0
2006-07
176.0
142.0
1653.0


Balance of Payments (BoP)

The summary of all its economic transactions that have
taken place between the countrys residents and the
residents of other countries during a specified time
period.
It is used as an indicator of a countrys political and
economic stability. A consistently positive BoP reflects
more foreign investment and money coming into the
country and not much of its currency being exported. On
the other hand, adverse or negative BoP indicates more
outflows of money compared to inflows.

Balance of Trade
The difference between the value of exports and imports is termed
as Balance of Trade.
India had negative balance of trade over the years except during
two financial years, i.e,. a positive trade balance of US$ 134
million 197273 and US$ 77 million in 199697.
There has been a steep rise in trade deficit from US$ 5.98 billion in
200001 to US$ 80.39 billion in 200708 mainly due to the steep
rise in its unit value prices of Indias import products, especially
the petroleum products and fertilizers besides domestic demand

Indias Trade Balance


Constraints in Indias Exports Growth
Adoption of import substitution rather than export

promotion strategy
Overprotection to Indian industry from external
competition
High import barriers
High import tariff
Inadequate infrastructure
Complexity of trade procedures



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Copyright @ Oxford University Press Intern

Chapter 3: International Trade Patterns

Chapter 3: International Trade Patterns

To explain the significance of international trade

To provide an overview of world trade

To evaluate Indias international trade

To outline the concept of terms of trade

To explicate balance of payments

To highlight key issues in Indias foreign trade

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Significance of International Trade Patterns

Chapter 3: International Trade Patterns

World Trade: An Overview

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Composition of World Trade (2007)

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Direction of World Trade

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Direction of World Exports

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Direction of World Merchandise Exports

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Direction of World Merchandise Imports

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Composition of World Merchandise Trade

Chapter 3: International Trade Patterns

Patterns of World Merchandise Exports

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Composition of World Merchandise Exports

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

World Commercial Services Trade

Chapter 3: International Trade Patterns

Direction of World Commercial

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Direction of World Commercial

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Composition of World Exports of

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Indias Foreign Trade: An Overview

Chapter 3: International Trade Patterns

India's Foreign Trade

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Composition of India's External Trade

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Direction of India's Trade : Exports

Copyright @ Oxford Univers

Chapter 3: International Trade Patterns

Direction of India's Trade : Imports