India's International Trade Patterns and Balance of Payments Analysis

Copyright @ Oxford University Press
International Business R. M. Joshi
Chapter 3: International Trade Patterns
and Balance of Payments
International Business
Rakesh Mohan Joshi
Professor & Chairperson, IIFT New Delhi
1

INTERNATIONAL TRADE
PATTERNS
AND
BALANCE OF PAYMENTS
Chapter 3

Learning Objectives
 To explain the significance of international trade
patterns
 To provide an overview of world trade
 To evaluate India’s international trade
 To outline the concept of terms of trade
 To explicate balance of payments
 To highlight key issues in India’s foreign trade

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)
Commercial
Services
19.4%
Merchandise
80.6%

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

Direction of World Exports
0
2000000
4000000
6000000
8000000
10000000
12000000
14000000
F.O.B.US$Million
1980
1990
2000
2003
2004
2005
2006
2007
Years
Developed Economies Developing Economies Economies in Transition

Direction of World Merchandise Exports
(2007)
No rth America
13.7%
As ia
28.0%
Euro pe
42.5%
Africa
3.1%
So uth and Central
America
3.7%
Middle Eas t
5.3%
CIS
3.7%

Direction of World Merchandise Imports
(2007)
Middle East
3.3%
South and Central
America
3.3%
CIS
2.7%
Africa
2.5%
North America
19.4%
Asia
25.3%
Europe
43.4%

Composition of World Merchandise Trade
Composition of Trade: The statistical analysis of a
country’s 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
0%
20%
40%
60%
80%
100%
Percentage
1965
1970
1980
1995
2000
2002
2005
2006
Years
Food Items Agricultural raw materials Ores, metals and precious stones Fuels Manufactured goods

Composition of World Merchandise Exports
(2006)
Fuels
17.2%
Textiles
2.1%
Clothing
3.0%
Automotive products
9.8%
Agricultural Products
9.2%
Other machinery
14.0%
Other semi Manufactures
7.7%
Pharmaceuticals
3.0%
Office &telecom equipment
14.1%
Ores &minerals
1.9%
Iron &Steel
3.6%
Non-ferrous metals
3.0%
Scientific and controlling
instruments
2.3%
Other chemicals
9.1%

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.

South &Central
America
2.8%
Africa
2.6% Middle East
2.4%
CIS
2.0%
North America
16.4%
Asia
22.9%
Europe
51.0%
Direction of World Commercial
Services Exports (2007)

Direction of World Commercial
Services Imports (2007)
South &CentralAmerica
3.2%
Middle East
4.1%
Africa
3.2%
CIS
2.9%
North America
14.4%
Asia
25.4%
Europe
46.8%

Composition of World Exports of
Commercial Services (2007)
Other Commercial
Services
50.8%
Travel
26.5%
Transport
22.8%

India’s Foreign Trade: An Overview
India’s 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
0
50000
100000
150000
200000
250000
300000
350000
1949-50
1951-52
1953-54
1955-56
1957-58
1959-60
1961-62
1963-64
1965-66
1967-68
1969-70
1971-72
1973-74
1975-76
1977-78
1979-80
1981-82
1983-84
1985-86
1987-88
1989-90
1991-92
1993-94
1995-96
1997-98
1999-2000
2001-02
2003-04
2005-06
2007-08*
Years
US$(billion)
Exports (including re-exports) Imports

Composition of India's External Trade
(2006-07)
Merchandise,
72.6%
Services, 27.4%

Direction of India's Trade : Exports
0
20000
40000
60000
80000
100000
120000
140000
US$(Million)
1987-88
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2004-05
2005-06
2006-07*
Years
OECD countries OPEC Eastern Europe Developing countries Others / unspecified

Direction of India's Trade : Imports
0.0
20000.0
40000.0
60000.0
80000.0
100000.0
120000.0
140000.0
160000.0
180000.0
200000.0
US$Million
1987-88
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2004-05
2005-06
2006-07*
Years
OECD countries OPEC Eastern Europe Developing countries Others / unspecified

Composition of India's Export
15.2
2.5
80.7
0.1
1.5
13.5
2.6
78.0
4.2
1.7
13.5
2.9
76.1
4.8
2.7
12.8
3.8
76.6
4.9
2.0
10.5
5.5
74.3
8.5
1.2
10.2
5.2
72.0
11.5
1.1
10.3
4.8
68.6
15.0
1.3
9.3
4.0
67.4
17.9
1.4
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Percentage
1999-2000
2000-01
2001-02
2002-03
2004-05
2005-06
2006-07
2007-08*
Years
Agriculture &allied products Ores & Minerals Manufactured Goods Crude & Petroleum Products Others & Unclassified items

Composition of India's Imports
5.8
27.4
2.80.9
12.0
32.8
18.3
3.7
33.2
1.50.9
11.0
29.8
19.9
4.5
29.5
1.30.9
11.4
30.3
22.1
4.6
30.7
1.00.7
12.1
28.2
22.7
3.5
29.6
1.10.7
13.0
48.3
3.8
2.5
32.1
1.30.6
15.8
43.7
4.0
2.9
33.2
1.60.6
15.4
43.8
2.5
2.2
33.6
1.90.6
13.2
40.4
8.1
0
10
20
30
40
50
60
70
80
90
100
Percentage
1999-2000
2000-01
2001-02
2002-03
2004-05
2005-06
2006-07
2007-08*
Years
Food and allied products Fuel Fertilizers Paper board, manufactures & newsprint Capital goods Others Unclassified items

India’s Services Trade
The services sector in India has grown remarkably and
account for over 55 per cent of India’s GDP making it
the most significant component of the country’s
economy. India’s services exports have significantly
grown from a meager US$ 295 million in 1970–71 to
US$ 76.2 billion in 2006–07 with a growth of 32.1 per
cent over the previous year.

Composition of India’s Service Exports
(2007-08)**
Miscellaneous*,
28.1
Travel, 12.9
Transportation,
10.8
Insurance, 1.8
G.N.I.E., 0.4
Software, 46.0
** 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 country’s 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 partner’s 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 nation’s 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

Year Terms of Trade
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
Trade Indices : Developed vs. Developing
Economies (Base Year 2000=100)

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.

India’s Terms of Trade
India’s Unit Value Index for imports, as shown in Table 3.13 rose
from 35.3 in 1970–71 to 608 in 2006–07 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 India’s
financial burden.
Factors responsible for this include relative inelasticity of India’s
import demands for petroleum products, foodgrains, fertilizers,
oilseeds, and capital goods constrained India in making any
substantial cuts on imports.

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
Trade Indices of India’s Foreign Trade
(Base: 1978-79=100)

Balance of Payments (BoP)
The summary of all its economic transactions that have
taken place between the country’s residents and the
residents of other countries during a specified time
period.
It is used as an indicator of a country’s 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 1972–73 and US$ 77 million in 1996–97.
There has been a steep rise in trade deficit from US$ 5.98 billion
in 2000–01 to US$ 80.39 billion in 2007–08 mainly due to the
steep rise in its unit value prices of India’s import products,
especially the petroleum products and fertilizers besides domestic
demand

India’s Trade Balance

Constraints in India’s 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

India's International Trade Patterns and Balance of Payments Analysis

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