Grade 10 Economics||International Trade|| Notes

1.0 Meaning and Definition of International Trade

Meaning:

International trade refers to the exchange of goods and services between countries. When Nepal imports petroleum from Saudi Arabia or exports carpets to the USA, that's international trade.

Examples from daily life:

Mobile phones (made in China, used in Nepal)

Rice (exported from Nepal to Bangladesh)

Doctors going abroad for work (service export)

Students studying in foreign countries (service import)

Definition:

According to D.G. Locket:
"International trade is the purchase of goods and services by the citizens of one country from the citizens of another country."

Simple Definition:
"International trade is the exchange of goods and services across international borders."

Why Countries Trade:

1. No country is self-sufficient: Nepal can't produce everything it needs
2. Different resources: Nepal has water resources, Saudi Arabia has oil
3. Climate differences: Nepal grows tea, Gulf countries don't
4. Different technology: Japan has advanced technology, Nepal doesn't
5. Cost differences: Some goods cheaper to produce in certain countries

2.0 Importance of International Trade

Major Benefits:

Specialization and Division of Labor:

• Countries produce what they're best at
• Example: Nepal specializes in carpets, Bangladesh in garments
• Increases efficiency and productivity

Optimum Use of Resources:

• Countries use their resources best
• Nepal: Water for hydropower
• Middle East: Oil for energy
• Australia: Minerals for export

Availability of Various Goods:

• Consumers get variety
• Nepali people use iPhones, cars, computers from abroad
• Foreigners get Nepali tea, carpets, pashmina

Transfer of Technology:

• Advanced technology spreads
• Nepal gets medical equipment, machinery
• Learning new production methods

Increase in Employment:

• Export industries create jobs
• In Nepal: Carpet industry employs thousands
• Import industries also create jobs (distribution, sales)

Price Stability:

• Shortages can be imported
• Surplus can be exported
• Prevents price fluctuations

Economic Growth:

• Increases GDP
• More foreign exchange earnings
• Investment opportunities

International Cooperation:

• Countries become interdependent
• Promotes peace and understanding
• Cultural exchange

For Nepal Specifically:

1. Earns foreign exchange: Exports bring US dollars
2. Imports essential goods: Petroleum, medicines, machinery
3. Employment: 2.5 million Nepalis work abroad
4. Remittances: 25% of GDP from workers abroad
5. Technology transfer: Get access to modern technology

3.0 Balance of Trade (BOT)

Definition:

Balance of Trade is the difference between a country's exports and imports of visible goods over a specific period (usually one year).

Formula:

Types of Balance of Trade:

1. Favorable Balance of Trade (Trade Surplus):

• Exports > Imports
• Country earns more than spends
• Example: China usually has trade surplus
• For Nepal: Rare, only occasionally

2 .Unfavorable Balance of Trade (Trade Deficit):

• Imports > Exports
• Country spends more than earns
• Example: Nepal usually has trade deficit

Nepal's situation (2022):

• Exports: $1.2 billion
• Imports: $15.6 billion
• Trade Deficit: $14.4 billion

Balanced Balance of Trade:

• Exports = Imports
• Very rare in practice
• Temporary situation

Nepal's Trade Balance Situation:

1. Chronic trade deficit since 1960s
2. Main reasons:

• Limited industrial base
• High dependency on imports
• Low-value exports
• Landlocked country (high transport cost)

3. Major exports: Carpets, garments, pulses, tea

4. Major imports: Petroleum, machinery, vehicles, gold

4.0 Balance of Payments (BOP)

Definition:

Balance of Payments is a complete record of all economic transactions between a country and the rest of the world during a specific period.

Difference between BOT and BOP:

Components of Balance of Payments:

A. Current Account:

• Trade Balance (Goods: exports-imports)
• Services (Tourism, transport, insurance)
• Income (Remittances, interest, dividends)
• Transfers (Grants, gifts, aid)

B. Capital Account:

• Foreign Direct Investment (FDI)
• Portfolio Investment
• Loans and borrowings
• Banking capital

C. Official Reserves Account:

• Changes in foreign exchange reserves
• Gold reserves
• SDRs with IMF

Formula:

Note: BOP always balances (theoretically)

Nepal's BOP Situation:

• Current Account: Usually deficit (due to trade deficit)
• Capital Account: Usually surplus (due to remittances, aid)
• Overall: Managed through reserves
• Foreign reserves: About $10 billion (2022)

5.0 Free Trade Policy

Meaning:

Free trade policy means no restrictions on international trade. Government doesn't impose tariffs, quotas, or other barriers.

Key features:

1. No import/export duties
2. No quotas or restrictions
3. Market forces determine trade
4. Example: Trade between US states

Advantages of Free Trade:

Efficiency:

1. Countries specialize
2. Resources used optimally
3. Lower production costs

Consumer Benefits:

1. More choices
2. Lower prices
3. Better quality

Economic Growth:

1. Larger markets
2. Economies of scale
3. Innovation encouraged

International Relations:

1. Promotes peace
2. Cultural exchange
3. Mutual dependence

Technology Transfer:

1. Access to new technology
2. Knowledge sharing
3. Skills development

Disadvantages of Free Trade:

Harm to Domestic Industries:

• Local industries can't compete
• May shut down
• Job losses

Dependency:

• Over-reliance on imports
• Food security risk
• Strategic goods dependency

Exploitation:

• Developed countries dominate
• Unequal bargaining power
• Price manipulation

Environmental Issues:

• Pollution from transportation
• Resource depletion
• Carbon footprint

Cultural Impact:

• Loss of local culture
• Westernization
• Traditional skills lost

Relevance to Nepal:

• Nepal follows mixed policy
• Some free trade (with India, under SAFTA)
• Some protection (to safeguard local industries)
• WTO membership requires reducing trade barriers

6.0 Protection Trade Policy

Meaning:

Protection policy means government imposes restrictions on international trade to protect domestic industries.

Protection measures:

Tariffs: Taxes on imports

Quotas: Limits on quantity

Subsidies: Support to local producers

Exchange control: Restrictions on foreign currency

Quality standards: Strict requirements

Objectives of Protection Policy:

Protect Infant Industries:

• New industries need time
• Can't compete with established foreign industries
• Example: Nepal's cement industry needed protection

Employment Protection:

• Save local jobs
• Prevent factory closures
• Maintain living standards

National Security:

• Essential goods produced domestically
• Food security
• Strategic industries (defense, energy)

Balance of Payments:

• Reduce imports
• Improve trade balance
• Save foreign exchange

Revenue Generation:

• Tariffs provide government revenue
• Important for developing countries

Methods of Protection:

Tariff Barriers:

• Import duties
• Export duties
• Transit duties

Non-Tariff Barriers:

• Import quotas
• Licensing
• Technical standards
• Health regulations
• Environmental standards

Advantages for Nepal:

• Protects local industries: Cement, sugar, textiles
• Saves foreign exchange: Reduces unnecessary imports
• Employment: Protects jobs in local industries
• Self-reliance: Reduces dependency
• Government revenue: From tariffs

Disadvantages for Nepal:

• Higher prices: Consumers pay more
• Inefficiency: Protected industries become lazy
• Limited choices: Fewer goods available
• Retaliation: Other countries impose barriers
• Corruption: Licensing can lead to corruption

7.0 Comparative Cost Theory

Developer: David Ricardo (1817)

Basic Concept:

Countries should specialize in producing goods where they have comparative advantage

Even if one country is better at producing everything, both can benefit from trade

Key Assumptions:

• Two countries, two goods
• Labor is only factor of production
• Constant returns to scale
• No transportation costs
• Perfect competition
• Free trade
• Full employment

Example: Nepal vs. India

Production capacity (per worker per day):

Absolute Advantage:

India is better at producing both (absolute advantage in both)

Comparative Advantage:

• Calculate opportunity cost:
• Nepal: 1 meter carpet = 0.4 kg tea (2/5)
• India: 1 meter carpet = 0.5 kg tea (4/8)
• Nepal has lower opportunity cost for carpets (comparative advantage)
• India has lower opportunity cost for tea (comparative advantage)

Specialization:

• Nepal specializes in carpets
• India specializes in tea
• Both trade and both benefit

Gains from Trade:

• Increased total production: More of both goods
• Lower prices: Due to specialization
• Better resource allocation: Each country uses resources efficiently
• Higher consumption: Both countries can consume more

Criticisms:

• Unrealistic assumptions: No transport costs, perfect competition
• Only two countries, two goods: Real world more complex
• Ignores other factors: Capital, technology, land
• Static theory: Doesn't consider changes over time
• Assumes full employment: Not realistic

Relevance to Nepal:

• Nepal has comparative advantage in:
• Hydropower
• Tourism
• Agriculture (organic)
• Handicrafts
• Should specialize in these areas

8.0 World Trade Organization (WTO)

Background:

• Established: 1 January 1995
• Headquarters: Geneva, Switzerland
• Replaced: GATT (General Agreement on Tariffs and Trade)
• Members: 164 countries (2022)
• Nepal joined: 23 April 2004

Objectives:

• Promote free trade: Reduce trade barriers
• Ensure non-discrimination: Most Favored Nation (MFN) principle
• Provide forum for negotiations: Settle trade disputes
• Assist developing countries: Technical assistance
• Sustainable development: Balance trade and environment

Principles:

• Most-Favored-Nation (MFN): Equal treatment to all members
• National Treatment: Foreign and local goods treated equally
• Transparency: Clear trade rules and regulations
• Free Trade: Progressive liberalization
• Fair Competition: Anti-dumping measures

Functions:

• Administer trade agreements
• Forum for trade negotiations
• Handle trade disputes
• Monitor trade policies
• Technical assistance to developing countries
• Cooperation with other international organizations

Benefits for Nepal:

• Market access: 163 other countries
• Dispute settlement mechanism: Fair treatment
• Technical assistance: Capacity building
• Policy guidance: Trade policy formulation
• Participation in global trade system

Challenges for Nepal:

• Implementation costs: Expensive to implement agreements
• Competition: Local industries face global competition
• Intellectual property rights: TRIPS agreement challenges
• Agriculture subsidies: Developed countries subsidize their farmers
• Capacity constraints: Lack of expertise

9.0 South Asian Free Trade Area (SAFTA)

Background:

• Established: 6 January 2004 (came into force 1 January 2006)
• Members: 8 SAARC countries
• Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka
• Objective: Create free trade area in South Asia

Key Features:

• Tariff reduction: Gradual reduction to 0-5%
• Sensitive lists: Some products protected
• Rules of origin: Criteria for preferential treatment
• Dispute settlement mechanism
• Technical assistance

Objectives:

• Promote trade: Among SAARC countries
• Economic cooperation: Joint projects
• Remove trade barriers: Tariffs and non-tariff barriers
• Increase investment: Regional investment
• Poverty reduction: Through economic growth

Benefits for Nepal:

• Market access: To 7 neighboring countries
• Geographical advantage: Close to large markets
• Similar products: Preferences for similar climates
• Cultural similarity: Similar consumer preferences
• Transport cost: Lower than distant markets

Challenges for Nepal:

• Trade deficit: With all SAARC countries, especially India
• Non-tariff barriers: Still exist
• Infrastructure: Poor transport connectivity
• Product competitiveness: Can't compete with India, Bangladesh
• Sensitive lists: Many Nepali products on India's sensitive list

Nepal's Trade with SAARC (2022):

• Total trade: $8.5 billion
• With India: $8.2 billion (96%)
• Exports to SAARC: $0.9 billion
• Imports from SAARC: $7.6 billion
• Trade deficit: $6.7 billion

10.0 Nepal's Foreign Trade: Current Status

Trade Statistics (2022/23):

• Total trade: $16.8 billion
• Exports: $1.2 billion (7.1%)
• Imports: $15.6 billion (92.9%)
• Trade deficit: $14.4 billion

Major Export Items:

• Carpets: $87 million
• Yarn: $75 million
• Cardamom: $65 million
• Noodles: $62 million
• Tea: $33 million
• Pashmina: $28 million
• Readymade garments: $25 million

Major Import Items:

• Petroleum products: $2.5 billion
• Machinery/parts: $1.8 billion
• Vehicles: $1.2 billion
• Iron and steel: $1.1 billion
• Gold: $0.9 billion
• Medicines: $0.5 billion
• Cement: $0.4 billion

Major Trading Partners:

India: 64% of total trade

China: 14%

USA: 6%

UAE: 4%

Other countries: 12%

Problems in Nepal's Foreign Trade:

1. Chronic trade deficit: Import > Export for decades
2. Limited export basket: Few products, low value
3. Concentration on few markets: Over 60% with India
4. High import dependency: Essential goods imported
5. Low productivity: Traditional methods, small scale
6. Infrastructure constraints: Poor transport, storage
7. Non-tariff barriers: From trading partners
8. Quality issues: Don't meet international standards
9. Political instability: Affects trade policy
10. Landlocked: High transport costs

Government Initiatives:

Trade Policy 2015: Export promotion, import substitution

1. Special Economic Zones: Birgunj, Bhairahawa, Simara
2. Export incentives: Cash incentives for exporters
3. Trade agreements: With India, China, others
4. Quality certification: Help for exporters
5. Trade fairs: Participation in international fairs
6. Export houses: Support for export businesses

11.0 Recent Developments in Nepal's Trade

Key Agreements:

Nepal-India Trade Treaty (2009, renewed):

1. Preferential access to Indian market
2. Some tariff concessions
3. Transit rights through India
4. Nepal-China Transit Agreement (2016):
5. Access to Chinese ports
6. Alternative to Indian route
7. Not fully utilized yet
8. Nepal-Bangladesh Trade Agreement:
9. Preferential treatment
10. Transit through India
11. Electricity export potential

Emerging Opportunities:

1. Hydropower export: To India, Bangladesh
2. IT services: Growing sector
3. Medical tourism: Quality at lower cost
4. Organic agriculture: For export markets
5. Herbal products: Ayurvedic medicines
6. Education services: For foreign students

Challenges:

1. COVID-19 impact: Disrupted supply chains
2. Global recession: Reduced demand
3. Climate change: Affects agriculture exports
4. Geopolitical tensions: India-China relations affect Nepal
5. Internal issues: Political instability, corruption

Important Formulas and Calculations

1. Balance of Trade:

Example:

Exports: $1,200 million

Imports: $15,600 million

BOT = 1,200 - 15,600 = -$14,400 million (deficit)

2. Export-Import Ratio:

Example for Nepal:

Ratio = (1,200 ÷ 15,600) × 100% = 7.7%

3. Trade Dependence Ratio:

Example for Nepal:

Total trade: $16,800 million

GDP: $36,000 million

Dependence = (16,800 ÷ 36,000) × 100% = 46.7%

4. Comparative Advantage Calculation:

Step 1: Calculate production per unit
Step 2: Calculate opportunity cost
Step 3: Identify comparative advantage
Step 4: Determine specialization

Case Studies

Case 1: Nepal's Carpet Industry

History: Started 1960s

Success factors: Cheap labor, traditional skills

Challenges: Competition from China, India

Current status: Second largest export

Lesson: Traditional industries can be competitive

Case 2: Bangladesh's Garment Industry

Growth: From zero to $35 billion exports

Success factors: Cheap labor, MFA quotas, government support

Employment: 4 million workers

Lesson: Right policies can transform an industry

Case 3: India's IT Services

Growth: $150 billion exports

Success factors: English education, time zone, government support

Lesson: Services can be major export

Case 4: China's Manufacturing

"World's factory": $2.5 trillion exports

Success factors: Infrastructure, labor, government support

Lesson: Scale matters in manufacturing

Important Definitions (for Exam)

1. International Trade: Exchange of goods and services between countries.
2. Balance of Trade: Difference between exports and imports of goods.
3. Balance of Payments: Complete record of all economic transactions with other countries.
4. Free Trade: Trade without government restrictions.
5. Protection Policy: Government restrictions to protect domestic industries.
6. Comparative Advantage: Ability to produce at lower opportunity cost.
7. WTO: World Trade Organization, global trade regulating body.
8. SAFTA: South Asian Free Trade Area, regional trade agreement.
9. Tariff: Tax on imports or exports.
10. Quota: Limit on quantity of imports or exports.