ECONOMIC ENVIORNMENT OF INTERNATIONAL

TRADE

COMPILED BY

•VINITA MAKHIJA 55•RASHMI MAGHANI 58•PAYAL MALIK 56•AKHIL 59•RAVI NARANG 61•RAHUL PAHUWANI 65•SAKSHI PHULWANI 66

TABLE OF CONTENTS•Introduction•Macro Environment•Economic Systems•Countries classified by income •Infrastructure •Tariff and Non tariff barriers

ECONOMIC ENVIRONMENT

•The economic environment consists of external factors in a business' market and the broader economy that can influence a business.

•You can divide the economic environment into :• 1.Microeconomic environment: Which affects business decision-making such as individual actions of firms and consumers.

•2.Macroeconomic environment :Which affects an entire economy and all of its participants.

MACRO FACTORS• Interest rates •Taxes • Inflation •Currency exchange rates •Consumer discretionary income •Savings rates •Consumer confidence levels •Unemployment rate •Recession •Depression

MICRO FACTORS

•Market size •Demand •Supply •Competitors •Suppliers •Distribution chain - such as retailer stores

NEW REALITY

•Capital movements have replaced trade as the driving force of the world economy

•establishment of production facility in various countries

•The world economy, not individual countries, is the dominating factor

•75-year struggle between capitalism and socialism has almost ended

MACRO ECONOMIC ENVIORNMENT•Social factors•Cultural factors•Technological factors•Economic Factors•Political Factors•Demographic Environment•Natural Factors

MACRO ECONOMIC ISSUES AFFECTING BUSINESS DECISIONS•Economic Growth

•Inflation

•Balance of Payments

•Economic Transition

ECONOMIC SYSTEMS• Economic system is an organization of institutions established to satisfy human needs.

• A mechanism that deals with the production, distribution and consumption of goods and services.

• Economic system are based on resource allocation in the system.

TYPES OF ECONOMIC SYSTEMSThere are three types of economic systems:

1. CAPITALISM

2. COMMUNISM

3. MIXED

CAPITALISTIC ECONOMIC SYSTEM•A Capitalist economic system is one characterised by free markets and the absence of government intervention in the economy.

• Individuals and firms allocate resources•Production resources are privately owned•Government’s role is to promote competition among firms and ensure competition

• eg. USA, Japan and UK are examples of capitalistic countries

SOCIALISTIC ECONOMIC SYSTEM

• Socialism is an economic system in which the means of production are socially owned and used to meet human needs, not to create profits.

• The means of production refers to the tools, technology, buildings, and other materials used to make the goods or services in an economy. 

• Equal distribution of income results in benefit for all.

COMMUNISTIC ECONOMIC SYSTEM•Communism, also known as a command system, is an economic system where the government owns most of the factors of production and decides the allocation of resources and what products and services will be provided.

•Private property and private rights to income are abolished.

•Workers were urged to work for the glory of the state.

COUNTRIES CLASSIFIED BY INCOME

World Bank categorizes countries on the basis per capita gross national income (GNI)--

•Low income: $1,035 or less•Lower middle income: $1,036 to $4,085•Upper middle income: $4,086 to $12,615•High income: $12,616 or more

Low-Income CountriesCharacteristics

• Limited industrialization

• High percentage of population into agriculture

• High birth rates

• Low literacy rates

• Heavy reliance on foreign aid

• Political instability and unrest

• Excessive unemployment

• Technological backwardness

• Examples-Ethiopia, Bangladesh, Cambodia, Congo etc

Lower-Middle Income CountriesCharacteristics

• Early stages of industrialization

• Availability of cheap and motivated labor

• Rapidly expanding consumer market

• Mature, standardized, labor-intensive industries like textiles, clothing, batteries etc.

• Examples- China, Fiji, Indonesia

Upper-Middle Income Countries

Characteristics:

• Less dependence on agriculture

• Increasing urbanization

• Increase in literacy, formal education and increased wage rates

• High exports and rapid economic development.

• Also called newly industrializing economies (NIEs)

• Examples: Brazil, Russia, Malaysia, Mexico, Hungary

High-Income CountriesCharacteristics

•Sustained economic growth through disciplined innovation

•Service sector is more than 50% of GNI

•Development of information sector

•Domination of scientists and professionals

•Emphasis on the future plan

•These countries face problems like pollution, excessive urbanization etc.

•Examples: USA, UK, Japan, Australia

INFRATRUCTURE•Infrastructure is a very important element in considering whether to market in a country or not.

•Transportation, is vital. •for example, Zimbabwe vs Tanzania.

•Energy consumption shows the overall industrialization of a society.

•Communications are essential. •India has only 10 million telephones to a population of 1 billion people.

•Media availability is important. •Zambia has 680 radios per 1000 population, France 2,059 per 1000.

•Malawi has no domestic television service but access to satellite television.

MOBILITY• It is the most fundamental and important characteristics of economic activity as it satisfies the basic need of going from one location to the other.

• Seaports.• Rivers and canals• Railways.• Roads.• Airways and information technologies

• Transportation as an Economic Factor• Commodity market. • Labor market.

ELEMENTS OF ECONOMIC ENVIRONMENT• GDP: Total value of all final goods and services produced in a

country in a given year equal to total consumer, investment and government spending, plus the value of exports minus the value of imports

• GNI: The income generated both by total domestic production as well as international production activities of national companies

• GNP: The value of all final goods and services produced within a nation in a given year, plus the income earned by its citizen abroad, minus the income earned by foreigners from domestic production

TARIFF BARRIERS

• What are tariff barriers?–Refers to the tax imposed on the goods when they enter or leave the national frontier or boundary.

• What is the purpose of tariffs?–To protect the domestic industry by increasing the cost of imported goods.

–ExampleExample: GoI imposed tariffs to protect domestic automobile industry, sugar industry, cement industry and steel industry.

TYPES OF TARIFF BARRIERS•On the basis of Purpose:

•Revenue Tariff: •To provide state with the revenue.•Levied on luxury goods.

•Protective Tariff:•To maintain and encourage those branches of home industry protected by the duties.

•On the Basis of Origin and Destination:•Ad Valorem Duty:

•Levied as the percentage of the total value of the imported common duty.

•Specific Duty:•Levied per physical unit of the imported commodity.

•Compound Duty:•Levied a percentage ad valorem duty plus a specific duty on each unit of the commodity. Eg. 1 lac + 10% of the price.

•On the Basis of Country-wise Discrimination:•Single Column Tariff:

•A uniform rate of duty is imposed on all similar commodities irrespective of the country from which they are imported.

•Double Column Tariff:•Two different rates of duty have been imposed.

•Triple Column Tariff:•Two or more tariff rates are levied on each category of commodity.

NON-TARIFF BARRIERS

Non-Tariff measures include all measures, other than tariffs, the effect of which is to restrict imports, or to significantly distort trade.

(1) Specific Limitations on Trade:1. Quotas2. Import Licensing requirements3. Proportion restrictions of foreign to domestic goods (local

content requirements)

TYPES OF NON TARIFF BARRIERS

(3) Government Participation in Trade:1. Government procurement policies2. Export subsidies3. Countervailing duties4. Domestic assistance programs

(2) Customs and Administrative Entry Procedures:1. Valuation systems2. Antidumping practices3. Documentation requirements4. Fees

(5) Others:1. Voluntary export restraints2. Monetary Barriers

(4) Charges on imports:1. Prior import deposit subsidies2. Administrative fees3. Special supplementary duties4. Import credit discriminations5. Border taxes