Trade is one of the powerful forces of economic integration. The term ‘trade’ Means exchange of goods, wares or Merchandise among people. Trade is of two types. They are:

1. Internal Trade and
2. International Trade.

Internal Trade:

It refers to the exchange of goods and services within the political and Geographical boundaries of a nation. It Is a trade within a country. This is also known as ‘domestic trade’ or ‘home trade’ or ‘intra-regional trade’.

International Trade:

It refers to the trade or exchange of goods and services between two or more countries. In other words, it is a trade among different countries or trade across political boundaries. It is also called as ‘external trade’ or ‘foreign trade’ or ‘inter-regional trade’

Gains from International Trade:

International trade helps a country To export its surplus goods to other Countries and secure a better market for It. Similarly, international trade helps a Country to import the goods which cannot Be produced at all or can be produced at a Higher cost. The gains from international Trade may be categorized under four Heads.

Efficient Production:

International trade enables each Participatory country to specialize in The production of goods in which it has Absolute or comparative advantages. International specialization offers the Following gains. Better utilization of resources.

1. Concentration in the production of Goods in which it has a comparative Advantage.
2. Saving in time.
3. Perfection of skills in production.
4. Improvement in the techniques of Production.
5. Increased production.
6. Higher standard of living in the trading Countries.

Equalization of Prices between Countries International trades may help to equalize prices in all the trading countries.

1. Prices of goods are equalized between the countries (However, in reality it has not happened).
2. The difference is only with regard to the Cost of transportation.
3. Prices of factors of production are also Equalized (However, in reality it has not Happened).

Equitable Distribution of Scarce Materials:

International trade may help the Trading countries to have equitable Distribution of scarce resources.

General Advantages of International Trade:

1. Availability of variety of goods for consumption.
2. Generation of more employment Opportunities.
3. Industrialization of backward nations.
4. Improvement in relationship among Countries (However, in reality it has not happened).
5. Division of labour and specialisation.
6. Expansion in transport facilities

Balance of Trade Vs Balance of Payments:

Balance of Trade and Balance of Payments are two different concepts in the subject of international trade.

Balance of Trade (BOT):

Balance of Trade (BOT) refers to the total value of a country’s exports of Commodities and total value of imports of commodities. Only export and Import of commodities are included in the statement of Balance of Trade of a Country. Movements of goods (export and Imports of commodities) are also known As ‘visible trade’, because the movement of commodities between countries can be Seen by eyes and felt by hands and can be Verified physically by custom authorities of a country.

Favourable BOT:

When the total value of commodity Exports of a country exceeds the total value of commodity imports of that country, it is said that the country has a ‘favourable’Balance of trade.

Unfavourable BOT:

If total value of commodity exports of a country is less than the total value of Commodity imports of that country, that Country is said to have an ‘unfavourable’ Balance of trade.

Balance of Payments (BOP):

BoP is a systematic record of A country’s economic and financial Transactions with the rest of the world Over a period of time.When a payment is received from a Foreign country, it is a credit transaction While a payment to a foreign country is A debit transaction. The principal items Shown on the credit side are exports Of goods and services, transfer receipts In the form of gift etc., from foreigners, Borrowing from abroad, foreign directAssets including gold to foreign countries And international agencies.

The principal items on the debit sideInclude imports of goods and services, Transfer payments to foreigners, lending To foreign countries, investments by Residents in foreign countries and official Purchase of reserve assets or gold from Foreign countries and international Agencies.

Components of BOPs:

The credit and debit items are shown vertically in the BOP account of a country.Horizontally they are divided into three Categories, i.e.

1. The current account,
2. The capital account and
3. The official settlements account or Official reserve assets account.

The Current Account: It includes all international trade transactionsOf goods and services, international Service transactions (i.e. tourism, Transportation and royalty fees) and International unilateral transfers (i.e. Gifts and foreign aid).

The Capital Account: Financial Transactions consisting of direct Investment and purchases of interest-Bearing financial instruments, non-Interest bearing demand deposits and Gold fall under the capital account.

The Official Reserve Assets Account: Official reserve transactions consist of Movements of international reserves by Governments and official agencies to accommodate imbalances arising from the current and capital accounts. The official reserve assets of a country include its gold stock, holdings of its Convertible foreign currencies and Special Drawing Rights (SDRs) and its net Position in the International Monetary

Fund (IMF):

Credit (Receipts) – Debit (Payments) = Balance [Deficit (-), Surplus (+)

Balance of Payments Disequilibrium:

The BoP is said to be balanced when The receipts (R) and payments (P) are just Equal, i.e,

Favourable BoP:

When receipts exceed payments, the BoP is said to be favourable. That is, R / P > 1.

Unfavourable BOP:

When receipts are less than payments, The BoP is said to be unfavourable or Adverse.That is R / P < 1.

Exchange Rate:

FOREX refers to foreign currencies. The mechanism through which payments are effected between two countries having Different currency systems is called FOREX System. It covers methods of payment, Rules and regulations of payment and the Institutions facilitating such payments.

Definition of FOREX:

“FOREX is the system or process of converting one national currency into another, and of transferring money from one country to another”.

 Rate of Exchange:

The transactions in the exchange Market are carried out at exchange rates. It Is the external value of domestic currency. Thus, exchange rate may be defined as thePrice paid in the home currency (say ₹ 75) for a unit of foreign currency (say 1 US $). It can be quoted in two ways: One unit of foreign money (1 USD) to So many units of the domestic currency (₹); or

A certain number of units of foreign Currency (USD)to one unit of domestic Money (₹ 1)

Types of Exchange Rate Systems:

Broadly, there are two major Exchange rate systems, namely, (1) fixed (or pegged) exchange rate system and (2) flexible (or floating) exchange rate System. Managed Floating Exchange Rate System also prevails in some countries (like India).

Fixed Exchange Rates:

Countries following the fixed Exchange rate (also known as stable Exchange rate and pegged exchange rate) System agree to keep their currencies At a fixed rate as determined by the Government. Under the gold standard, the value of currencies was fixed in terms Of gold.

Flexible Exchange Rates:

Under the flexible exchange rate (also Known as floating exchange rate) system, Exchange rates are freely determined in an Open market by market forces of demand And supply.

Foreign Direct Investment (FDI) and Trade:

 FDI is an important factor in global Economy. Foreign trade and FDI are closely related. In developing countries Like India, FDI in the natural resource Sector, including plantations, increases Trade volume. Foreign production by FDI is useful to substitute foreign trade. FDI is Also influenced by the income generated from the trade and regional integration Schemes.

FDI is helpful to accelerate the Economic growth by facilitating essential Imports needed for carrying out Development programmes like capital Goods, technical know-how, raw materials And other inputs and even scarce consumer Goods.

When the export earnings of a Country are not sufficient to finance for Imports, FDI may be required to fill the Trade gap.

FDI is encouraged by the factors Such as foreign exchange shortage, desire To create employment and acceleration of The pace of economic development. Many Developing countries strongly prefer foreign investment to imports. However, the real impact of FDI on different Sections of an economy (say India) may differ. It could be a boon for some as well As bane for others. This may be discussed in the class – room. Large demand for USD, generated by IMF and World Bank Policies (FUND – BANK POLICIES), help The USD to gain value continuously. This Is one of the hidden agenda of Fund – Bank policies.

Meaning of FDI

FDI means an investment in a foreign Country that involves some degree ofControl and participation in management. It corresponds to the investment made by a multinational enterprise in a foreign Country. It is different from portfolio Investment, which is primarily motivated by short term profit and it does not seek Management control.

Objectives of FDI:

FDI has the following objectives.

1. Sales Expansion
2. Acquisition of resources
3. Diversification
4. Minimization of competitive risk.

Foreign investment mostly takes the Form of direct investment. Hence, we deal here with the foreign direct investment.

Foreign Portfolio Investment (FPI):

Means the entry of funds into a nation where foreigners deposit money in a Nation’s bank or make purchase in the Stock and bond markets, sometimes for speculation. FPI is part of capital Account of BoP.

Objectives of FDI:

FDI has the following objectives.

1. Sales Expansion
2. Acquisition of resources
3. Diversification
4. Minimization of competitive risk.

Foreign Institutional Investment (FII)Is an investment in hedge funds, Insurance companies, pension funds And mutual funds. Foreign institutional Investment is a common term in the Financial sector of India. For example, A mutual fund in the United States can Make investment in an India-based Company.

Advantages of FDI:

Foreign investment mostly takes the Form of direct investment. Hence, we deal Here with the foreign direct investment.The important advantages of foreign Direct investment are the following:

1. FDI may help to increase the investment Level and thereby the income and Employment in the host country.
2. Direct foreign investment may facilitate Transfer of technology to the recipient Country.
3. FDI may also bring revenue to the Government of host country when it Taxes profits of foreign firms or gets Royalties from concession agreements.
4. A part of profit from direct foreign Investment may be ploughed back Into the expansion, modernization or Development of related industries.
5. It may kindle a managerial revolution In the recipient country through Professional management and Sophisticated management techniques.
6. Foreign capital may enable the country To increase its exports and reduce Import requirements. And thereby ease BoP disequilibrium.
7. Foreign investment may also help Increase competition and break Domestic monopolies.
8. If FDI adds more value to output in the Recipient country than the return on Capital from foreign investment, then The social returns are greater than the Private returns on foreign investment.
9. By bringing capital and foreign exchange FDI may help in filling the savings gap And the foreign exchange gap in order To achieve the goal of national economic Development.
10. Foreign investments may stimulate Domestic enterprise to invest in Ancillary industries in collaboration with foreign enterprises.
11. Lastly, FDI flowing into a developing Country may also encourage its Entrepreneurs to invest in the other LDCs. Firms in India have started Investing in Nepal, Uganda, Ethiopia And Kenya and other LDCs while They are still borrowing from abroad. Larger FDI to India comes from a Small country (Mauritius).

Disadvantages of FDI:

The following criticisms are leveled against foreign direct investment.

1. Private foreign capital tends to flow to the high profit areas rather than to the Priority sectors.
2. The technologies brought in by the foreign investor may not be appropriate to the consumption needs, size of the Domestic market, resource availabilities, Stage of development of the economy, Etc.
3. Foreign investment, sometimes, have Unfavorable effect on the Balance of Payments of a country because when the drain of foreign exchange by way Of royalty, dividend, etc. Is more than the investment made by the foreign Concerns?
4. Foreign capital sometimes interferes in the national politics.
5. Foreign investors sometimes engage in Unfair and unethical trade practices.Foreign investment in some cases leads to the destruction or weakening of Small and medium enterprises.
6. Sometimes foreign investment can Result in the dangerous situation of Minimizing / eliminating competition and the creation of monopolies or Oligopolistic structures.
7. `Often, there are several costs associated with encouraging foreign investment.

FDI in India:

The early 1991 witnessed reforms in the economic policy. This helped to open Up Indian markets to FDI. FDI in India Has increased over the years. In India, FDI has been advantageous in terms of free flow of capital, improved technology, Management expertise and access to International markets.The major sectors benefited from FDI in India are:

• Financial sector (banking and Non-banking)
• Insurance
• Telecommunication
• Hospitality and tourism
• Pharmaceuticals and
• Software and information Technology.

FDI is not permitted in the industrial sectors like

• Arms and ammunition
• Atomic energy,
• Railways,