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1.]POSSIBLY till the publication of the second edition of the book “Geography, Economics and Economic Geography” by Thakur Sher Singh Parmar in October, 2003, the Indian intelligentsia, Indian and the world mass media had not attributed the liberalization of the Indian economy to the Balance-of-Payment Crisis that India had faced in the year 1991. IT WAS POSSIBLY FOR THE FIRST TIME IN THE WORLD THAT THIS SECOND EDITION BY THAKUR SHER SINGH PARMAR CORRECTLY POINTED OUT, DESCRIBED AND EXPLAINED THE BALANCE-OF-PAYMENT CRISIS FACED BY THE INDIAN GOVERNMENT IN 1991 TO BE THE MAIN CAUSE THAT HAD FORCED INDIA INTO ADOPTING THE LIBERALISATION-MODE FOR THE INDIAN ECONOMY……….!2.] The book contains for the first time many of the TERMS/ECONOMIC JARGONS REPHRASED/PARAPHRASED/ELABORATED/REDEFINED to make these ECONOMIC TERMS more INCLUSIVE and better understandable...................!For Example, See the following included in this book:"10.2 BASIC CONCEPTS 1. TRADE: Exchange of goods, services or information."The definition of the TRADE given above by Thakur Sher Singh Parmar is more inclusive than the following definition of the TRADE that had been given till then in numerous Standard Texts/Books on the subject of the Economics:"TRADE: Exchange of goods"
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8. ECONOMICS AND SCALE
8.1 INTRODUCTION :
In economics, effects of the increase in the amount of an input on total output
holding all other inputs constant is sometimes studied. This study is called the Law
of Diminishing returns. This law states that less and less extra output is obtained
with the addition of an additional dose of an input while holding other inputs fixed.
In other words, the marginal product of each unit of input will decline as the
amount of that input increases, holding all other inputs constant.
But, what if all the inputs are increased proportionately? Well, this leads to the
introduction of the concept of “scale”.
8.2 MEANING :
“Scale” means “quantity” or “extent”. When scaling up or an increase in all inputs
takes place proportionately, there may be 3 outcomes:
i. Constant returns,
ii Increasing returns,
iii Decreasing returns.
These returns are called returns to scale, because these are the returns or (gains in
output) that occur when an increase in inputs or the quantity(scale) takes place.
Thus, we have following 3 types of returns:
1.Constant Returns to Scale:
It is a situation in which a change in all inputs leads to a proportional change in
output i.e. if factors like labour, demand, etc. are increased by 3 times, the output
increases by 3 times ,also. Handloom operations in a developing country or
haircutting in U.S.A. are prime examples.
2. Increasing returns to scale :
It is a situation in which a change in all inputs leads to a more-than proportional
increase in the level of output. For example, in engineering field many
manufacturing processes get modestly increasing returns to scale for plants upto the
largest size, i.e., an engineer may get more than 15% proportional increase in output
by increasing inputs by 15%.
3.Decreasing returns to scale :
It is a situation in which a proportional increase in all inputs leads to a less than
proportional increase in total output. It may happen due to increased costs of
management or the control. Prime examples are activities like growing wine
grapes, provision of clean drinking water to a city, electricity generation plants.
8.3 ECONOMIES OF SCALE
INTRODUCTION :
As a brief study of the concept of “SCALE” shows clearly, an increase in inputs
leads to an increase in output irrespective of it being just proportional, more than
proportional or less than proportional. This increase in output or production helps
reduce or minimise the cost of production by way of getting especially the fixed
costs spread over a larger number of units produced.
Mass production techniques require factories to be of certain minimum size. With
an increase in output, firms divide production into smaller steps, taking advantage
of specialization and division of labour. It also allows intensive use of specialized
capital equipment, automation and computerized designes and manufacturing to
do simple repetitive jobs easily and quickly. Once Economies of scale has been
achieved especially in terms of constant returns to scale, it can be maintained by
replicating or duplicating elsewhere the existing manufacturing processes
irrespective of the level of output.
8.4 TYPES:
Advantages of large scale production or economies of large scale production may
be grouped into 2 categories:-
(1) Internal Economics
(2) External Economics
8.5 INTERNAL ECONOMIES:
These are advantages of cost reduction of output obtained by a firm from its
own growth. These can further be subdivided as follows :
a) ECONOMIES OF INCREASED DIMENSION:
Increasing of the dimension of the input leads to cost reduction per unit of
output in terms of increased output, i.e. ,use of machine leads to a larger
production.
b) ECONOMIES OF LINKING PROCESSES:
Linking processes give advantages. In large scale production, all the
processes right from beginning to end are linked with each other under single
control, thereby reducing the cost, i.e. , in a Sugar factory, all the processes
right from thrashing to sugar production are linked together under one
control.
c) ECONOMIES OF SUPERIOR TECHNIQUES:
Large-scale production requires use of superior techniques which may be
costly. But these superior techniques help increase production on a large
scale, thereby minimising the possible costs.
d) ECONOMIES OF SPECIALISATION AND DIVISION OF LABOUR:
With increase in production, a firm has to use division of labour and
specialisation. It has to divide or allocate different steps of the specialised
work/job to different workers specialising in their areas of competence.
Machines are employed to do highly specialised job. All this causes large
production leading to lower costs.
1. MANAGERIAL ECONOMIES :
With increase in the size of the production unit, one individual is unable to
look after all the aspects. It leads to delegation of authority and division of
labour. It in turn leads to better management resulting into a higher
efficiency. Higher efficiency generates a larger production.
2. MARKETING ECONOMIES:
A production unit has to incur marketing costs for its finished products
and raw material inventory. With a large market for products, it has to
maintain big stocks of raw materials. This raw material gets available at
lower prices, because it is purchased in bulk or a big quantity. Low price
of raw material helps it to lower the cost of production. Plus, cost of
marketing (like by sample method) gets distributed over the total quantity
produced.
3. FINANCIAL ECONOMIES:
A large firm gets a goodwill in market, amongst financial institutions,
investors, stock exchanges. This all helps in mobilising required capital
from market at lower rates, which helps in increasing the production.
4. ECONOMIES OF RISK BEARING :
A large firm has the advantages of product and market diversification. It
can offer a mix of different products and in different spatial/geographical
markets. It reduces the risk of product failure. If one product fails, its
losses are compensated by profits in other products. Similarly, losses in
one sales territory are sustained by profits in other sales territories. With a
large production, costs of products goes down, too. This minimises the
risk of failure or uncertainty. This practice is called “Putting eggs in
different baskets” .
8.6 EXTERNAL ECONOMIES:
These advantages or the economies are those advantages or economies which a
production unit gets from outside due to concentration of other production units in
the same area.
These are further subdivided as follows:
i. ECONOMIES OF CONCENTRATION :
Concentration of production units in a area gives it a significant independent
industrial identity and standing causing setting up of different facilities in the area
like transportation, financial institutions, etc. This helps in large-scale production
by getting certain required inputs easily, cheaply and quickly like finances.
ii. ECONOMIES OF INFORMATION :
Production units may have advantages in an industrial cluster or belt like some
common platform to discuss their problems and share information.
This helps in large-scale production by getting quickly, easily, cheaply the
requisite information ,i.e. ,Maharatta Chamber of Commerce located at Pune in
Maharashtra is such a forum.
iii. ECONOMIES OF DISINTEGRATION:
Large-scale production is made possible also by getting advantages of
disintegration in terms of existence of supporting or ancillary units. This avoids
wasting time, money and energy on some activities which are done by these
ancillary units. The saved time, money and energy are devoted to increasing the
production.
DISECONOMIES OF LARGE SCALE PRODUCTION :
Large scale production may lead to following disadvantages :
1. Decreasing returns to scale due to need for management and supervision.
2. Problems of management and co-ordination.
3. Ineffective management of increasing product lines and market areas
geographically.
4. Cutting off from the realities of market, etc. due to lesser time available to higher
controlling authorities with an increasing size of the firm involving delegation of
authority and spread of the functions over a large geographical/technical area.
5. Isolation from the reality causes slow responses to changes, i.e., General Motors
lost its much market share to smaller firms in the 1970s oil Prices Rise Crisis.
8.7 SPATIAL VARIATION IN DEMAND
1. INTRODUCTION:
What do we mean by spatial variation in demand? It means that the demand
for a product changes with a change in geographical space or area or
distance. With increasing distance from a market place, the demand for a product
goes on decreasing because the price goes on increasing. Price increases because
of other costs like the increased cost of transporting the products from market area
to the outside areas or the increased cost of transportation involved in travelling
from a place outside to the market area. In simple words, this is the meaning of
the phrase “Spatial Variation in Demand.”
2. GEOGRAPHICAL PERSPECTIVE :
There are various theories to explain the reasons for location in space of various
industries. Some of these theories take demand as constant or unchanged. Such
theories consider the effects of variations in the cost of manufacturing due to
different spatial or geographical locations of factors of production like raw
materials, labour, technology, etc. These theories totally ignore effect of other
factors on the choice/decision /action of locating a particular industrial unit at a
particular geographical location like effect of demand by consumers, behaviors or
psychology of the consumer & so on. Alfred Waber’s theory of location of
manufacturing units (secondary production) is such a prime example.
So, to overcome the shortcomings of such theories considering only factors of
production, some economists/ geographers came up with the idea of location of
industries based on the demand for a particular product. Such theories have come
to be known as Maximum Revenue Theories, because of the tendency of
manufactures to locate their industrial units in such a strategic geographical
location as would maximise their revenue based on optimum demand by
consumers. Demand in turn depends on 3 important factors:
(1) Price of the product
(2) Transport costs
(3) The Possibility of the substitution.
3. EXAMPLE : H. Hotelling has given a classical example of the working of
maximum revenue theory. He tried to find the location that would give
maximum sales to 2 ice-cream sellers on a mile of beach as shown in the
following diagram:
2 Vendors of ice – cream selling the same brand of ice - cream at the same price
would have ideal location at two points A and B, because M divides the beach
into 2 equal parts. One half has point ‘A’ as its centre. The other half has point
‘B’ as its centre. Naturally, both vendors can equally cover all the customers on
A A1
M
B
Beach
the beach. Now, supposing one vendor moves to point A1, here he/she will attract
‘B’ customers also. To avoid this, ‘B’ may move towards M. This may lead to a
situation wherein both A & B stand back to back to retain customers from their
areas and to avoid their customers going to the other vendor. But , it always may
not work. For example, one vendor may be selling superior quality brand to get
which a customer may be willing to travel more distance despite the same prices.
Thus, a location of a manufacturing unit affects and is affected by the location of
other units. This is also called locational interdependence.
4. THEORY:
The best known general theory of location giving more importance to demand
was proposed by August Losch in 1940. He tried to explain the size and shape
of market areas within which a location would command the largest revenue. To
simplify the matters, he assumed :
(1) Isotropic surface ( a flat uniform plain ).
(2) Constant Supply of products.
(3) Decrease in demand for a product within increase in its price.
(4) Decrease in demand with increasing distance owing to increased
transportation costs from the production centre to the market centre.
(5) Existence of monopolistic competition instead of perfect competition unlike
A. Waber.
(6) Non – Existence of economic discriminations amongst population. Open and
uniform career building opportunities to all individuals.
(7) Even distribution of population & self-sufficiency of area in agricultural
production.
(8) Uniformity in tastes, knowledge, andtechnical skill of people.
(9) Uniformity and proportionality of transport costs in all directions.
(10) Limited Number of producers & Consumers.
(11) Satisfactory location to both producer and consumers.
(12) Equal serving of the entire area by factories .
(13) No entry of a new firm.
(14) Confirmity in the range and quantum of profit
A = No demand due to very high price
OP = Price at production point
PQ = Quantity sold at P
AQN = demand Curve
P = Production Point
(i)
(ii)
Demand Curve rotated around production point to get cone AQP
(Source: August Losch ,“ The Economics of Location” ,Yale University Press1954)
As the figure (i) shows, demand decreases with an increase in price. This leads to
demand curve AQN. Now , let us suppose that price increases due to increasing
transportation costs, its clear that at price A, the demand is zero. Now, let us assume that
this price A is at the maximum distance beyond which there is negative demand! In other
words, we can assume PA as the distance from production point P. Now ,lets rotate the
curve around production point P, the shape of the market will be circular and the size of
A
Q P
NO
O Quantity
Price
AO
Q
P
Sales = Volume of Cone
Market area boundary
Distance
the market will be volume of the cone AQP, i.e., 1/3πr2h (volume of a right circular cone)
as shown in Figure (ii).
Further, increasing competition on the plain causeS development of hexagonal market
areas to avoid overlap and under lap. Also, each market shrinks due to eating up of
revenue by competitors. Each product has different market area depending upon the
relative importance of transport costs in its price. Different patterns of market areas
develop. When such patterns are rotated around a common production center point, then
some of these patterns may coincide nearly, thereby giving indications of formation of
points of maximum demand. This in turn should develop as concentrations of industry.
CRITICISM :
Positive:
1) It has successfully explained the effect of demand on industrial locations.
2) It led to further theorising in the field of locational analysis of industries in terms
of demand.
3) Its failure to consider other factors led to emergence of theories like “Spatial
Margins to profitability theory “by D. M. Smith, “Sub – Optimal locations
theories”,Optimiser theory and satisfier theories.
4) He was first person to give importance to influence of demand on industrial
location.
5) Right & correct emphasis upon the role of competition.
6) Simple and easily applicable calculations.
7) Philosophical contributions on the motive of entrepreneur’s role.
8) Introduction of Equilibrium concept.
9) More précised nature of the concept of “profit maximization” in sharp contrast
least cost” concept of A.Waber.
How Market Areas become Hexagonal
(Source : August Losch, “The Economic of Location, , Yales University Press, 1954)
Negative:
1) This theory is too abstract in nature.
2) It does not consider problems of locational interdependence.
3) It gives too much importance to one aspect, that is the demand just as had been
given to supply by Alfred Waber.
4) It fails to consider other factors like human psychology &human behavior .
5) It generalises human behavior in sharp contrast to postmodern geographical theme
of “ heterogeneity, particularity and uniqueness.”
6) It is not universally applicable, when checked against reality.
7) It is too simplified a model of reality. It rarely occurs in actuality.
8) Its more of an intellectual exercise, because his assumptions are hardly present in
the real / decision making world.
9) Ignorance of “Political decision role “ in industrial location.
1 2 3 4
Firms Operate with Circular Market Areas
Competition increases to serve all the potential market
To avoid overlap of Circles and to serve all areas, the market areas become hexagonal
Final pattern of market areas
10) Neglect of factors like variation in the cost of raw materials and labour wages
rate.
11) Arbitrary dichotomy of the role of agriculture and industry.
12) Agriculture may show a play of the abstract and optimum situation, but industrial
location is a far more complex matter. This theory may be more practical in
agriculture rather than in industry.
13) Demand curve must be rotated around production point O, where there is
maximum demand ON. By taking P Production point , he has ignored the
maximum production at point O. The actual size of the market should be the
volume of the right circular cone ANO and not the volume of the right circular
cone AQP!
OTHER IMPORTANT THEORIES:
1. TRANSPORT COST THEORY OF EDGAR M. HOOVER:
It is an extension of A. Waber’s theory. It emphasizes on the role of 4 costs:
Procurement, production, distribution, transport.
2. BEHAVIONRAL THEORY:
It places emphasis on the role of individual behavior or entrepreneurial decisions
as chief determinants of industrial location. Allan Pred’s Matrix theory is the
most well known behavioral theory.
3. MARKET AREAS THEORY:
It emphasizes more on the competition with others as chief determinant of
industrial location . Frank Fetter is the most well known theorist of this
approach.
4. INTEGRAL THEORY:
It emphasizes on the integrated role of both factors supply and demand. Green
hut & Walter Isard are the well-known theorists of this approach.
9. ECONOMIC DEVELOPMENT
9.1 CLASSIFICATION OF COUNTRIES
Countries have variously been classified in economic geography by taking into consideration
different criteria.
Here, we follow the classifications given by T.A. Hartshorne & J. W. Alexander in their
book “Economic geography” and the U.N.O.
1. CLASSIFICATION BY HARTSHORNE & ALEXANDER :
(A) FIRST WORLD COUNTRIES:
Highly developed countries of North American continent and Europe like U.S.A. ,
England excluding the communist block are called first world countries / Nations.
(B) SECOND WORLD COUNTRIES:
Countries having centrally planned economies like China and the erstwhile USSR,
besides other communist countries are called second world countries/ nations.
(C) THIRD WORLD COUNTRIES:
Countries which are developing areas lacking in a modern urban – industrial
structure are generally known as third world countries/Nations. For example, Kenya
,Pakistan etc.
2. CLASSIFICATION BY UNITED NATIONS :
To quote Asha A Bhende and Tara Kanitkar (in “Principles of Population
Studies”) ,
“The United Nations prefers to designate the economically advanced countries as
“more developed” and the economically backward countries as “less developed
countriess.”
Accordingly, following is the classification given by the U.N.O:
a) “More Developed” Countries
1. North America
2. Japan
3. Europe
4. Australia & New Zealand
5. Temperate South America
b) “Less Developed” Countries
All other countries other than more developed countries mentioned above fall
into this category.
9.2 MEASURES OF ECONOMIC DEVELOPMENT
Economic development of a country/region can be measured in various terms called “Measures” .
These measure or indicators broadly include factors like population, gross domestic
product, Adult literacy and life expectancy.
Economically advanced countries have a low population growth rate, low birth and death rates,
high life expectancy and literacy rates besides a higher standard of living. On the other hand ,
less economically developed countries have still not reached the post demographic transition
population growth and these countries have a relatively higher rate of mortality, low life
expectancy ,low literacy and poor standards of living.
Output per worker is indicative of economic development,also. For example, since 1870,
in 16 high income category countries like USA, West European nations , Japan &
Australia, the output per worker grew by 2.4 % per annum ( a factor of 16 over 120
years) closely moving with increasing standard of living.
Following chart, quoted from “Economics” by Samuelson Nordhaus, illustrates it
amply:
Average growth rate (%)
Period GDP GDP/Person –Hours Labour Force Total Hours worked
1870 – 1913 2.5 1.6 1.2 0.9
1913 – 1950 1.9 1.8 0.8 0.1
1950 – 1973 4.9 4.5 1.0 0.3
1973 – 1990 2.5 2.7 1.1 - 0.1
WORLD DEVELOPMENT REPORT 1997 (world bank ,WASHINGTON 1997):
Nation states or countries are grouped by the world bank into 4 main groups based upon
their per capita incomes. Each includes important indicators of economic development
like , Adult illiteracy and life expectancy.
GDP
Total Per Capita Per Capita
Country
/Group/
ECONOMIE
S
Population
In 1995
( in millions) Total
1995
($ billion)
Level 1995
($ billion)
Growth
(1985-95)
% per year
Adult
Illiterac
y
1995
( %)
Life
Expectancy
at birth
(Years)
Low income
China/India
others
2130
1050
1035
317
499
290
6.1
-1.4
32
46
66
56
LOWER
MIDDLE
INCOME
ECONOMIE
S
(Philippines,
Thailand)
1153
2026
1670
-1.3
20
67
UPPER
MIDDLE
INCOME
ECONOMIE
S
(Brazil,
Malaysia
etc.)
438
1982
4260
0.2
14
69
HIGH
INCOME
GROUP
ECONOMIE
S
(USA, Japan,
France, etc.)
902
22486
32039
1.9
<5
77
Broadly speaking aforesaid discussion is enough to understand the measures of economic
development. Of course, one may enumerate a large number of other variables or
indicators, too as follows:
1. Gross national product/Net National product
2. Per Capita income
3. Per Capita Consumption of iron & steel
4. Population growth rate
5. Infant mortality rate
6. Birth rate
7. Death rate
8. Literacy rate
9. Occupational structures
a) Commercial activities – Developed countries
b) Substantive activities – Less Developed countries
10. Technological Levels
11. Migration trends
12. Religious influences
13. Food availability (malnutrition, etc.)
14. Health (good, poor, etc.)
15. Use of family planning devices
16. Proportion of Urban population
17. International trade.
For example, in 1995, the per capita GNP of USA was $ 26980, Germany $27,510 ,India-
$340, Bangladesh - $ 240, Ethiopia - $ 100.
FOLLOWING INFORMATION AMPLY ILLUSTRATES VARIOUS MEASURES
OF ECONOMIC DEVELOPMENT:
(A) World as a whole had a population of 5840 million in mid 1997, with more
developed countries having a share of 1175 million and the less developed
countries a share of 4666 millions (including china). World in mid 1997 had a
birth rate of 24, death rate of 9, an annual natural increase rate of 1.5 % in
population, population doubling time of 47 years, infant mortality rate of 59, total
fertility rate of 3.0 , life expectancy of 64 years (males) 68 years (females), 32 %
below 15 years and 7 % above 65 years of age population, 43 % urban
population, 56 % of married women using contraception of all kinds and only 50
% of married women using modern methods of contraception, and world per
capita GNP (1995) of US $ 4920.
(B) Comparatively, More developed countries had a population of 1175 millions,
Birth rate of 11 per 1000 population, death rate of 10 per 1000 population, 0.1 %
of annual natural increase in population, 564 years of population doubling time,
infant mortality rate of 9 per 1000 population, total fertility rate of 1.6 % , 20 %
of < 15 years and 14 % of > 65 years of age population , life expectancy at birth
of 71 years for males and 78 year for females, 74 % of population as urban, 66 %
of married women using contraception of all methods and only 60 % of married
women using contraception of only modern methods, and per capita GNP of US $
19,310 ( as in 1995).
(C) Less developed countries ( including China) had a mid 1997 population of 4666
million, a birth rate of 27 pr 1000 population , a death rate of 9 per 1000
population , an annual increase of 1.8% in population growth, a population
doubling time of 38 years, infant mortality rate of 64 per 1000 population , total
fertility rate of 3.4 % , 35% of < 15 years and 5 % of above 65 years population,
life expectancy at birth of 62 years for males and 65 yeas for females, 36 % of
population as urban, 54 % of the married women using contraceptives of all kinds
and only 49 % of married women using modern methods of contraceptives, and a
per capita GNP of US$ 11,20 (as in 1995)
[Source: 1997 World Population Data Sheet, Population, Reference Bureau
Washington D.C.]
9.3 GEOGRAPHICAL ACCOUNT OF W.ROSTOW’S NON-SPATIAL MODEL
1. INTRODUCTION:
The non-spatial model formulated by W. Rostow in 1955 identifies five
stages of economic development. This model was formulated to explain varying
economic development without reference to spatial (geographical) aspect. It is
called The Rostow Model of economic development ,also.
2. PRINCIPLE:
Economic development takes place in five stages, with take-off into self
sustaining growth coming about as one sector of the economy develops rapidly
and encourages the growth of other sectors.This way , the whole region develops.
The Classical Economic theory is the basis of this model. This theory assumes
existence of uniform costs, perfect competition, perfect mobility of capital and
labour in a given region. Further , it assumes that these assumed conditions shall
produce equilibrating forces to maintain inter-regional equality.
For example, excess labour migrate out from a region which has no employment
opportunities- thus, the given region loses labour to outside region-but, low labour
costs in the given region attracts new industry which helps develop economically
the given region – therefore, inter-regional equality is maintained.
3. EXAMPLES:
The great Industrial Revolution in U.K. was led by the cotton industry, which in
turn encouraged the textile machinery industry, transport improvements, service
industries in the expanding towns and so on.
4. CRITICISM:
i. Positive:
a) It is the best-known non-spatial model formulated to explain the
process of economic development.
b) It is easy to understand.
ii. Negative:
a) The model is too simplistic overlooking complex spatial variation.
b) It does not specify time required to move from one stage to the next.
c) It does not tell any mechanism to find out the stage in which a
particular economy is.
d) Its not necessary that an economy has to go through the sequence
suggested by W.Rostow.
e) It is totally incorrect to assume existence of uniform costs, perfect
competition, perfect mobility of capital and labour in a given region.
Further , it is incorrect to assume that these assumed conditions shall
produce equilibrating forces to maintain inter-regional equality.
f) Regional inequalities is a global feature.
g) To quote KNOWLES & WAREING ,
“ If economic development affects the structure of the economy by
producing leading sectors, it may be inferred from Rostow Model that
the distribution of economic activity will be similarly affected, with
the emergence of leading regions.”
For example, in 19th century Britain, the leading sectors of the economy
such as cotton and iron were certainly characterised by regional
specialisation and concentration.
h) It is suggested by many economists that economic development
actually encourages regional inequalities.
i) Costs are never uniform, competition is never perfect, and capital and
labour are not perfectly mobile. These forces don’t maintain inter
regional equality.
The ages of high mass Consumption
5
The drive to Maturity
4
Take - Off 3
The Preconditions for take - off
2
The Traditional Society
1
Decades
THE ROSTOW MODEL OF ECONOMIC DEVELOPMENT
1.
9.4 G.MYRDAL’S SPATIAL MODEL OF ECONOMIC
DEVELOPMENT
INTRODUCTION :
The most important model attempting to explain spatial variations in economic prosperity
by G. Myrdal in 1956 is called Myrdal’s model of economic development.This is a
spatial model or a geographical model.
2. PRINCIPLE :
Contrary to classical theory, economic market forces increase regional differences rather
than decrease them. Two associated processes cause unequal growth. These are :
i. Cumulative Causation
ii. Spatial Interaction
i. Cumulative Causation: Economic development takes place in a region initially
because of the natural advantages offered by it, like raw materials, and presence
of power. Then, once such a region moves forward and ahead of others, a process
of cumulative causation takes place, as acquired advantages are developed to
reinforce the status of the region and ensure that it continues to grow and stay
ahead of others. One development leads to another development.
ii. Spatial Interaction: It occurs with movement of labour, capital and commodities
into the growing region. Such growth produces a backwash effect in the other
regions in that the other regions lose skilled labour and capital to the growth
region and their markets are flooded with goods, thereby preventing local
development.
Consequently, growing and stagnating regions are born. On the other hand, with the
expansion of economy, the benefits of growth begin to affect all regions and the spread
effect of an expanding economy may encourage the process of cumulative causation to
occur and self – sustaining growth to take place in other regions.
Provision of better infrastructure for population and industrial development – roads, factory, sites, public utilities, etc.
Development of external economies for former’s development
Development of ancilliary industry to supply former with inputs, etc.
Expansion of local government funds through increased local tax yield.
Expansion of general wealth of Community
Expansion of service Industries and others serving local market.
Attraction of capital and enterprise to exploit expanding demands for locally produced goods and services.
Increase in local pool of trained industrial labour.
Expansion of local employment and population
Location of new Industry
3. STAGES OF REGIONAL DIFFERENTIATION:
A region passes through 3 stages of regional differentiation in the Myrdal Model :
i. Pre-industrial : There are few regional inequalities.
iii. Second : Great inequalities are produced by cumulative causation and its
backwash effect as the economy “takes off” and expands rapidly.
ii. Third : The spread effect of growth operates to reduce regional
imbalances or differences.
4. CRITICISM :
A. Positive :
a. It successfully explains the development processes in the underdeveloped countries.
B. Negative :
1. To quote KNOWLES AND WAREING “…the forces
producing regional inequalities are much more powerful than
the spread effects operating to reduce them” .
For example, despite government action ,regional inequality
persists in U.K.
2. It does not fully explain the process of development in more developed
economies for which other theories like export base theory, regional
multiplier (input-output analysis), growth poles ,etc. have been advanced.
10. INTERNATIONAL TRADE
10.1 INTRODUCTION
1.) MEANING :
The trade carried on an international level is called international trade.It can be
bilateral(BETWEEN TWO COUNTRIES) or multilateral(AMONGST MORE THAN
TWO COUNTRIES).
2.) BACKGROUND :
International trade has been going on since ancient times. For example, condiments and
pepper were exported from India to cold temperature European countries to make the
meat tasty there. Similarly, silk route was famous for trade between countries of west and
the Far East china. Presently, big multinational companies are involved in international
trade besides local national players.
Examples : Bilateral Trade
India and china – US $ 3 billion (2000 A.D.)
Foreign Exchange Reserves
India reported foreign exchange reserves of US $ 50 billion (2002 A.D.)
The value of goods in world trade since 1938 (Exports in million of US $)
Economics 1938 1950 1960 1970 1980
Developed market 15,100 37,026 85,845 224,908 1,270,323
Developing market 6,000 19,163 27,067 55,684 5,40,353
OPEC 1,000 4,014 7,792 18,032 296,376
Centrally planned 1,600 4,596 15,363 33,2786 177,329
World Total 22,700 60,785 128,275 313,868 1,988,005
SOURCE : UN STATISTICAL YEARBOOK
CERTAIN FACTS AND FIGURES ABOUT
INTERNATIONAL TRADE/GLOBAL ECONOMY:
1. In a single day all over the world, 40%
of the goods and services produced is
traded and nearly 1.5 trillion US $ gets
exchanged in the world exchange
markets.
2. World trade stood at US $ 3.4 trillion
in 1999 and 6.2 trillion in 2000.
3. Value of world output was US $ 24.4
trillion in 1994 and 31.4 trillion in
2000(Source:IMF).
4. Following table gives trend in growth
of the world output:
PERIOD AVERAGE VALUE (US $ trillion ) GROWTH RATE
1983-1992 18 3.4 %
1993-2000 29.6 3.6 %
5. USA was the largest importer and
exporte with imports and exports
worth $ 1060 billion and $ 695 billion .
15 member EU had exports worth US $
799 billion , but its imports were of less
value than USA’s .China ranked 10th in
exports.India ranked 30th in
exports.Indian exports were primarily
directed to USA(21%) and EU(20-
25%).Figures given here are for the
year 2000.
6. World trade grew at the rate of 5.4%
in 1980s and 7.5% in 1990s. As per
W.T.O. , this growth was 12.5% in the
year 2000.
7. Increase in the world trade was more
than the increase in world GDP at the
rate of 5.4% in 1980s and 7.5% in
1990s.
8. Indian exports grew from US $ 32366
million in 2000 (April-Dec.) to US $
32572 million in 2001 ( April-
Dec.).Indian imports rose from US $
38242 million in 2000( April-Dec.) to(
April-Dec.) US $ 38362 million in 2001(
April-Dec.).Thus,exports showed a
growth of 0.64% and imports
0.31%.During the same period , Indian
IT software and services exports rose
by 25% in value.
9. Export of cashew held the third
position with a contribution of 0.93%
(Rs.1882.23 crore)of the total export
earnings of India in 2000-01.
10. Bilateral trade between India and China
during January-Novembar period of 2001
amounted to 3.27 billion US $ ,up 26% over
the same period in 2000.Indian exports to
China during 2001 was 1.56 billion dollars
and China’s exports to India was 1.71 billion
dollars .
11. Following table gives the yearwise value in
indian rupees (crores) of Indian Imports and
Exports since 1950-51:
Year imports exports total value balance of trade
1950-51 581,17 606,81 1187,98 + 25,64
1960-61 1121,62 642,39 1764,01 - 479,23
1970-71 1634,20 1535,16 3169,36 - 99,04
1980-81 12,549,15 6710,71 19,259,86 - 5838,44
1986-87 20,083,53 12,566,62 32,650,15 - 7516,91
1990-91
2000-01
As the above table shows, Indian imports and exports grew by
27 times in value from 1950-51 to 1986-87. However, imports
grew by 34 times and exports by 20 times during this period.
India had a trade deficit of 100 crore rupees in 1970-71 and
7516 crore rupees in 1986-87.Such unfavourable trade is a
cause of concern to India.
Indian exported mainly raw materials and imported
manufactured products before 1951. But, after independence,
this trend has got changed.The following 6 commodities
formed main items exported from India in 1951:
1. Cotton thread and
apparels.
2. Jute products.
3. Tea.
4. Vegetable oil and
products made from it.
5. Leather and skins.
6. Tobacco and products
made from it.
The following 6 new commodities formed main items exported
from India in 1983-84,1984-85,1985-86:
1.Precious jems and jewellery.
2.Cotton apparels , readymade garments.
3.Tea.
4.Machines and transport equipments.
5.Iron ore.
6.Leather, leather products and shoes.
TREND: Since 1980s , Indian trade has shown a tremendous change
in its structure.Now, the items mainly exported are no more raw
materials or semi-manufactured products. The products being exported
are mainly those which have value addition through excellent Indian
craftsmanship and skill ,i.e.,jems and jewellery, readymade cotton
garments, leather products and shoes,etc.Other main export items are:
ores and engineering products.India imports certain items like Cashew
and Jems and exports these items after increasing their value through
excellent Indian craftsmanship and skill .Thus, Indian exports consist of
services ,also. Recently, Information Technology exports has become a
major item of Indian exports.
India saw a growth of 20% in exports in 2000-2001.The value of Indian
exports was 44.1 billion US dollars in 2000-2001 and 36.8 billion US
dollars in 1999-2001. The value of indian imports was 49.8 billion US
dollars in 2000-2001.The Indian imports were higher due to higher
priced oil imports ,i.e., 15.6 billion US dollars against 9.6 billion US
dollars in 1999-2000.It was estimated to rise to 18-19 billion US dollars
in 2001-2002 due to growing demand for petroleum products and rising
level of dependence on crude oil imports to nearly 70% of the nation’s
requirements.Non-oil imports in 2000-2001 had a much lower growth.
The Indian trade deficit came down to 5.8 billion US dollars in 2000-
2001 from the 12.9 billion Us dollars in 1999-2000.
The Commerce Ministry had set an export groth target of 18% for
2001-2002.But, this target could not be achieved due to the overall
depressed global growth in 2001-2002.
12. Following table gives the structure of world
economy in the year 2000:
ECONOMIES % SHARE IN GLOBAL
OUTPUT TRADE
1.DEVELOPED 57.1 75.7
2.DEVELOPING 37.0 20.0
3.CENTRALLY PLANNED 5.9 4.3
WORLD 100.0 100.0
4. USA $ 6 other big nations 45.4 47.7
5.Asia 21.6 9.2
6.China 11.6 3.7
7.India 4.6 0.8
1. Global economy witnessed 4.8% growth in
2000 and it weakened in 2001 mainly due to a
slow down of USA’s economy which grew at
the rate of 1-2% in the first half 2001 against
5% in 2000.The USA SLOW DOWN hit
several East and South East Asian countries
dependent on the American market for their
exports of electronics and computer
products.In a 10 years’ period , the year 2000
was the peak of growth.Industrial countries
had an average growth of 4.1% and developing
countries 5.8% during this period.IMF
projected a global economic growth of 3.2% in
2001 in the hope of USA economic recovery in
the second half of 2001 and emerging of Japan
out of its longest recessionary period.Though
there have been many cuts in interest rates by
US Federal Reserve Bank , yet 11th September ,
2001 event of collapsing of the World Trade
Centres in Newyork by terrorists adversely
affected the whole global economy including
the American economy.The only beneficiary
was Pakistani economy which saw huge inflow
of American Aid meant to wipe out AFGHANI
TALIBANS , besides remittances by Pakistanis
settled abroad anxious to avoid getting their
financial assets frozen due to any suspicion on
them by USA for their any possible role in the
11th September 2001 Tragedy! “The World
Economic Situation and Prospects for 2002”
report released by the United Nations says that
the terrorist attacks in New York and
Washington caused the lowest growth in Gross
World Product ( GDP ) in a decade.The GWP
fell from decade high of 4% in 2000 to 1.3% in
2001.The report foresees a gradual recovery in
2002 with GWP expected to grow by 1.5% and
world trade by 3%.It means limited growth in
2002 with no growth in per capita world output
for 2 consecutive years.
ADVANTAGES OF INTERNATIONAL TRADE :
1. John Stuart Mill says ,“ the benefit of international trade – a more efficient
employment of the productive forces of the world. ”
2. Mc Kinsey Study (Mc Kinsey Global Institute) 1990 identified following benefits
a. Competitiveness leads to increased real income.
b. Globalization increases productivity by improvement through introduction of
leading cutting edge technologies and stimulating competition.
c. High productivity leads to high living standards in terms of trade, capital, and ideas
from advanced countries and consequent competition.
d. The so called much hyped economies of scale/manufacturing techniques and
workers’ skill level/education are of little significance. Large differences exist
within firms in the same industry.
3.) CAUSE OF INTERNATIONAL TRADE :
International trade is carried on due to demand and supply factors involved in
goods and services produced, exchanged and consumed with reference to spatial
aspect on the earth. Countries deficit in certain goods and services import them.
Simultaneously, countries having surplus export them. This is the basic primary
cause generating international trade. However, there are other compelling reasons,
too like the need to earn foreign exchange or repay for goods and services purchased
from other countries.
10.2 BASIC CONCEPTS
1. TRADE :
Exchange of goods, services or information.
2. TRADE BALANCE :
The part of a nation’s balance of payments that deals with merchandise (or
visible) imports or exports, including such items as foodstuffs, capital goods,
and automobiles.
3. BALANCE ON TRADE ACCOUNT :
When services and other current items are included in a nation’s balance of
payments, this measures the balance on trade account.
4. BALANCE OF INTERNATONAL PAYMENTS :
A statement showing all of a nation’s transactions with the rest of the world
for a given period. It includes purchases and sales of goods and services,
gifts, government transactions, and capital movements.
5. BARTER :
The direct exchange of one good for another without using anything as
money or as a medium of exchange.
6. OPEN ECONOMY :
An economy that engages in international trade is called an open economy.
7. FOREIGN EXCHANGE RATE :
It is the price of one currency in terms of another currency.
8. FOREIGN EXCHANE MARKET :
A market in which currencies of different countries are traded and foreign
exchange rates are determined.
9. FLEXIBLE EXCHANGE RATES :
A system when exchange rates are completely flexible and move purely
under the influence of supply and demand.
10. FIXED EXCHANGE RATES :
A system when governments specify the rate at which their currency will be
converted into other currencies.
11. DEPRECIATION :
A fall in the price of one currency in terms of one or all other currencies.
12. APPRECIATION :
A rise in the price of a currency in terms of another currency.
13. DEVALUATION :
A situation in which a country has officially set or, “pegged” its exchange
rate relative to one or more other currencies and the pegged rate or parity is
changed by lowering the price of the currency.
14. REVALUATION :
When the pegged rate or parity is changed by raising the price of the
currency.
15. CREDIT :
If a transaction earns foreign exchange currency for the country, it is called a
credit and is recorded as a plus item.
16. DEBIT :
If a transaction makes a nation loose foreign exchange currency, it is called a
Debit and is recorded as a negative item.
17. BILATERAL TRADE :
Trade between two countries which is generally unbalanced.
18. MULTILATERAL TRADE :
Trade amongst more than two countries, which is generally beneficial.
19. TARIFF :
It is a tax levied on imports.
20. QUOTA :
It is a limit on the quantity of imports.
21. PROHIBITIVE TARIFF :
A tariff so high that it chokes off all imports.
22. NON PROHIBITIVE TARIFF :
A tariff which is so low as to injure but not kill off trade.
23.TERMS OF TRADE: -
It is the ratio of export prices to import prices.
24. OPTIMAL TARIFF :-
The set of tariffs that maximizes domestic real incomes is called the optimal
tariff.
25. PROTECTIONISM :-
Any policy adopted by a country to protect domestic industries against
competition from import (most commonly, a tariff or quota imposed on such
imports ).
26 ECONOMIES OF SCALE :-
Increase in productivity, or decreases in average cost of production, that
arises from increasing all factors of production in the same proportion.
27. MONETARY UNION :-
Adoption of a common currency by a groups of nations ,i.e.,,”Euro” by
European countries under the maastricht Treaty of 1991.
28. GLOBALIZATION :-
Exposure of a region/country to competition with the world leader in a
particular industry.
29. COMPETITIVENESS :-
The extent to which a nation’s goods can compete in the world market place.
30. PRODUCTIVITY :-
It is the output per unit of input.
31. REAL NET EXPORTS :-
The quantity of exports minus the quantity of imports, both measured in
constant prices.
32. OVERVALUED CURRENCY :-
A currency whose value is high relative to its long run or sustainable level.
33. IMPORT :-
Bringing in of a product, services or information on payment from a foreign
country.
34. EXPORT :-
Selling to another country on payment products, services or information.
35. FAVOURABLE TRADE :-
When Exports are more than imports.
36. UNFAVOURABLE TRADE :-
When Exports are less than imports.
10.3 FACTORS INFLUENCING THE INTERNATIONAL TRADE :
A combination of different GEOGRAPHICAL AND NON- GEOGRAPHICAL
factors Influence international trade. These factors may act as encouraging
or discouraging one from time to time and may vary in degree of
importance spatially.GEOGRAPHICAL FACTORS SHOW PRIMACY IN THE
SHORT RUN.HOWEVER, NON-GEOGRAPHICAL FACTORS BECOME MOST
IMPORTANT IN THE LONG RUN.
International trade is totally dependent on transport Network or systems. Without
transportation , no movement or flow of goods and services can take place. 2 important
theories/ models have been advanced to explain this flow of goods and services system or
transport network:
1. FLOW THEORY :
E.L.Ullman has identified 3 basic factors influencing interaction between
regions: Complementarily, intervening opportunity and transferability.
(a) COMPLIMENTARITY :
First, there has to be a demand in one region that can be met from other region.
Secondly, the area of demand must be able to pay for the supply of goods and services to
generate a two- way movement of the same. This demand and supply region develops a
complimentary relationship. Earlier, tropical regions would supply primary goods to
temperate regions in exchange for manufactured goods. Regional specialization
strengthens complimentarity. Of course, buyers and sellers may have alternative options.
So, it’s just one of the factors.
(b) INTERVENING OPPORTUNITIES :
With the development of synthetic rubber, interaction between tropics and temperate
regions has decreased due to decrease in demand for natural rubber. Likewise, depletion
of lake superior iron ore deposits has resulted in the use of South American and African
ores in the U.S.A. Thus, the principle of intervening opportunity in economic context,
determines/influences international trade.
(c) TRANSFERABILITY :
Interaction between complimentary regions can take place only if the
products/services/informations are transferable. Transferability decreases as economic
distance increases and any intervening opportunity will be taken , if it reduces this
distance. Transferability changes from time to time since intervening opportunity and
economic distance are not constants.
“ The development of transport systems must be seen as a process in which
complementarity operating to encourage movement between regions, is balanced
against intervening opportunity and transferability, which operate to discourage
movement.”
2. GRAVITY MODEL :
Applying gravity model, one may conclude that the amount of economic
interaction/international trade depends on the product of the economic size (purchasing
power) of the two regions divided by the result of the economic distance between them.
Or in other words, it’s the operation of distance decay theory, meaning that the
interaction decreases with increasing economic distance.
3. NETWORK REVOLUTION :
The network revolution that began in the great age of discovery in Europe
influenced international trade. Europeans were originally marginalised due to fall of
Constantinople to the Turks in 1453 and the venetian monopoly of eastern trade.
However ,during the renaissance period, revival of Greek ideas of a spherical earth,
navigational aides like compass, improvements in ship design encouraged the search
for alternative routes to bypass the Mediterranean. Discovery of India in 1498,
America in 1492, China in 1513 through sea and Magellan’s expedition around the
world in 1519-22 changed Europe’s position from relative isolation to being centre
of the world trade.
New patterns of trade emerged. Trade Winds helped trade leading to development
of a triangular or quadrangular Atlantic trade in manufacturing goods from Britain
to West Africa in exchange for slaves to the West Indies or American Colonies in
Exchange for sugar, rum, Cotton & Tobacco back to Britain. Cargo changed,also .
Tea, Sugar & Tobacco entered World Trade, yet it was essentially in high value low
bulk goods.
4. THE CARGO REVOLUTION:
The process of industrialization using steam power and mechanical methods of
manufacturing to increase production, creating a demand for large quantities of
raw materials and a supply of manufactured goods caused cargo revolution leading
to the large scale transfer of bulk cargoes. Increased complimentarity ,growing
population ,increased urbanization ,high demand for food staffs leading to new
methods of finance like extension of credit by the new commercial banks, free trade
philosophy ,improved methods of transport, settling of Europeans in Americas and
Australia, creating new sources of supply and demand ; the scramble for Africa in later
19th century led to a search for materials and market. All this influenced nature and
structure of World Trade.
5. WARS AND ECONOMIC SCENARIOS:
Wars and prevailing economic scenario influenced world ,too, i.e, two world wars and the
great depression of the 1930’s have greatly changed the structure and direction of world
trade especially since 1945.
6. POPULATION GROWTH :-
Growth in population since 1945 especially great “baby boom” of 1950s has greatly
stimulated demand for international products services and information.
7. EMERGENCE OF ECONOMIC BLOCKS :-
Emergence of syndicates or blocks amongst countries influences world trade.
Generally, countries of a block encourage trade amongst its members only and
discourage trading activities with outsiders by way of reduced and increased tariffs
respectively.
8. DIVERSITY IN NATURAL RESOURCES :-
Noted economist Samuelson Nordhams says ,
“ Trade may take place because of the diversity in productive possibilities among
countries”.
These productive possibilities in part reflect endowment of natural resources ,i.e.,
Saudi Arabia is blessed with Petroleum, whereas India has a fertile land producing
enough food grains to spare for trade.
To quote Knowles & Wareing,
“Trade arises mainly from regional economic difference and serves to balance
production and consumption by moving goods and services from areas of surplus to
areas of deficiency”.
9. DIFFERENCES IN TASTES :-
Even if conditions of production were identical in all regions , countries might still
engage in trade if their tastes for goods were different , i.e , Indians and Pakistanis
produce sugar and movies. But ,lets say Indians have fondness for sugar more than
cotton and Pakistanis for movies than the sugar. In such a situation both can
maximise happiness by mutually exchanging sugar and movies.
10. ECONOMIES OF SCALE OR THE DECREASING COSTS :-
To quote Samuelson Nordhaus (Economics) ,
“Perhaps the most important reason for trade is difference amo ng countries in
production costs”.
The economies of scale gives a country high volume- low cost products in the areas of its
cumulative acqusitions advantages of a headstart. It gives it a comparative advantage
over the other country in terms of cost effectiveness. Thus, David Ricardo’s (1817) law
of comparative advantages comes into play. This factor influences trade.
11. FOREIGN EXHANGE REGIME :-
If the exchange rate of a currency goes higher relative to other currencies , it
encourages imports by making them cheaper & discourages exports by making
them costly to buyers abroad. Reverse happens with a decrease in the value of a
currency, i.e,depreciation or devaluation. This factor affects the composition of the
trade, its structure and flow of commodities , services and information.
10.4 STRUCTURE OF INTERNATIONAL TRADE
Structure of International trade can be approached from 2 perspectives:
1. Volume of Trade
2. Composition of commodity flows
1. Volume of trade :
a) World trade has been growing at a rate of 8% per annum since 1950. It has
increased almost 50 times since 1938 ,i.e. ,to 1,988005 million US $ (1980)
from US $ 22,700 millions (in 1938). Its still 6 fold increase after allowing for
currency inflation.
b) Period since 1945 has seen rapid economic growth.
c) Despite destruction of productive capacities of much of Europe, USSR &
Japan in 2 world wars, these regions have witnessed rapid economic growth at
a level higher than 1938s due to economic upsurge sweeping all advanced
economies.
d) There is a reduction in Tariff barrier since 1945.
e) High population growth, increased standard of living and enhanced demand
for materialistic comforts has stimulated volumes.
f) Increase in volumes of trade is not uniform.
Following chart shows it :
% SHARE OF WORLD TRADE
Countries/Economics 1938 1972 1980 2000
Developed 69.6 - 75.1 75.7
Developing 23.0 - 12.3
OPEC - 6.6 14.9
20.00
Centrally paired 7.4 - 8.9 4.3
World 100.00 100.00 100.00
2. COMPOSITION:
1938 1980 2000
Primary 50% 33%
Secondary 46% 63%
Tertiary and Others 4% 4%
100% 100% 100%
a) The above table shows decreasing importance of primary products in the world trade.
Type of commodity has changed. In 1980, Wool, Rubber, Fruit dropped out from
top 20 commodities. Tin, Lead, Zinc have increased in importance. Petroleum has
constituted 50% of total tonnage of the world trade since 1960.
Primary reasons for decrease in the importance of primary products are:
1.Development of synthetic for rubber silk and cotton.
2.Application of scientific methods to agriculture in the developed countries
increasing their primary production.
3.Population increase in food exporting countries leading to less availability of
surplus food for trade.
4.Protection of agriculture by tariffs on imports despite the GATT (1947).
5.Decreased irrigation in agricultural sector in developed countries due
to comparatively higher price of water diversion for irrigation leading to a drop in the
agricultural products.
3. TRENDS/DIRECTION:
A. Direction of commodity flows from the pattern established in the 19th
century has changed. Earlier in the 19th century, manufactured goods from
developed countries were exchanged for the food stuffs and raw materials
from the less developed countries.
To quote KNOWLES &WAREING (Economic & Social Geography),
“Now most trade is in manufactured goods between developed
countries and 60% of trade takes place between 2 leading areas,
Anglo-America and Western Europe, although there are important
traders such as Japan elsewhere.”
B. Britain,s share of exports has declined, especially to Latin America,
Commonwealth countries like Australia and New Zealand. This has
reduced London’s role as the hub of trade.
A. Other exporters have developed to fill up the gap left by Britain’s ouster :
1. USA is now the world’s leading exporter with extensive markets in
Europe, Japan & Canada.
2. Germany has been able to increase its exports due to removal of tariff
barriers in the EEC.
3. Japan has carried out aggressive policies in USA & Europe.
4. Asian Dragons are a force to reckon with.
B. Trade has increased between Erstwhile USSR & its European allies/satellites with
smaller increases to Western Europe and developing countries.
C. There is a small increase in the trade of a few small number of primary products,
largely restricted to minerals.
D. Role of the 3rd world countries has decreased due to developing economies
increasingly trading among themselves.
E. Formation of several duty free areas made up of several countries too has altered
the direction of trade . Following are some of the most important trading blocs
mentioned against their year of formation:
i. 1957 – EEC
ii. 1959 – European free trade Area (EFTA)
iii. 1959 – Central American Common Market (CAMT)
iv. 1960 – Latin American free trade Association (LAFTA)
v. 1960 - Organisation of Petroleum Exporting Countries (OPEC)
These areas/unions increase trade between members, restrict trade between
members and non-members and encourage trade between non-members ,i.e.,
Britain’s entry into the EEC in 1972 increased its food imports from Europe and
decreased the same from traditional suppliers like New Zealand. New Zealand in
turn directed its exports to new markets like Japan.
F. To quote KNOWLES & WAREING, “Flows of international trade are therefore
large and complex and are constantly growing and changing and this is reflected
in the complex transport networks that have been built to make these exchanges
possible.”
10.5 PROBLEMS OF INTERNATIONAL TRADE :
Following are the problems related to International trade :
1. PAST 2. PRESENT 3. FUTURE
Despite temporal or time veriation aspect, most of these problems remain the same
whether we study contemporary international trade, past trade or the future trade.
PROBLEMS :
1.Imbalance in the volume of trade amongst countries.
2.Imbalance in terms of composition of commodity flows.
3.Imbalance in terms of direction of commodity flows.
4.Prohibitions, restrictions.
5.High import tariff rates /protection.
6.Foreign Exchange Problem.
7.Balance of International payments.
8.Non-Tariff Barriers.
9.Subsidies to domestic production areas like agriculture.
10. Wars and bad diplomatic ties amongst countries.
1.Foreign Exchange Rate Problem.
To avoid a repetition of the Great Depression of 1929,the noted
economist John Maynard Keynes & others made conceted efforts. Their efforts led
to the setting up of Bretton Woods system(1944) at New Hampshire. Under this
system, each currency was linked to Gold or Dollar terms or both. Later on,
International Monetary Fund (IMF) was established as a central bank to solve the
problem of Balance of payments faced by member nation states so as to mitigate
/discourage inflation and attendant problems. It administers International
monetary system. The World Bank was established to finance economically sound
projects & it disbursed loans worth US $ 21 billion in 1996. However, Presently,
Hybrid System is in vogue which consists of
1.Free floating currencies
2.Managed but flexible currencies
3.Pegging to basket currencies (gliding /crawling peg)
4.Currency-bloc currencies
5.Intervention by countries.
2.Balance of Payment Crisis :
India had to face this crisis in 1990 when it had to mortgage to London 250 tonne of
Gold!
PROBLEMS OF INTERNATIONAL TRADE
OR
THE FACTORS INFLUENCING INTERNATIONAL TRADE
1.INTRODUCTION :-
International trade has faced several problems in the past. It is facing problems
even presently. It shall continue facing one or the other problem in future ,too,
Thus,problems are a part and parcel of international trade.
2) PROBLEMS :-
Problems of international trade can broadly be classified in the following two categories:
i.) General ii) special or immediate
i) GENERAL :-
These problems generally exist at all points of time in varying degrees of
importance. These may be summarised as follows:
1) HISTORICAL:
Historicity acts as a problem, sometimes. For example, African countries over a fairly
long period of history have been drained of their precious human resources by
European countries. Consequently, Agricultural and other developments in Africa
suffered. Comparatively, European countries with their historical stock of financial,
technological and other resources experienced a higher stage of economic growth and
came to dictate terms of trade in the international market. This has created problems
for smaller and less developed countries of Africa which can’t compete on an equal
footing with European Nations due to later’s superiority in technology, management,
finances, etc.
2) POLITICAL:
World politics creates problems ,too. For example, the creation of trade blocks
encourages trade amongst member countries and discourages trade with non members
countries. European Nations (EU), a trade block comprising of 15 European nations,
experiences intratrade to the tune 61% and only 39% of its trade takes place with non
member countries.The following table gives a clear idea about % of intra -block
exports(exports within the block members)as in 2000 A.D.:
TRADE BLOCKS PERCENTAGE OF INTRA-BLOCK EXPORTS
NAFTA 52.0
ASEAN 20.6
SAARC 4.5
In world politics, enemy nation state tries to protect its enlightened national self
interests through various means like diplomacy, war, negotiations, trade restrictions,
high import tariff rates, etc. This creates problems. For example, World War I and II
adversely affected world trade from 1919 to1950. On the other hand, existence of peace
encourages international trade, because traders are able to carry out trade activities
without fearing any losses due to war or armed clashes.
3) ECONOMIC: -
Certain economic factors create problems . For example ,poor means of transportation
and communication; poor demand and supply of goods, services and information;
recession; lack of goodwill in the market; poor financial conditions; Lack of foreign
exchange resources to pay for imports, fluctuation in the foreign currency exchange
rates, Economic Distance, existence of same selling price of a product, etc. we can get
an idea of the significance of this factor by discussing the impact of recession on
trade. During recession , supply outstrips the demand leading to a piling up of a huge
inventory/stocks. This causes loss of employment because manufacturers try to cut
down on costs by retrenching the workers on all levels. This triggers a chain reaction
by restricting the purchasing power of the general public, which in turn causes a drop
in the demand for products whether indigenously manufactured or imported from
outside. This drop in the demand causes a drop in the volume and value of
international trade, because no one would like to incur losses by trading in products
which have no demand! Great Depression of 1929 in U.S.A is a classic example.
Even as recently as 2001, South Asian and East Asian Countries supplying computers
related products to U.S.A could not do much trading of these items due to a poor
demand in U.S.A owing to a slow down of U.S.A domestic economy.
4) GEOGRAPHICAL / PHYSICAL :-
Physical or natural factors like geographical location, relief features, climate, soil, etc.
hampers trade, too. For example, Nepal, Bhutan, Mangolia and Afghanistan are land
locked countries with no direct access to cheap sea routes. Consequently, these
nations have to incurr heavy transportation costs in moving their cargoes through
land routes of neighbouring countries for further onward shipping through seas!
Alternatively, transportation by air becomes costly, thereby reducing their
competitiveness in international markets. This in turn may sometimes discourage
them from undertaking trade activities on an international trade.
5) CULTURAL :-
Cultural factors like race, religion, caste, creed, language, etc. may hinder
international trade. For example, in medieval India, it was forbidden and considered
a sin to travel across the seas to other lands inhabited by the so-called “Malechhas”.
Consequently, Indians could not take advantage of contemporary international trade.
Whereas foreigners like Arabs and Europeans with no such social / religious
restrictions indulged in international trade and reaped the benefits. Islam enjoins upon
its practitioners to travel far and wide. Consequently, Arabian Muslims travelled far
and wide which encouraged trading activities in the Middle East and other Muslim
dominated regions. Till the beginning of Renaissance in Europe, the church
discouraged international trade indirectly by disapproving material comforts of life.
One can’t trade in pork with Muslim countries and in beef with Hindu country like
Nepal because pork and beef eating are forbidden in their respective
religions/regions.
6) TECHNOLOGICAL :
Non-availability of appropriate scientific and technological aides hampers
international trade, too. For example, it was only after the introduction of
freezing/cold storage facilities aboard ships that beef could be exported to
European countries from Argentina. Highly perishable and delicate items
require a high degree of sophistication in packing and handling.Availability of
such facilities has made it possible to export to the gulf countries from
Maharashtra in India the highly perishable items like grapes and “Hapus
7) NATURAL HAZARDS:
Sometimes, natural hazards block the carrying out of trade
Activities. The Great Bubonic plague of 1348 wiped out a large
number of European population leaving little scope for
international trade to prosper due to reduced demand for products.
Famines and Epidermic cause vast devastation and loss of life,
thereby reducing the population having requisite purchasing
power. Low purchasing power and a lower number of people mean
a lower demand for goods, services and information.
(ii) SPECIAL OR IMMEDIATE FACTOR:
Although the general factors mentioned above go on affecting international trade all
the time in varying degree, yet their impact may not vary dramatically. From the point
of view of the present time, it is the immediate factor which makes the most powerful
impact on international trade. This special or immediate factor varies from time to
time. For example, the division of the world into communist and capitalist blocks
during cold war era was the most important factor which inhibited the growth of trade
amongst countries of these two blocks. This factor has lost its importance with the
disintegration of the erstwhile USSR and the emergence of U.S.A. as the global super
power. The year 2001 saw the emergence of threats by international terrorism as the
immediate factor, which hampered the recovery of U.S.A. and the global economy
and consequently the international trade. The collapse of the “North” and “South
Towers” of World Trade Center (WTC) at New York on 11th September 2001 by
terrorists through hijacked aeroplanes caused a loss of thousand of billions US
Dollars in terms of economic growth and trade by sending the whole global economy
into a panic, because WTC was the nerve centre of the World Financial Market.
10.6 PROSPECTS OF INTERNATIONAL TRADE: 1. Taking into consideration contemporary development in the world, it seems
reasonably well to see bright prospects on the horizon for international trade, since the
world is inching towards integrated global dynamic spatial economy by slowly removing
tariff barriers in the direction of a perfectly balanced world economic landscape.
2. The period from 1950 to 2000 has witnessed a mixed picture, with some successes and
some failures. However, an overall impartial assessment would show that international
trade has grown faster than output for every major country.
Having learned the dangers of protectionism in the 1930’s ,nations have now joined
together in multinational trade treaties and agreements to overcome the temptation to
impose trade restrictions, i.e. ,1993 Uruguay round which extended the principle of free
and open trade to new sectors and new nations.
3. MAASTRIHT TREATY (1991) which usheredd in “Euro ” currency and the resultant
1992 crisis have shown that :-
A country can’t have simultaneously :-
1. a fixed but adjustable exchange rate.
2. Open capital market.
3. Independent domestic monetary policy.
10.7 DAVID RICARD’S CLASSICAL THEORY
1. INTRODUCTION :
David Ricardo, the British Economist in 1817 gave the law of comparative
advantages. This law shows that international specialization benefits a nation. In
other words, international trade benefits all trading nations.
2. BACKGROUND :
Around 1800, questions were raised whether nations should import nothing and
‘protect’ their markets with tariffs or quotas. For example, will America import
nothing if its labour (or resources) is absolutely more productive than European
Labour? Is it economically wise for Europe to “protect” its markets with tariffs or
quotas? David Ricardo answered these questions by his classical theory of
comparative advantages.
3. EXPLANATIONS :
David Ricardo considered two types of advantages :
i. Absolute
ii. Comparative
For simplicity, he took two regions and only two goods. He chose to measure all
production costs in terms of labour-hours. He analysed food and clothing for
Europe and America.
In America, it takes 1 hour of labour to produce a unit of food and 2 hours of
labour to produce a unit of clothing. In Europe, it takes 4 hours of labours to
produce a unit of food and 3 hours of labour to produce a unit of clothing.
Clearly, America has absolute advantage in both goods, because it takes less time to
produce these in America compared to in Europe. However, America has comparative
advantage in food compared to clothing because it takes less time to produce food than
the clothing. Europe has comparative advantage in clothing, because it takes less time to
produce clothing than the food. From these facts, Ricardo proved that both regions will
benefit, if they specialize in their areas of comparative advantage, i.e., if America
specializes in the production of food and Europe specializes in the production of clothing.
Thus, America will export food to pay for European clothing and Europe will export
clothing to pay for American food.
American and European Labour Requirements for Production
Necessary Labour for production
(labour-hours)
Product In America In Europe
1 unit of food 1 4
1 unit of clothing 2 3
Comparative Advantages Depends only on Relative Costs. In a hypothetical example,
America has lower labour costs in both food and clothing. American Labour productivity
is between 1½ and 4 times Europe’s (1½ times in clothing and 4 times in food).
Now, there are two situations :
i. Before trade
ii. After trade
i. Before trade : The real wage of the American worker for an hour’s work is 1
unit of food or 1/2 unit of clothing. The real wage of the European worker for an
hour’s work is 1/4 unit of food and 1/3 unit of clothing per hour work. With
perfect competition, in America clothing will be 2 times as expensive as food
,because it takes twice as much labour to produce a unit of clothing as it does to
produce a unit of food. In Europe, clothing will be only 3/4ths as expensive as
food.
ii. After trade : After trade, the relative prices of food and clothing must be
somewhere between the European Price Ratio (4/3 = food to clothing ratio) and
the American Price Ratio (1/2 = food to clothing ratio) which is assumed to be
2/3. So, 2 units of clothing trade for 3 units of food, because it takes more hours
to produce clothing than food (i.e. 3 hours) : In one hour, only 1/2 unit of food is
available. In one hour, only 1/3 unit of clothing is available. 1 unit of clothing is
completed in three hours as follows :
1/3 +1/3+1/3=3/3 = 1 unit
In three hours, following unit of food is ready =
1/2+1/2+1/2=3/2 units
Thus, to get 1 unit of clothing prepared in 3 hours ,the other one has to give 3 hours of
food which is 3/2 units of food. Or to get 2 units of clothing , 2 times the 3/2 units of food
have to be exchanged. Therefore
3/2 * 2 = 3 units of food
2 units of clothing = 3 units of food
ECONOMIC GAINS FROM TRADE:
Initially American worker was required to work for 3 hours and European 7 hours to get
one unit each of food and clothing.
After opening of trade, the American has still to produce food (within 1 hour) and has to
work for another 1 ½ hour to get a unit of clothing (assuming that price of food is $2 per
unit and $3 for clothing per unit) Thus, he has to work only for 2 ½ work, thereby
saving ½ hour or gaining real wage by 20%. Similarly, European worker has still to work
for 3 hours to produce one unit of clothing. However, he has to work to get one unit of
food. Since food cost is $ 2 and his each hour’s work is equal to $ 1, he has to work for
another 2 hours. Thus, he has to work only for 3+2=5 hours, thereby saving 2 hours. It
means an increase of 40% in the real wages.
Then workers and consumers can obtain a large quantity of consumer goods for the same
amount of work, when they specialize in the areas of comparative advantage and trade
their own production for goods in which they have relative disadvantage.
4. IMPORTANCE :
This theory can be applied to trade between and amongst countries. When countries
produce products in which they have comparative advantage, then they are better off.
Free trade allows the world to move to its production – possibility frontier as shown
below :
Bilateral, multilateral trade in numerous commodities benefit from operation of
the law of comparative advantages. Bilateral balancing of trade leads to severely
reduced economic gains. Trade between a single country and “the rest of the
world” stands to gain numerous benefits for its operators.
Following Figure shows it:
Production Possibility Frontier
Food Z
E
Before Trade
After Trade
500
X
Clothing
Consumer Electronics Machinery
Developing Countries
Japan
America
Oil
500
Or
Following example:
India ‘s Pakistan’s
Comparative wheat engineering products sugar Comparative
Advantage Advantage
5. CRITICISM :
i. Positive : It clearly shows the importance/significance/advantages of
International trade. Other sectors will gain more than the injured sectors
will lose. Over long periods of time, those displaced from low-wage
sectors will move towards higher-wage jobs.
ii. Negative :
a)Classical assumption : Classical assumption of a smoothly working
competitive economy with flexible prices and wages and voluntary
unemployment is quite wrong. Imports may lead to unemployment of
workers in that particular sector due to cheaper imports compared to
domestic products.Overvalued foreign exchange rate may reduce demand
for workers who may not find comparable jobs in other sectors. Nation
may be pushed inside its PPF with rising unemployment and falling GDP.
1930s depression led to Tariff walls inU.S.A.
To quote Samuelson Nordhaus (in Economics),
“The classical theory of comparative advantage is strictly valid only
when exchange rates, prices, and wages are at appropriate levels and
when macro economic policies banish major business cycles and trade
dislocations from the economic scene.”
c) Income distribution : People, sectors or factors of production or regions
may get harmed due to substitution of people, sectors or factors of high
income countries by low-wage developing countries or regions. This
leads to loss of wages in the receiving country due to availability of cheap
foreign products rendering local labour or factors incompetitive.
d) Those who are temporarily injured by international trade are genuinely
harmed and are vocal advocates for protection and trade barriers.
6. CONCLUSION:
To quote Samuelson Nordhaus,
“Notwithstanding its limitations, the theory of comparative advantage is one
of the deepest truths in all economics. Nations that disregard comparative
advantage pay a heavy price in terms of their living standards and economic
growth.”
“Petition of the Candle Makers,”Written by French economist/Satarist Frederic
Bastat aptly sums up the whole truth of comparative advantage and protectionism
in the following paragraph,
“To the chamber of Deputies:We are subject to the intolerable competition of a
foreign rival, who enjoys such superior facilities for the production of light that
he can inundate our national market at reduced price. This rival is no other than
the sun. Our petition is to pass a law shutting up all windows, openings, and
fissures through which the light of the sun is used to penetrate our dwellings, to
the prejudice of the profitable manufacture we have been enabled to bestow on
the country.
Signed : The Candle Makers,”
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