INTERNATIONAL ECONOMICSUnit – 1

International Trade - Internal & International trade – Economic growth and International trade – Features of International Transactions –International Trade Theories Comparative cost theory – Opportunity cost theory – H.O theory - International Trade Equilibrium International trade

International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), it’s economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders.International trade is, in principle, not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture.Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Trade in goods and services can serve as a substitute for trade in factors of production.Instead of importing a factor of production, a country can import goods that make intensive use of that factor of production and thus embody it. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor, the United States imports goods that were produced with Chinese labor. One report in 2010 suggested that international trade was increased when a country hosted a network of immigrants, but the trade effect was weakened when the immigrants became assimilated into their new country.International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.

Differences between Internal and International TradeThere are certain special features, which differentiate internal trade from international trade.

They are explained as following manner:

Demand and Supply: Demand and supply cannot work out their full effects where foreign trade is concerned. Where as such factors can work out their full efforts in the case of internal trade.

Artificial Barriers to Trade: The natural difficulties may be increased by artificial barriers to trade, either through prohibitive laws as in war time of through customs duties or protective tariffs in the context of international trade.

Differences in Economic Environment from country to country: Different countries have different facilities in carrying out their productive activities. Differences in system of national and local taxation, regulations for health, sanitation, factory organisation, education and insurance, policy regarding the transport and public utilities, laws relating to industrial combinations and trade, etc., do exist as between countries. These differences bring about a difference in the costs of production between them.

Currency differences are still more important because of the fact that exchange is thereby hampered. For instance, if an Indian manufacturer wishes to sell goods in the U.S.A or English, he must know the value of the U.S.A or England currency units in terms of Indian money. Apart form this, each country is under the control of a separate central bank, each following a separate monetary policy which may greatly affect the foreign trade of the country.

The geographical and climatic conditions may give rise to territorial division of labour and localization of industries. Some countries may have natural resources is abundance such as iron ore, coal, etc., whereas in some other countries climatic conditions give advantages to them.

Long-distance: International trade is predominantly long-distance. This may affect the transport costs and the mobility of the different factors of production.

Preference: Preference for home and the prejudice against foreigners remain as one of the major factors that would explain as to why the rates of earning of the different of equal efficiency would not be equalized between different countries.

International Trade and Economic GrowthThe issues of international trade and economic growth have gained substantial importance with the introduction of trade liberalization policies in the developing nations across the world. International trade and its impact on economic growth crucially depend on globalization. As far as the impact of international trade on economic growth is concerned, the economists and policy makers of the developed and developing economies are divided into two separate groups. One group of economists is of the view that international trade has brought about unfavorable changes in the economic and financial scenarios of the developing countries. According to them, the gains from trade have gone mostly to the developed nations of the world. Liberalization of trade policies, reduction of tariffs and globalization have adversely affected the industrial setups of the less developed and developing economies. As an aftermath of liberalization, majority of the infant industries in these nations have closed their operations. Many other industries that used

to operate under government protection found it very difficult to compete with their global counterparts.The other group of economists, which speaks in favor of globalization and international trade, come with a brighter view of the international trade and its impact on economic growth of the developing nations. According to them developing countries, which have followed trade liberalization policies, have experienced all the favorable effects of globalization and international trade. China and India are regarded as the trend-setters in this case.There is no denying that international trade is beneficial for the countries involved in trade, if practiced properly. International trade opens up the opportunities of global market to the entrepreneurs of the developing nations. International trade also makes the latest technology readily available to the businesses operating in these countries. It results in increased competition both in the domestic and global fronts. To compete with their global counterparts, the domestic entrepreneurs try to be more efficient and this in turn ensures efficient utilization of available resources. Open trade policies also bring in a host of related opportunities for the countries that are involved in international trade. However, even if we take the positive impacts of international trade, it is important to consider that international trade alone cannot bring about economic growth and prosperity in any country. There are many other factors like flexible trade policies, favorable macroeconomic scenario and political stability that need to be there to complement the gains from trade. There are examples of countries, which have failed to reap the benefits of international trade due to lack of appropriate policy measures. The economic stagnation in the Ivory Coast during the periods of 1980s and 1990s was mainly due to absence of commensurate macroeconomic stability that in turn prevented the positive effects of international trade to trickle down the different layers of society. However, instances like this cannot stand in the way of international trade activities that are practiced across the different nations of the world. In conclusion it can be said that, international trade leads to economic growth provided the policy measures and economic infrastructure are accommodative enough to cope with the changes in social and financial scenario that result from it.International Trade and Economic growthAdvantages of international trade in economic growth

1. International trade injects global competitiveness and hence the domestic business units tend to become very efficient being exposed international competition. Due to the integration with the world economy the entrepreneurs can have easy access to the technological innovations. They can utilize the latest technologies to enhance their productivity.

2. The developing countries have higher trade protectionism measures as compared to the developed countries. The countries that have adopted such measures are seen to reap the benefits of an open trade regime.

3. The products that are labour intensive like clothing, footwear, textiles etc are exported by the developing countries to both developed and underdeveloped countries. Such exports earn heavy tax revenue in countries like Mexico, India, China and many more.

4. International Trade has also brought in a reduction in the poverty level. India was a closed economy in the 1960s and 70s. There was not even 1% decline in the poverty level. The entire scenario changed with globalisation and international trade. According to Prof. Jagadish Bhagwati the reduction in the poverty level is due to a pull up rather than a trickle down effect. The economic growth brought about by international trade can generate financial resources. Such resources can be used to set up anti poverty programs . Better education and health facilities can also be provided to the poor.

5. The exclusion of all types of trade barriers in the agricultural products of the developed countries will lead to a decline and rise in production and world prices respectively. The developing countries profit by selling or exporting these products at escalated world prices.

6. Optimum use of Resources: Foreign trades helps in the optimum use of natural resources and avoid wastages of resources.

7. Stable Price: It ensures the presence of stable price by avoiding wide fluctuations in prices. It tries to equalise the world price.

8. Availability of all types of goods: It enables a country to import those goods which it cannot produce.

9. Increased Standard of living: It ensures more production to meet the demand of the people of different countries. By increased production, it becomes possible to increase income and the standard of living of its people. It also increase the standard of living by increasing more employment opportunities.

10. Large Scale production: It ensures large production because the production is carried on to meet the demand of its people as well as world market. Large scale production also ensures a great deal of internal economies which reduces the cost of production

11. Increase sales and profits

12. Gain your global market share

13. Reduce dependence on existing markets

14. Exploit international trade technology

15. Extend sales potential of existing products

Disadvantage of international trade:

1. It is a long distance trade and as such it becomes difficult to maintain close relationship between the buyer and the seller.

2. Each country has its own language. As foreign trade involves trade between two or more countries, there is diversity of languages. This difference in language creates problem in foreign trade.

3. Foreign trade involves preparation of a number of documents which also creates difficulties in the way of foreign trade.

4. Some restrictions are imposed on export and import of commodities. These restrictions stands on the progress of foreign trade.

5. Foreign trade involves a great deal of risks because trade takes place over a long distance. Though the risks are covered through insurance, it involves extra cost of production becuase insurance cost is added to cost.

6. The gains from trade have gone mostly to the developed nations of the world. Liberalization of trade policies, reduction of tariffs and globalization have adversely affected the industrial setups of the less developed and developing economies. As an aftermath of liberalization, majority of the infant industries in these nations have closed their operations. Many other industries that used to operate under government protection found it very difficult to compete with their global counterparts.

7. Hire staff to launch international trading8. Exhaustion of Natural Resources - It means exhaust all its natural resource in

due courseof time.It encourages an underdeveloped country to export its all raw material very early.

9. Dependence - Import of cheap quality product increases dependence of foreign countries  to the extent which lead that country no productive (i mean their production within the country stops altogether.

10. Loss to Agricultural Countries - In INTERNATIONAL TRADE predominantly agricultural countries are loser to the maximum extent.This is because Demand for agricultural product is less elastic , there is hardly any increase in their demand despite fall in the price.

Features of International Transactions

There are several reasons - practical as well as pedagogic - for evolving a separate theory of international trade and consequent development of a distinctive branch of economics called "International Economics" dealing with issues and problems of the international economy.International trade follows different laws of behaviour from those of domestic trade. Therefore, a separate theory is inevitable. These reasons, in a way, tend to point out the distinguishing attributes of international transactions. Following Kindleberger, we may enlist the important features of international trade as under?Immobility of Factors : The degree of immobility of factors like labour and capital is generally greater between countries than within a country. Immigration laws, citizenship requirement, etc., often restrict the international mobility of labour.International capital flows are prohibited or severely limited by different governments. Consequently, the economic significance of such mobility of factors tends to equality within but not between countries. For instance, wages may be equal in Mumbai and Pune but not in Mumbai and London.According to Harrod, it thus, follows that domestic trade consists largely of exchange of goods between producers who enjoy similar standards of life, whereas, international trade consists of exchange of goods between producers enjoying widely differing standards. Evidently, the principles which determine the course and nature of the internal and international trade are bound to be different in some respects at least.In this context, it may be pointed out that, the price of a commodity in the country where it is produced tends to equal its cost of production. The reason is that, if in an industry the price is higher than its cost, resources will flow into it from other industries, output will increase and the price will fall until it is equal to the cost of production. Conversely, resources will flow out of the industry, output will decline, the price will go up and ultimately equal the cost of production.Therefore, among different countries, resources are comparatively immobile; hence, there is an automatic influence equalising price and costs. There may be permanent difference between the cost of production of a commodity in one country and the price obtained in a different country for it. For instance, the price of tea in India must, in the long run, be equal to its cost of production in India. But in the U.K., the price of Indian tea may be permanently higher than its cost of production in India. In this way international trade differs from home trade.To the extent that, there are differences in factor mobility and equality of factor returns, costs and price of goods produced and exchanged between countries as compared to those within a single country, international trade will follow different laws. A distinct set of theories will thus, be needed to analyse international transactions.Heterogeneous Markets : In the international economy, world markets lack homogeneity on account of differences in language, preferences, customs, weights and measures, etc. The behaviour of international buyers in each case would, therefore, be different. For instance, the Indians have right-hand driven cars while Americans have left-hand driven cars. Hence, the markets for automobiles are

effectively separated. Thus, one peculiarity of international trade is that, it involves heterogeneous national markets.Different National Groups : An obvious difference between home trade and foreign trade is that trade within a country is trade among the same group of people, whereas, trade between countries runs between differently cohered groups. The socio-economic environment differs greatly between nations, while it is more or less uniform within countries. Friedrich List, therefore, put that: "Domestic trade is among us, international trade is between us and them."Different Political Units : International trade is a phenomenon which occurs between politically different units, while domestic trade occurs within the same political unit. The government in each country is keen about the welfare of its own nationals against that of the people of other countries. Hence, in international trade policy, each government tries to see its own interest at the cost of the other country. As a matter of fact national sovereignty exerts its great influence on the character of economic activity and trade.Thus, the task of international economics is to discover a common ground, if it can, for economic relationship which will satisfy the various components of a peaceful world.

Different National Policies and Government Intervention : National rules, laws and policies relating to trade, commerce, industry, taxation, etc., are more or less uniform within a country, but differ widely between countries. Tariff policy, import quota system, subsidies and other controls adopted by a government interfere with the course of normal trade between it and other countries. Thus, state interference causes different problems in international trade while the value theory in its pure form, which assumes-laissez-faire policy, cannot be applied in toto to the international trade theory.Different Currencies : Perhaps the principal difference between domestic and international trade is that, the latter involves the use of different types of currencies. That is why there is the problem of exchange rates and foreign exchange. It is a fact that different countries follow different foreign exchange policies. Thus, one has to study not only the factors which determine the value of each country's monetary unit, but also the fact of divergent practices and exchange resorted to.

Specific Problems : International economic relations give rise to certain specific problems of a peculiar nature, e.g., international liquidity, international monetary co-operation, evolution of international organisations like the European Common Market, etc. Such problems can never arise in regional economics. These are to be studied separately and solved by "international economics" against the background of world movements at large.

International Trade TheoriesIntroduction

In the 1600 and 1700 centuries, mercantilism stressed that countries should simultaneously encourage exports and discourage imports. Although mercantilism is an old theory it echoes in modern politics and trade policies of many countries. The neoclassical economist Adam Smith, who developed the theory of absolute advantage, was the first to explain why unrestricted free trade is beneficial to a country. Smith argued that 'the invisible hand' of the market mechanism, rather than government policy, should determine what a country imports and what it exports. Two theories have been developed from Adam Smith's absolute advantage theory. The first is the English neoclassical economist David Ricardo's comparative advantage. Two Swedish economists, Eli Hecksher and Bertil Ohlin, develop the second theory.   The Heckscher-Ohlin theory is preferred on theoretical grounds, but in real-world international trade pattern it turned out not to be easily transferred, referred to as the Leontief paradox. Another theory trying to explain the failure of the Hecksher-Ohlin theory of international trade was the product life cycle theory developed by Raymond Vernon.MercantilismAccording to Wild, 2000, the trade theory that states that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports is called mercantilism. According to this theory other measures of countries' well being, such as living standards or human development, are irrelevant. Mainly Great Britain, France, the Netherlands, Portugal and Spain used mercantilism during the 1500s to the late 1700s.   Mercantilistic countries practised the so-called zero-sum game, which meant that world wealth was limited and that countries only could increase their share at expense of their neighbours. The economic development was prevented when the mercantilistic countries paid the colonies little for export and charged them high price for import. The main problem with mercantilism is that all countries engaged in export but was restricted from import, another prevention from development of international trade.Absolute AdvantageThe Scottish economist Adam Smith developed the trade theory of absolute advantage in 1776. A country that has an absolute advantage produces greater output of a good or service than other countries using the same amount of resources. Smith stated that tariffs and quotas should not restrict international trade; it should be allowed to flow according to market forces. Contrary to mercantilism Smith argued that a country should concentrate on production of goods in which it holds an absolute advantage. No country would then need to produce all the goods it consumed. The theory of absolute advantage destroys the mercantilistic idea that international trade is a zero-sum game. According to the absolute advantage theory, international trade is a positive-sum game, because there are gains for both countries to an exchange. Unlike mercantilism this theory measures the nation's wealth by the living standards of its people and not by gold and silver.   There is a potential problem with absolute advantage. If there is one country that does not have an absolute advantage in the production of any product, will there still be benefit to trade, and will trade even occur? The answer may be found in the extension of absolute advantage, the theory of comparative advantage.Comparative Advantage

The most basic concept in the whole of international trade theory is the principle of comparative advantage, first introduced by David Ricardo in 1817. It remains a major influence on much international trade policy and is therefore important in understanding the modern global economy. The principle of comparative advantage states that a country should specialise in producing and exporting those products in which is has a comparative, or relative cost, advantage compared with other countries and should import those goods in which it has a comparative disadvantage. Out of such specialisation, it is argued, will accrue greater benefit for all.   In this theory there are several assumptions that limit the real-world application. The assumption that countries are driven only by the maximisation of production and consumption, and not by issues out of concern for workers or consumers is a mistake.Heckscher-Ohlin TheoryIn the early 1900s an international trade theory called factor proportions theory emerged by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory is also called the Heckscher-Ohlin theory. The Heckscher-Ohlin theory stresses that countries should produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply. This theory differs from the theories of comparative advantage and absolute advantage since these theory focuses on the productivity of the production process for a particular good. On the contrary, the Heckscher-Ohlin theory states that a country should specialise production and export using the factors that are most abundant, and thus the cheapest. Not produce, as earlier theories stated, the goods it produces most efficiently.   The Heckscher-Ohlin theory is preferred to the Ricardo theory by many economists, because it makes fewer simplifying assumptions. In 1953, Wassily Leontief published a study, where he tested the validity of the Heckscher-Ohlin theory. The study showed that the U.S was more abundant in capital compared to other countries, therefore the U.S would export capital- intensive goods and import labour-intensive goods. Leontief found out that the U.S's export was less capital intensive than import.Product Life Cycle Theory Raymond Vernon developed the international product life cycle theory in the 1960s. The international product life cycle theory stresses that a company will begin to export its product and later take on foreign direct investment as the product moves through its life cycle. Eventually a country's export becomes its import. Although the model is developed around the U.S, it can be generalised and applied to any of the developed and innovative markets of the world.   The product life cycle theory was developed during the 1960s and focused on the U.S since most innovations came from that market. This was an applicable theory at that time since the U.S dominated the world trade. Today, the U.S is no longer the only innovator of products in the world. Today companies design new products and modify them much quicker than before. Companies are forced to introduce the products in many different markets at the same time to gain cost benefits before its sales declines. The theory does not explain trade patterns of today.SummaryMercantilism proposed that a country should try to export more than it imports, in order to receive gold. The main criticism of mercantilism is that countries are restricted from import, a

prevention of international trade. Adam Smith developed the theory of absolute advantage that stressed that a country should produce goods or services if it uses a lesser amount of resources than other countries. David Ricardo stated in his theory of comparative advantage that a country should specialise in producing and exporting products in which it has a comparative advantage and it should import goods in which it has a comparative disadvantage. Hecksher-Ohlin's theory of factor endowments stressed that a country should produce and export goods that require resources (factors) that are abundant in the home country. Leontief tested the Hecksher-Ohlin theory in the U.S. and found that it was not applicable in the U.S. Raymond Vernon's product life cycle theory stresses that a company will begin to export its product and later take on foreign direct investment as the product moves through its life cycle. Eventually a country's export becomes its import.COMPARATIVE COST THEORY: DAVID RICARDO Each country specializes in that commodity in which its comparative cost is the least .Therefore when a country enters into trade it will export those commodity in which it’s comparative costs are less and will import those commodities in which comparative costs are high.It follows that each country will specialize in this commodity in which it has greatest advantage or the least comparative advantage. The assumptions of this theory are as follows.

1. There are two countries.2. There are two commodities.3. There is similar taste in both the countries.4. Labour is the only factor.5. The supply of labour is unchanged.6. All units of labour are homogeneous7. Price of the two commodities are determined by labour costs.8. Commodities are reduced under the law of constant cost.9. Technical knowledge is unchanged.10. Factors of production are perfectly mobile within each country but are immobile between each country.11. All the factors are fully employed.12. There are no trade barriers.

Unit – II

Gains from international trade – Terms of trade – Technical progress and Trade – Balance of Trade – Balance of Payments and Indian perspective – Economic effects and Trade restrictions – Bilateralism – OPEC & other international cartels.

GAINS FROM INTERNATIONAL TRADE:1. Kind of Gains from Trade2. Sources of Gains from Trade3. Determinants of Gains from Trade4. Measurement of Gains from Trade5. Size of the Country and Gains from Trade

DEFINITION Gains from International trade refers to that advantages which different countries

participating in international trade enjoy as a result of specialization and division of labour. The Gains from trade are the benefits from trading rather than producing i.e. the benefits that accrue to each country to a transaction over and above the benefits each would have derived from producing the goods or services themselves.

KINDS OF GAINS FROM TRADE1. STATIC GAINS: Static gains are the gains from the reallocation of factors of

production in sectors where the country has a comparative advantage. Static gains can be reaped immediately in the short-run through more efficient allocation.

2. DYNAMIC GAINS: Dynamic gains are those gains which accumulates over a period of time. Dynamic gains accrue only over time in less obvious and direct ways.

STATIC GAINS:1. Maximisation of Production i.e efficiency gains from exploiting comparative advantage2. Increase in Welfare3. Increase in National Income4. Reduced Costs from Economies of Scale5. Increased Product Variety6. Vent for Surplus

DYANAMIC GAINS FROM TRADE1. Efficient Utilisation of Resources2. Widening of the Market3. Increase in Saving and Investment4. Educational Effect (Learning by importing and learning by exporting)5. Checking of Monopolies6. Increase in Competition

SOURCES OF GAINS FROM INTERNATIONAL TRADE1. Expansion of the Size of the Market2. Division of Labour3. Gains from Specialisation

4. Gains from Increased Product Variety5. Gains from Increased Competition6. Gains from Increased Economies of Scale7. Productivity Gains

DETERMINANTS OF GAINS FROM INTERNATIONAL TRADE1. TERMS OF TRADE: Terms of trade refers to the rate at which the goods of one country

are exchanged for the goods of another country. Country with better term of trade gains more.

2. RECIPROCAL DEMAND: If the demand of a country for the production of another country is inelastic, terms of trade will be unfavourable.

3. DIFFERENCE IN COST RATIOS: More the difference in the cost ratios of two countries, more is the gain from international trade.

4. IMPROVEMENT IN PRODUCTIVITY: With improvement in productivity, costs and prices fall in both the countries leading to enlargement of productivity gains.

5. STAGE OF DEVELOPMENT: An industrialist advanced and capital rich country generally enjoys a larger share of the gain of trade than an economically backward and labour-abundant country.

6. SIZE OF THE COUNTRY: Inverse relationship between size of the country and gains from trade. A smaller country gains more from specialisation.

7. NATURE OF EXPORT GOODS: A country exporting primary goods have adverse term of trade and gains less from trade whereas a country exporting manufacturing goods gains more from trade.

8. TRANSPORT COSTS: High transport costs limits the gains from trade. An decrease in transportation costs increases the gains from trade.

9. COMPETITION AND MONOPOLY: Goods having production in many countries faces more competition and hence the gains from trade will be less to the countries exporting these goods.

MEASUREMENT OF GAINS FROM INTERNATIONAL TRADETRADITIONAL VIEW

1. Reduction in Production Costs (Ricardo Approach)2. Terms of Trade (Mills Approach)3. Increase in Real Income

MODERN VIEW

RICARDO APPROACH FOR MEASUREMENT OF GAINS

Reduction in the total real costs is the basis of gains.A country will export those commodities in which its comparative production costs are less and will import those commodities in which comparative production costs are high.The country thus economises in the use of its resources, obtaining for a given amount thereof a larger total income than if it attempted to produce everything at home. The difference between the two is its gain from trade .

A1A

E

B B1O

O X - Commodity Y - Commodity A B C . E . F A` B` Before Trade: AB is the PPC curve of the country. Point E indicates equilibrium position before trade. After Trade: PPC shifts and take the shape of BC. Slope of BC shows international price ratio. Suppose the country is in equilibrium at point F on BC curve, then to produce there it would have to increase its labour such as to shift its PPC to A`B` The amount of gains from trade will be BB`/OBG A 0 B 0 Malthus criticised that Ricardo has greatly over-estimated the gains. He argued that F will not be the equilibrium point. He opined that consumer will prefer a point right of F on A`B`. CI Findlay has modified gains from trade by introducing indifference curve CI. If the labour input is increased sufficiently to push PPC to A 0 B 0 instead of A`B`, the point G on CI will give equal satisfaction as in F. The amount of gains from trade will be BB 0 /OB .

CA1A2 F

Y -COMMODITY

X-COMMODITY

THE AMOUNT OF GAIN FROM TRADE IS BB1/OB

Y-COMMODITY

AA

C1AA G

B B2 B1

J.S. MILL APPROACHThe Ricardo analysis does not show the exact position of quantum of gains and how they

are distributed.John Stuart Mill had resolved the problem of how to exactly reach the rate of exchange in international market.According to Mills it is the reciprocal demand that actually determines the prevailing terms of trade and the gains obtained by a particular country.In his view import, or in other words , demand, must be of much more importance than export in determining the real terms of trade.

When a country participate trade it firstly takes the status as a demander. Another status of a trader, supplier, is just derived there from. It is the relative extensibility of reciprocal demand that actually determines the real terms of trade and consequently the distribution of possible total gains from trade between the two trade partners. Suppose India has a comparative advantage in wheat and enormous demand for auto. And U.S.A. has a comparative advantage in auto and enormous demand for wheat.The equilibrium terms of trade depend on both Indian demand for auto and wheat as well as U.S.A. demand for these two goods.If the Indian demand for auto is stronger, term of trade will be close to Indian price ratio. And if the US demand for wheat is stronger, terms of trade will be close to US price ratio.

REAL INCOME APPROACHInstead of importing goods from abroad, if the same are produced and consumed within

the country, then the relative loss suffered by the country will constitute the basis for measuring gains from trade. This would be maximum gains.On the other hand, if the goods received from international trade are consumed in same ratio as when the same are produced with in the country, then the resulting increase in income will be the minimum gains from trade.Real gains from trade is always between these maximum and minimum gains.

X -COMMODITY

MODERN APPROACHModern Theory divides the gains from trade into gains from production and gains from

consumption . The theory states that the introduction of trade permits the realisation of gain from exchange and gain from specialisation. Both consumers and producers gain from international trade by consuming more and producing more than the pre-trade level.

SIZE OF THE COUNTRY AND GAINS FROM TRADE

1. Gains from trade are relatively larger for a small country.2. Owning to small size, the scope of gains from specialisation and exchange are limited

whereas large country has scope for both.3. Trade provide an opportunity for the small country to specialise in the production of

those commodities in which it has comparative advantage and exchange them in world market.

4. The more world market prices differ from domestic market, more will be its gains.

In international economics and international trade, terms of trade or TOT is (Price Exports)/(Price Imports). In layman's terms it means what quantity of imports can be purchased through the sale of a fixed quantity of exports. "Terms of trade" are sometimes used as a proxy for the relative social welfare of a country, but this heuristic is technically questionable and should be used with extreme caution. An improvement in a nation's terms of trade (the increase of the ratio) is good for that country in the sense that it can buy more imports for any given level of exports. The terms of trade is influenced by the exchange rate because a rise in the value of a country's currency lowers the domestic prices for its imports but does not directly affect the commodities it produces (i.e. its exports).

Terms of tradeIn international economics and international trade, terms of trade or TOT is (Price of

exportable goods)/(Price of importable goods). In layman's terms it means what quantity of imports can be purchased through the sale of a fixed quantity of exports. "Terms of trade" are sometimes used as a proxy for the relative social welfare of a country, but this heuristic is technically questionable and should be used with extreme caution. An improvement in a nation's terms of trade (the increase of the ratio) is good for that country in the sense that it can buy more imports for any given level of exports. The terms of trade is influenced by the exchange rate because a rise in the value of a country's currency lowers the domestic prices for its imports but does not directly affect the commodities it produces (i.e. its exports).Two country model CIE economics

In the simplified case of two countries and two commodities, terms of trade is defined as the ratio of the total export revenue[clarification needed] a country receives for its export commodity to the total import revenue it pays for its import commodity. In this case the imports of one country are the exports of the other country. For example, if a country exports 50 dollars worth of product in exchange for 100 dollars worth of imported product, that country's terms of trade are 50/100 = 0.5. The terms of trade for the other country must be the reciprocal (100/50 = 2). When this number is falling, the country is said to have "deteriorating terms of trade". If multiplied by 100, these calculations can be expressed as a percentage (50% and 200% respectively). If a country's terms of trade fall from say 100% to 70% (from 1.0 to 0.7), it has experienced a 30% deterioration in its terms of trade. When doing longitudinal (time series) calculations, it is common to set a value for the base year[citation needed] to make interpretation of the results easier.In basic Microeconomics, the terms of trade are usually set in the interval between the opportunity costs for the production of a given good of two countries.Terms of trade is the ratio of a country's export price index to its import price index, multiplied by 100. The terms of trade measures the rate of exchange of one good or service for another when two countries trade with each other.Multi-commodity multi-country modelIn the more realistic case of many products exchanged between many countries, terms of trade can be calculated using a Laspeyres index. In this case, a nation's terms of trade is the ratio of the Laspeyre price index of exports to the Laspeyre price index of imports. The Laspeyre export index is the current value of the base period exports divided by the base period value of the base period exports. Similarly, the Laspeyres import index is the current value of the base period imports divided by the base period value of the base period imports.

Where

price of exports in the current period

quantity of exports in the base period

price of exports in the base period

price of imports in the current period

quantity of imports in the base period

price of imports in the base periodBasically: Export Price Over Import price times 100 If the percentage is over 100% then your economy is doing well (Capital Accumulation). If the percentage is under 100% then your economy is not going well (More money going out than coming in).

Technical Progress of a Country and International Trade

The modern world is a highly mechanised world. It is shaped by technical progress. The rapid progress of modern economic societies has become possible due to changes caused by technological and scientific progress.It must, however, be recognised that, technical progress can affect the volume and mode of international trade to a great extent. As technical progress influences the composition of production function, relative cost-price structure, demand pattern use of resources, so on and so forth, its effect on foreign trade is also bound to be very significant.Forms of Technical Progress : (i) Natural Technical Progress : It refers to a neutral innovation - a new process of production. As Hicks put it, in a two-factor production function (say, labour and capital inputs). The effect of neutral innovation is to raise the marginal productivity of both the factors - labour and capital - in the same proportion. Thus, neutral technical progress keeps the relationship between labour and capital unaffected.(ii) Labour-saving Technical Progress : Using Hicksian criterion, labour-saving technical progress may be defined as that kind of technical improvement and change in the process of production which increases the marginal productivity of labour relatively to that of capital. Under labour-saving innovation, the production function is modified with an increasing quantity of capital and reduced input of labour.(iii) Capital-saving Technical Progress : It refers to that new process which tends to increase the marginal productivity of c relatively to that of labour. The effect of capital-saving innovation on the production function is to reduce the input of capital and increase the quantum of labour.Technical Progress and Terms of Trades Technical progress can affect the terms of trade of a country by influencing the productivity factory inputs. How it reacts we shall analyze below.Different forms of technical progress will affect the terms of trade and foreign trade of country in different ways.Effect of Neutral Technical Progress A general hypothesis may be laid down that, if neutral technical progress takes place in export sector of a country, the country's terms of trade may deteriorate, while technological pro in the import substitutions of the country will help the country to improve its terms of trade.To explain this phenomenon, let us assume a two-factor, two-good, two-country model, say countries A and B have factors labour (L) and capital (K), and produce goods X and Y. Assume the product X is labour-intensive and F capital-intensive.When neutral technical progress takes place in Y industry, the isoquant downward, its slope renaming unchanged. This implies that, due to a proportional rise in the productivities of labour and capital, less input of both these factors will be needed to produce the same outputs of Y. If factor prices are unchanged: P1 /IP0, the same factor proportions Used in the production function as before. But if the same commodity prices are to be maintained, Factor prices will have to be changed. The new factor-price ratio is obtained by drawing a New factor-price line p2 tangent to

the new y'y' isoquant the old xx isoquant. This is reflected in a rise in the relative prices of capital in the Y industry. This is due to the fact that as producers find increased productivity of capital and want to produce of Y the demand for capital tend to increase leading to a rise in the price of capital. But when capital becomes costly, the producers will resort to Labour-intensive techniques in both the industries X and Y. The new ratio of factor-proportions in the production function is, thus, shown by OZ' in Y and OM' in X. Induced by technical progress in the Y industry, when the country produces more of Y with labour-intensive method, the labour input in X decreases, so the output of X contracts. At the constant commodity price, therefore, there will be an excess demand for X Consequently, the price of X will rise and that of Y will tend to fall (caused by its increased supply).Now, if Y happens to be the country's exportable goods and X its importable goods, the terms of trade of the country will be settled unfavourably on account of the rising domestic price of Y (exportable), leading to contraction in its foreign demand and increasing domestic demand for X, resulting in its high import demand. In this event, the offer curve of the country will shift towards the exportable axis offering more amount of exportable for a given unit of importable.If, however, Y is an import substitute, technical progress in this line will improve the bargaining position of the country so its terms of trade will also improve.However, the direction in the charge of the terms of trade caused by neutral innovation depends more on elasticities of demand for exports and imports, along with other factors. If the income elasticity of demand for importable goods is less than unity, the deterioration in terms of trade will be less in the unfavorable case and improvement in terms of trade will be more in the favourable case.Effect of Capital-saving Technical Progress The basic hypothesis is that capital-saving technological progress will lead to unfavourable terms of trade in a country if its exportables belong to the capital-intensive line of production. If technical progress relates to the import substitution industry (which belongs to the capital-intensive sector), the terms of trade will improve on account of the capital-saving innovation.To explain this phenomenon, in our illustration model, when capital-saving innovation occurs, the marginal productivity of labour improves; so at unchanged factor prices, the method of production will tend to be more labour-intensive.If commodity prices are to be kept constant, factor prices must change in favour of capital, so capital has become more dear, producers will resort to labour-intensive techniques in both the lines of production. Since income expands due to increased productivity caused by technological progress, demand for X and Y will tend to increase.At a constant price therefore, demand for X will be in excess in relation to its supply, assist supply decreases in the process of transferring more labour to Y industry. The price of X will thus rise. Thus, if Y is exportable, the terms of trade will go against the country. If Y is an import substitute, then the country's terms of trade will tend to improve.Effect of Labour-saving Innovation

In the case of a labour-saving technological progress in a capital-intensive industry, we cannot visualise any determinate effect on the terms of trade, as the relative price of the innovating good might increase or decrease, so on precise theoretical inference is possible.In the geometric model, when labour-saving technical progress occurs in the case of Y industry, the new isoquant will be y'y' with a changed slope along with, the shift towards origin.Then, the price of capital (PK) must rise. Because, when technological innovation occurs in the Y (capital-intensive) sector, producers will be inclined to produce more of Y, as such the demand for AT will rise. Further, in a labour-saving innovation capital productivity rises, so also the demand for capital rises, which causes PK to rise. The new factor price line P is derived thus. New Equilibrium points are Z' and M. It appears that ~ ratio falls in A" industry, though, there is no technical progress (but on account of the high price of capital, labour-intensive method is adopted). However, the marginal productivity of capital improves because of labour-saving technical progress, so the producers may be induced to adopt capital-intensive technique of production. The stronger this tendency, the greater will be the use made of the capital-intensive method, despite its high cost.But if innovation were to lower the costs still further, as is seen from y "y" isoquant, the story would be different. Then, the new factor price line will be p2, which means a very high cost of capital relative to labour. In the X industry, then, labour-intensive method will be adopted (see equilibrium point M"). Similarly, the equilibrium point Z" indicates that in Y industry also, more labour-intensive technique will be used, despite the improved marginal productivity of capital.In short, labour-saving technical progress in the capital-intensive sector will cause an increaseIn the relative price of capital to that of labour and ratio will fall in the labour-intensive production sector. A high ratio in capital-intensive industry will mean a decrease in Y product; but a low Ratio in labour-intensive industry will mean an increase in the production of X at constant prices. Thus, there will be excess demand for 7(caused by rising income and contracting output), the price of Y- (Py) will rise in relation to the price of X- (Px). If, however, reduction in costs cause by innovation is high the reverse will happen. So, we cannot arrive at a determinate conclusion this regard.To recapitulate, technical progress affects the marginal productivities of factors of production. When the r productivity of a factor rises on account of innovation, a greater proportion of this factor will be employed in the innovating industry than in a non-innovating industry. Hence, reallocation of factors depends on the change in t absolute value of the marginal productivities.As Bo Sodersten concludes: "When technological progress increases the marginal productivities of both the factors (in a. two-factoral production function), the effects on output and relative prices, and terms of trade are clearly determinate. But if the marginal productivity of one of the factors or both the factors falls, then the resulting phenomenon about terms of trade cannot be firmly determined.Bo Sodersten also states that technical progress in the import substitution field will always have a positive effect on the real income of the country. If it is so in the case of the export sector, and the marginal productivities of factors are decreased by innovation, then only will it have a

positive effect on the national income. But an increased marginal productivity caused by the export-oriented innovation produces a negative effect on real income.

Balance of tradeThe balance of trade, or net exports (sometimes symbolized as NX), is the difference

between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports.[1][dead link] A positive balance is known as a trade surplus if it consists of exporting more than is imported; a negative balance is referred to as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance.Early understanding of the functioning of balance of trade informed the economic policies of Early Modern Europe that are grouped under the heading mercantilism. An early statement appeared in Discourse of the Common Wealth of this Realm of England, 1549: "We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and enrich them."[2] Similarly a systematic and coherent explanation of balance of trade was made public through Thomas Mun's c1630 "England's treasure by forraign trade, or, The balance of our forraign trade is the rule of our treasure"[3]

DefinitionThe balance of trade forms part of the current account, which includes other transactions

such as income from the international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position.The trade balance is identical to the difference between a country's output and its domestic demand (the difference between what goods a country produces and how many goods it buys from abroad; this does not include money re-spent on foreign stock, nor does it factor in the concept of importing goods to produce for the domestic market).Measuring the balance of trade can be problematic because of problems with recording and collecting data. As an illustration of this problem, when official data for all the world's countries are added up, exports exceed imports by almost 1%; it appears the world is running a positive balance of trade with itself. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems. However, especially for developed countries, accuracy is likely.

Factors that can affect the balance of trade include:

The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economy vis-à-vis those in the importing economy;

The cost and availability of raw materials, intermediate goods and other inputs; Exchange rate movements; Multilateral, bilateral and unilateral taxes or restrictions on trade;

Non-tariff barriers such as environmental, health or safety standards; The availability of adequate foreign exchange with which to pay for imports; and Prices of goods manufactured at home (influenced by the responsiveness of supply) In addition, the trade balance is likely to differ across the business cycle. In export-led

growth (such as oil and early industrial goods), the balance of trade will improve during an economic expansion. However, with domestic demand led growth (as in the United States and Australia) the trade balance will worsen at the same stage in the business cycle.

Since the mid 1980s, the United States has had a growing deficit in tradeable goods, especially with Asian nations (China and Japan) which now hold large sums of U.S debt that has funded the consumption.[4][5] The U.S. has a trade surplus with nations such as Australia. The issue of trade deficits can be complex. Trade deficits generated in tradeable goods such as manufactured goods or software may impact domestic employment to different degrees than trade deficits in raw materials.

Economies such as Canada, Japan, and Germany which have savings surpluses, typically run trade surpluses. China, a high growth economy, has tended to run trade surpluses. A higher savings rate generally corresponds to a trade surplus. Correspondingly, the U.S. with its lower savings rate has tended to run high trade deficits, especially with Asian nations.

Main Components of India's Balance of Payments

1. Trade BalanceTrade balance was in deficit through out the period shown in the table as imports always

exceeded the exports. Within the imports the POL items constituting a sizeable position continued to increase throughout. Exports did not achieve the required growth rate. Trade deficit in 2005-06 stood at $ -51,841 billion US $.

2. Current AccountCurrent account balance includes visible items (trade balance) and invisibles is in a more

encouraging position. It declined to $ -2,666 million in 2000-01 from $-9680 million in 1990-91 and recorded a surplus in 2003-04 to the extent of $ 14,083 million. In 2005-06, once again there was a deficit of $ 9,186 million. The main reason for the improvement during 2001-05 was the success of invisible items.

3. InvisibleThe impressive role placed by invisibles in covering trade deficit is due to sharp rise

invisible receipts. The main contributing factor to rise in invisible receipts are non factor receipts and private transfers. As far as non factor services receipts are concerned the main development has been the rapid increase in the exports of software services. As far as private transfers are concerned their main constituent is workers remittance from abroad. During this period the private transfer receipts also increased from $ 2,069 million in 1990-91 to $ 24,102 million in

2005-06. The current trend of outsourcing a number of jobs by the developed countries to the developing ones is also helping us to get more jobs and earn additional foreign exchange.

4. Capital AccountCapital account has been positive throughout the period. NRI deposits and foreign

investment both portfolio and direct have helped to a great extent. The main reasons for huge increase in capital account is due to large capital inflows on account of Foreign direct investment (FDI); Foreign Institutional Investors (FIIs) investment on the stock markets and also by way of Euro equities raised by Indian firms. The Non-resident deposit also forms a part of capital account.

5. ReservesReserves have changed during this period depending on a balance between current and

capital account. An increase in inflow under capital account has helped us to build up our foreign exchange reserve making the country quiet comfortable on this count. In April 2007 we had $ 203 billion foreign exchangereserves.

The year 2005-06 registered the highest trade deficit so far running into $ 51,841 million, because of rising Oil prices; As a result despite impressive positive earnings of as much as $ 42,655 million from invisibles, the current account deficit in this year was $ 9,189 million which is 1.1% of GDP.

Conclusion

The balance of payment situation started improving since 1992-93. There was a satisfactory balance of payment position in that period; the reasons are (i) High earnings from invisibles, (ii) Rise in external commercial borrowings, and (iii) Encouragement to foreign direct investment.

The positive earnings from invisibles covered a substantial part of trade deficit and current account deficit reduced significantly. The external commercial borrowings was extensively used to finance the current account deficit. The net non resident deposits were positive through out the ten year period. There has been a growing strength in India's balance of payment position in the post reform period inspite of growing trade deficit and current account deficit.

COMPARATIVE ANALYSIS OF BALANCE OFPAYMENTS: INDIAN PERSPECTIVE

The balance of payments of a country is a systematic record of all transactions between the residents of a country and the rest of the world carried out in a specific period of time. Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The BOP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are

recorded as negative or deficit items. When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter-balanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries.

While the overall BOP accounts will always balance when all types of payments are included,imbalances are possible on individual elements of the BOP, such as the current account, the capital account excluding the central bank's reserve account, or the sum of the two. Imbalances in the latter sum can result in surplus countries accumulating wealth, while deficit nations become increasingly indebted. The term "balance of payments" often refers to this sum: a country's balance of payments is said to be in surplus (equivalently, the balance of payments is positive) by a certain amount if sources of funds (such as export goods sold and bonds sold) exceed uses of funds (such as paying for imported goods and paying for foreign bonds purchased) by that amount. There is said to be a balance of payments deficit (the balance of payments is said to be negative) if the former are less than the latter.

Under a fixed exchange rate system, the central bank accommodates those flows by buying up any net inflow of funds into the country or by providing foreign currency funds to the foreign exchange market to match any international outflow of funds, thus preventing the funds flows from affecting the exchange rate between the country's currency and other currencies. Then the net change per year in the central bank's foreign exchange reserves is sometimes called the balance of payments surplus or deficit. Alternatives to a fixed exchange rate system include a managed float where some changes of exchange rates are allowed, or at the other extreme apurely floating exchange rate (also known as a purely flexible exchange rate). With a pure floatThe central bank does not intervene at all to protect or devalue its currency, allowing the rate to be set by the market, and the central bank's foreign exchange reserves do not change. Historically

there have been different approaches to the question of how or even whether to eliminate current account or trade imbalances. With record trade imbalances held up as one of the contributing factors to the financial crisis of 2007–2010, plans to address global imbalances have been high on the agenda of policy makers since 2009. India's balance of payment worsened in the early 1990's but now the situation is under control. In fact, India has a good foreign exchange reserves mainly due to capital inflows from foreign financial institutions or the stock exchange.

CONCEPT OF BALANCE OF PAYMENTThe two principal parts of the BOP accounts are the current account and the capital

account. The current account shows the net amount a country is earning if it is in surplus, or spending if it is in deficit. It is the sum of the balance of trade (net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers. It is called the current account as it covers transactions in the "here and now" - those that don't give rise to future claims. The capital account records the

net change in ownership of foreign assets. It includes the reserve account (the foreign exchange market operations of a nation's central bank), along with loans and investments between the country and the rest of world (but not the future regular repayments/dividends that the loans and investments yield; those are earnings and will be recorded in the current account). The term "capital account" is also used in the narrower sense that excludes central bank foreign exchange market operations: Sometimes the reserve account is classified as "below the line" and so no reported as part of the capital account. Expressed with the broader meaning for the capital account, the BOP identity assumes that any current account surplus will be balanced by a capital account deficit of equal size – or alternatively a current account deficit will be balanced by a corresponding capital account surplus: current account + broadly defined capital account +balancing item+0 . The balancing item which may be positive or negative is simply an amount that accounts for any statistical errors and assures that the current and capital accounts sum to zero. By the principles of double entry accounting, an entry in the current account gives rise to an entry in the capital account, and in aggregate the two accounts automatically balance. A balance isn't always reflected in reported figures for the current and capital accounts, which might, for example, report a surplus for both accounts, but when this happens it always means something has been missed most commonly, the operations of the country's central bank and what has been missed is recorded in the statistical discrepancy term (the balancing item).

The International Monetary Fund (IMF) use a particular set of definitions for the BOP accounts, which is also used by the Organisation for Economic Cooperation and Development (OECD), and the United Nations System of National Accounts (SNA). The main difference in the IMF's terminology is that it uses the term "financial account" to capture transactions that would under alternative definitions be recorded in the capital account. The IMF uses the term capital account to designate a subset of transactions that, according to other usage, form a small part of the overall capital account. The IMF separates these transactions out to form an additional top level division of the BOP accounts. The IMF uses the term current account with the same meaning as that used by other organizations, although it has its own names for its three leading subdivisions, which are:

The goods and services account (the overall trade balance) The primary income account (factor income such as from loans and investments) The secondary income account (transfer payments)

REVIEW WORK ON INDIA’S BALANCE OF PAYMENTSDuring the quarter of April-June 2011, the trade deficit rose by 9.7% to USD 35.4 billion,

despite a sharp increase in exports relative to imports. Export goods recorded growth of 47.1% year-on-year (YOY), and imports registered a 33.2% YoY growth during the quarter. In absolute terms, the trade deficit increased by USD 3.1 billion from USD 32.3 billion in the corresponding quarter previous year. Meanwhile, net exports of services rose by 19.1% in the quarter, mainly due to higher growth in receipts led by the transportation, construction, insurance and pension, telecommunication, computer and information sectors. Driven by higher commodity prices, the

current account deficit (CAD) widened by 17.4% YoY to USD 14.1 billion during the first quarter of the current fiscal year. This wider CAD was financed by an overall capital and financial accounts surplus in excess of USD 15.4 billion during the same period. Mainly due to increasing net foreign direct investment (FDI) inflows to India, net financial inflows increased 20.4% to USD 15.7 billion in the quarter compared to the previous year. FDI inflows increased to USD 7.2 billion during the first quarter of fiscal year 2011-2012 as compared to USD 2.9 billion last year. There was a net accretion to foreign exchange reserves to the tune of USD 5.4 billion reflecting depreciation of the U.S. dollar against major international currencies during the quarter.

The RBI’s latest presentation of the trade deficit patterns is decomposed into specific current account components with detailed breakdowns on trade of goods, services, and income transfers. In line with current international standards, the new BPM6 classifications enhance India’s BoP statistics with more detail and better cross-country comparisons. India could not insulate itself from the adverse developments in the international financial markets, despite having a banking and financial system that had little to do with investments in structured financial instruments carved out of subprime mortgages, whose failure had set off the chain of events culminating in a global crisis. Economic growth decelerated in 2008-09 to 6.7 percent. This represented a decline of 2.1 percent from the average growth rate of 8.8 percent in the previous five years (2003-04 to 2007-08). Per capita GDP growth grew by an estimated 4.6 percent in 2008-09. Though this represents a substantial slowdown from the average growth of 7.3 percent per annum during the previous five years, it is still significantly higher than the average 3.3 percent per annum income growth during 1998-99 to 2002-03. The effect of the crisis on the Indian economy was not significant in the beginning. The initial effect of the subprime crisis was, in fact, positive, as the country received accelerated Foreign Institutional Investment (FII) flows during September 2007 to January 2008. There was a general belief at this time that the emerging economies could remain largely insulated from the crisis and provide an alternative engine of growth to the world economy. The argument soon proved unfounded as the global crisis intensified and spread to the emerging economies through capital and current account of the balance of payments. The net portfolio flows to India soon turned negative as Foreign Institutional Investors rushed to sell equity stakes in a bid to replenish overseas cash balances. This had a knock-on effect on the stock market and the exchange rates through creating the supply demand imbalance in the foreign exchange market. The current account was affected mainly after September 2008 through slowdown in exports. Despite setbacks, however, the BoP situation of the country continues to remain resilient. The challenges that confronted the Indian economy in 2008-09 and continue to do so in 2009- 10 fall into two categories - the short-term macroeconomic challenges of monetary and fiscal policy and the medium-term challenge of attaining and sustaining high rates of economic growth. The former covers issues such as the trade-off between inflation and growth, the use of monetary policy versus use of fiscal policy, their relative effectiveness and coordination between the two.

The latter includes the tension between short- and long-term fiscal policy, the immediate longer term imperatives of monetary policy and the policy and institutional reforms necessary for restoring high growth.

India’s balance of payments in 2008-09 captured the spread of the global crisis to India. The current account deficit during 2008-09 shot up to 2.6 percent of GDP from 1.5 percent of GDP in 2007-08 (Table 1). And this is the highest level of current account deficit for India since 1990-91. The capital account surplus dropped from a record high of 9.3 percent of GDP in 2007-08 to 0.9 percent of GDP. And this is lowest level of capital account surplus since 1981- 82. The year ended with a decline in reserves of US$ 20.1 billion (inclusive of valuation changes) against a record rise in reserves of US$ 92.2 billion for 2007-08. The global financial crisis began to affect India from early 2008 through a withdrawal of capital from India’s financial markets. This is shown in India’s balance of payments as a substantial decline in net capital inflows in the first half of 2008-09 to US$ 19 billion from US$ 51.4 billion in the first half of 2007-08, a 63 percent decline. This is seen from a large outflow of portfolio investment (as equity disinvestment by foreign institutional investors); and lower external commercial borrowings, short-term trade credit, and short-term bank borrowings. Inflows under foreign direct investment, external assistance and NRI deposits, by contrast, surged during the first half of 2008-09.

IMBALANCESWhile the BOP has to balance overall, surpluses or deficits on its individual elements can

lead to imbalances between countries. In general there is concern over deficits in the current account. Countries with deficits in their current accounts will build up increasing debt and/or see increased foreign ownership of their assets. The types of deficits that typically raise concern are:

A visible trade deficit where a nation is importing more physical goods than it exports (even if this is balanced by the other components of the current account.)

An overall current account deficit. A basic deficit which is the current account plus foreign direct investment (but excluding

other elements of the capital account like short terms loans and the reserve account. As discussed in the history section below, the Washington Consensus period saw a swing

of opinion towards the view that there is no need to worry about imbalances. Opinion swung back in the opposite direction in the wake of financial crisis of 2007–2009. Mainstream opinion expressed by the leading financial press and economists, international bodies like the IMF—as well as leaders of surplus and deficit countries—has returned to the view that large current account imbalances do matter. Some economists do, however, remain relatively unconcerned about imbalances and there have been assertions, such as by Michael P. Dooley, David Folkerts-Landau and Peter Garber, that nations need to avoid temptation to switch to protectionism as a means to correct imbalances.

CAUSES OF BOP IMBALANCES

There are conflicting views as to the primary cause of BOP imbalances, with much attention on the US which currently has by far the biggest deficit. The conventional view is those currentaccounts factors are the primary causes these include the exchange rate, the government's fiscal deficit, business competitiveness, and private behaviour such as the willingness of consumers to go into debt to finance extra consumption. An alternative view, argued at length in a 2005 paper by Ben Bernanke, is that the primary driver is the capital account, where a global savings glut caused by savers in surplus countries, runs ahead of the available investment opportunities, and is pushed into the US resulting in excess consumption and asset price inflation.

IMPROVEMENT IN THE EXCHANGE RATEThe exchange rate policy in recent years has been guided by the broad principles of monitoring and management of exchange rates with flexibility, without a fixed or a preannounced target or As of April 2010 a band, while allowing the underlying demand and supply conditions to determine the exchange rate movements of the Indian rupee over a period in an orderly manner. Subject to this predominant objective, the RBI’s intervention in the foreign exchange market has been driven by the objectives of reducing excess volatility, maintaining adequate level of reserves, and developing an orderly foreign exchange market. The surge in the supply of foreign currency in the domestic market led inevitably to a rise in the price of the rupee. The rupee gradually appreciated from Rs. 46.54 per US dollar in August 2006 to Rs.39.37 in January 2008, a movement that had begun to affect profitability and competitiveness of the export sector. The global financial crisis however reversed the rupee appreciation and after the end of positive shock around January 2008, rupee began a slow decline.

A major factor, which affected the emerging economies almost simultaneously, was the unwinding of stock positions by the FIIs to replenish cash balances abroad. The decline in rupee became more pronounced after the fall of Lehman Brothers in September 2008, requiring RBI intervention to reduce volatility. It is pertinent to note that a substantial part of the movement in the rupee-US dollar rate during this period has been a reflection of the movement of the dollar against a basket of currencies. The rupee stabilized after October 2008, with some volatility. With signs of recovery and return of foreign institutional investment (FII) flows after March 2009, the rupee has again been strengthening against the US dollar. For the year as a whole, the nominal value of the rupee declined from Rs. 40.36 per US dollar in March 2008 to Rs. 51.23 per US dollar in March 2009, reflecting 21 percent depreciation during the fiscal 2008/09. In fiscal 2009/10, however, with the signs of recovery and return of FII flows after March 2009, the rupee has been strengthening against the US dollar. The movement of the exchange rate in the year 2009/10 indicated that the average monthly exchange rate of the rupee against the US dollar appreciated by 9.9 percent from Rs 51.23 per US dollar in March 2009 to Rs 46.63 per US dollar in December 2009, mainly on account of weakening of the US dollar in the international market.

ECONOMIC GROWTH

From all accounts, except for the agricultural sector as noted above, economic recovery seems to be well underway. Economic growth stood at 7 percent during the first half of the current fiscal year and the advance estimates for GDP growth for 2009-10 is 7.2 percent. The recovery in GDP growth for 2009-10, as indicated in the advance estimates, is broad based. Seven out of eight sectors/sub-sectors show a growth rate of 6.5 percent or higher. The exception, as of April 2010 anticipated, is agriculture and allied sectors where the growth rate is estimated to be minus 0.2 percent over 2008-09. Sectors including mining and quarrying; manufacturing; and electricity, gas and water supply have significantly improved their growth rates at over 8 percent in comparison with 2008-09. When compared to countries across the world, India stands out as one of the best performing economies. Although there is a clear moderation in growth from 9 percent levels to 7+ percent, the pace still makes India the fastest growing major economy after the People’s Republic of China.

BILATERALISM:Bilateralism consists of the political, economic, or cultural relations between

two sovereign states.

BILATERAL AND MULTILATERAL INTERACTIONSFrom the foregoing discussion it becomes apparent that any decisive presumption in

favor of multilateralism or bilateralism would over reach, both normatively and descriptively, and would stand the chance of being self defeating for either side of the universalist/unilateralist debate. The relative merits of multilateral and bilateral regimes come into view only upon a more nuanced examination of different kinds of international cooperation across a variety of subject matters. The environment, trade and investment, human rights, diplomatic immunities, the sea and the moon, resource sharing, transport and telecommunication, health, and education are all, in the context of treaties, different types of “goods” that necessitate different types of international cooperation, lending themselves more naturally to different types of regulatory regimes. Values such as promoting the rule of law, equality, effectiveness, and democratic legitimacy may all be advanced through MLTs but may, at times, be better realized through more limited forms of cooperation.

No less importantly, neither MLTs nor BLTs operate in a vacuum. All treaties are buildings or structures in the overall architecture of international law. Or, to use Joseph Weiler’s metaphor, bilateralism and multilateralism are but two strata in the more complex geology of international law. Viewing each structure on its own closes off from view the myriad ways in which they interact with one another: how they complement, enrich, and strengthen one another, and also how they might inhibit or obstruct one another. Understanding the full scale of interaction makes the choice between designing BLTs or MLTs at any particular moment even more consequential. Although the previous sections have already alluded to some possible interactions, the following section is dedicated to their systematic exposition.

First, in their simplest and most elemental form, BLTs fully reproduce multilaterally designed legal rules, merely repeating the latter to reinforce them in the bilateral context. Such repetition is not redundant. Dyads of countries may wish to conclude bilateral agreements for symbolic reasons, emphasizing their intent to abide by an already multilaterally assumed commitment toward one another in particular. India and Pakistan, for instance, concluded a bilateral agreement on the treatment of their respective diplomatic and consular staff, even though both countries were already parties to the corresponding multilateral Vienna conventions. The fact that the agreement was signed amidst an enduring conflict between the two countries gave the bilateral agreement a special political and normative clout, which the Vienna conventions did not have.

Another reason to reproduce a multilateral commitment in a bilateral instrument is the belief that the pledge would carry more weight in the bilateral setting, where retaliation for violations is potentially more immediate and precise. The pre-existence of the multilateral norm makes it easier to repeat in the bilateral agreement. It is also possible that the multilateral rule, with its existing body of accepted practical application and interpretation may then operate to stabilize and reinforce the bilateral agreement.

Organization of Petroleum Exporting Countries

OPEC is an intergovernmental organization of twelve oil-producing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings among the oil ministers of its Member Countries. It is considered to be one of the most effective organizations in the world. Indonesia withdrew in 2008 after it became a net importer of oil, but stated it would likely return if it became a net exporter again.

According to its statutes, one of the principal goals is the determination of the best means for safeguarding the organization's interests, individually and collectively. It also pursues ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry.

OPEC's influence on the market has been widely criticized, since it became effective in determining production and prices. Arab members of OPEC alarmed the developed world when they used the “oil weapon” during the Yom Kippur War by implementing oil embargoes and initiating the 1973 oil crisis. Although largely political explanations for the timing and extent of the OPEC price increases are also valid, from OPEC’s point of view, these changes were triggered largely by previous unilateral changes in the world financial system and the ensuing period of high inflation in both the developed and developing world. This explanation encompasses OPEC actions both before and after the outbreak of hostilities in October 1973, and

concludes that “OPEC countries were only 'staying even' by dramatically raising the dollar price of oil.

OPEC's ability to control the price of oil has diminished somewhat since then, due to the subsequent discovery and development of large oil reserves in Alaska, the North Sea, Canada, the Gulf of Mexico, the opening up of Russia, and market modernization. As of November 2010, OPEC members collectively hold 79% of world crude oil reserves and 44% of the world’s crude oil production, affording them considerable control over the global market. [6]The next largest group of producers, members of the OECD and the Post-Soviet states produced only 23.8% and 14.8%, respectively, of the world's total oil production.[7] As early as 2003, concerns that OPEC members had little excess pumping capacity sparked speculation that their influence on crude oil prices would begin to slip.

Venezuela and Iran were the first countries to move towards the establishment of OPEC in the 1960s by approaching Iraq, Kuwait and Saudi Arabia in 1949, suggesting that they exchange views and explore avenues for regular and closer communication among petroleum-producing nations.[citation needed] The founding members are Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Later members include Algeria, Ecuador, Gabon, Indonesia, Libya, Qatar, Nigeria, and the United Arab Emirates.In 10–14 September 1960, at the initiative of the Venezuelan Energy and Mines minister Juan Pablo Pérez Alfonzo and the Saudi Arabian Energy and Mines minister Abdullah al-Tariki, the governments of Iraq, Iran, Kuwait, Saudi Arabia and Venezuela met in Baghdad to discuss ways to increase the price of the crude oil produced by their respective countries.

Oil exports imports difference

OPEC was founded to unify and coordinate members' petroleum policies. Original OPEC members include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975, the organization expanded to include Qatar(1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), and Nigeria (1971).Ecuador and Gabon were early members of OPEC, but Ecuador withdrew on December 31, 1992[10] because it was unwilling or unable to pay a $2 million membership fee and felt that it needed to produce more oil than it was allowed to under the OPEC quota,[11] although it rejoined in October 2007. Similar concerns prompted Gabon to suspend membership in January 1995.[12]Angola joined on the first day of 2007. Norway and Russia have attended OPEC meetings as observers. Indicating that OPEC is not averse to further expansion, Mohammed Barkindo, OPEC's Secretary General, recently asked Sudan to join.[13] Iraq remains a member of OPEC, but Iraqi production has not been a part of any OPEC quota agreements since March 1998.

In May 2008, Indonesia announced that it would leave OPEC when its membership expired at the end of that year, having become a net importer of oil and being unable to meet its production quota.[14]A statement released by OPEC on 10 September 2008 confirmed Indonesia's withdrawal, noting that it "regretfully accepted the wish of Indonesia to suspend its full Membership in the Organization and recorded its hope that the Country would be in a position to rejoin the Organization in the not too distant future." [15] Indonesia is still exporting

light, sweet crude oil and importing heavier, more sour crude oil to take advantage of price differentials (import is greater than export) due to Air pollution in Indonesia still being low as compared to China or India.

1973 oil embargo

The 1973 oil embargo happened in October following the United States' and Western Europe's support of Israel against Arab nations in the Yom Kippur War of 1973. Iran being chief among those angered by western support of Israel. As a nation Iran stopped providing oil to the United States and Western Europe. In doing so, the oil pricing for the United States went from 3 dollars a barrel to 12 dollars a barrel, spurring gas rationing. U.S. stations put a limit both on the amount of gas that could be dispensed, closed on Sundays, and limited the days it could be purchased based on licence plates. For example if the last digit on a car's license plate was even gas could only be purchased on even days.[citation needed] Prices continued to rise after the Embargo ended. [16] The Oil Embargo of 1973 had a lasting effect on the United States. U.S. citizens began purchasing smaller cars that were more fuel efficient. The embargo also forced America to reevaluate the cost and source of energy which previously receive little consideration. The Federal government got involved first with President Nixion recommending citizens reduce their speed for the sake of conservation, and later Congress issuing a 55mph limit at the end of 1973. This changed decreased consumption as well as crash fatalities. Daylight savings time was extended year round to reduce electrical use in the American home. Nixon also formed the Energy Department as a cabinet office. People were asked to decrease their thermostats to 65 degrees and factories changed their main energy supply to coal.

One of the most lasting effects of the Oil Embargo of 1973 was an economic recession throughout the world. Unemployment flew to the highest percentage on record while inflation did the same. In Detroit, consumer interest in large gas guzzling vehicles fell and production dropped. Although the embargo only lasted one year, oil prices had quadrupled and a new era of international relations was opened. Arab nations discovered that their oil could be used as both a political and economic weapon against other nations. 

1975 hostage incident

On 21 December 1975 Ahmed Zaki Yamani and the other oil ministers of the members of OPEC were taken hostage by a six-person team led by terrorist Carlos the Jackal (which included Gabriele Kröcher-Tiedemann and Hans-Joachim Klein), in Vienna, Austria, where the ministers were attending a meeting at the OPEC headquarters. Carlos planned to take over the conference by force and kidnap all eleven oil ministers in attendance and hold them for ransom, with the exception of Ahmed Zaki Yamani and Iran's Jamshid Amuzegar, who were to be executed. Carlos led his six-person team past two police officers in the building's lobby and up to the first floor, where a police officer, an Iraqi plain clothes security guard and a young Libyan economist were shot dead.

As Carlos entered the conference room and fired shots in the ceiling, the delegates ducked under the table. The terrorists searched for Ahmed Zaki Yamani and then divided the

sixty-three hostages into groups. Delegates of friendly countries were moved toward the door, 'neutrals' were placed in the centre of the room and the 'enemies' were placed along the back wall, next to a stack of explosives. This last group included those from Saudi Arabia, Iran, Qatar and the UAE. Carlos demanded a bus to be provided to take his group and the hostages to the airport, where a DC-9 airplane and crew would be waiting. In the meantime, Carlos briefed Ahmed Zaki Yamani on his plan to eventually fly to Aden, where Yamani and the Iranian minister would be killed.The bus was provided the following morning at 6.40 as requested and 42 hostages were boarded and taken to the airport. The group was airborne just after 9.00 and explosives placed under Yamani's seat. The plane first stopped in Algiers, where Carlos left the plane to meet with the Algierian Foreign minister. All 30 non-Arab hostages were released, excluding Amuzegar.The refueled plane left for Tripoli where there was trouble in acquiring another plane as had been planned. Carlos decided to instead return to Algiers and change to a Boeing 707, a plane large enough to fly to Baghdad nonstop. Ten more hostages were released before leaving.With only 10 hostages remaining, the Boeing 707 left for Algiers and arrived at 3.40 a.m. After leaving the plane to meet with the Algerians, Carlos talked with his colleagues in the front cabin of the plane and then told Yamani and Amouzegar that they would be released at mid-day. Carlos was then called from the plane a second time and returned after two hours.At this second meeting it is believed that Carlos held a phone conversation with Algerian President Houari Boumédienne who informed Carlos that the oil ministers' deaths would result in an attack on the plane. Yamani's biography suggests that the Algerians had used a covert listening device on the front of the aircraft to overhear the earlier conversation between the terrorists, and found that Carlos had in fact still planned to murder the two oil ministers. Boumédienne must also have offered Carlos asylum at this time and possibly financial compensation for failing to complete his assignment.On returning to the plane Carlos stood before Yamani and Amuzegar and expressed his regret at not being able to murder them. He then told the hostages that he and his comrades would leave the plane after which they would all be free. After waiting for the terrorists to leave, Yamani and the other nine hostages followed and were taken to the airport by Algerian Foreign Minister Abdelaziz Bouteflika. The terrorists were present in the next lounge and Khalid, the Palestinian, asked to speak to Yamani. As his hand reached for his coat, Khalid was surrounded by guards and a gun was found concealed in a holster.Some time after the attack it was revealed by Carlos' accomplices that the operation was commanded by Wadi Haddad, a Palestinian terrorist and founder of the Popular Front for the Liberation of Palestine. It was also claimed that the idea and funding came from an Arab president, widely thought to be Muammar al-Gaddafi.In the years following the OPEC raid, Bassam Abu Sharif and Klein claimed that Carlos had received a large sum of money in exchange for the safe release of the Arab hostages and had kept it for his personal use. There is still some uncertainty regarding the amount that changed hands but it is believed to be between US$20 million and US$50 million. The source of the money is also uncertain, but, according to Klein, it was from "an Arab president." Carlos later told his

lawyers that the money was paid by the Saudis on behalf of the Iranians and was, "diverted en route and lost by the Revolution".After 1980, oil prices began a six-year decline that culminated with a 46 percent price drop in 1986. This was due to reduced demand and over-production that produced a glut on the world market. Around this period, Iraq also increased its oil production to help pay for the Iran-Iraq War. Overall OPEC lost its unity and thus its net oil export revenues fell in the 1980s.

Responding to war and low prices

Leading up to the 1990-91 Gulf War, Iraqi President Saddam Hussein advocated that OPEC push world oil prices up, thereby helping Iraq, and other member states, service debts. But the division of OPEC countries occasioned by the Iraq-Iran War and the Iraqi invasion of Kuwait marked a low point in the cohesion of OPEC. Once supply disruption fears that accompanied these conflicts dissipated, oil prices began to slide dramatically.After oil prices slumped at around $15 a barrel in the late 1990s, concerted diplomacy, sometimes attributed to Venezuela’s president Hugo Chávez, achieved a coordinated scaling back of oil production beginning in 1998. In 2000, Chávez hosted the first summit of heads of state of OPEC in 25 years. The next year, however, the September 11, 2001 attacks against the United States, the following invasion of Afghanistan, and 2003 invasion of Iraq and subsequent occupation prompted a surge in oil prices to levels far higher than those targeted by OPEC during the preceding period. Indonesia withdrew from OPEC to protect its oil supply interests.On November 19, 2007, global oil prices reacted strongly as OPEC members spoke openly about potentially converting their cash reserves to the euro and away from the US dollar.[20]

Production disputes

The economic needs of the OPEC member states often affects the internal politics behind OPEC production quotas. Various members have pushed for reductions in production quotas to increase the price of oil and thus their own revenues.[21] These demands conflict with Saudi Arabia's stated long-term strategy of being a partner with the world's economic powers to ensure a steady flow of oil that would support economic expansion.[22] Part of the basis for this policy is the Saudi concern that expensive oil or oil of uncertain supply will drive developed nations to conserve and develop alternative fuels. To this point, former Saudi Oil Minister Sheikh Yamani famously said in 1973: "The stone age didn't end because we ran out of stones."

One such production dispute occurred on September 10, 2008, when the Saudis reportedly walked out of OPEC negotiating session where the organization voted to reduce production. Although Saudi Arabian OPEC delegates officially endorsed the new quotas, they stated anonymously that they would not observe them. The New York Times quoted one such anonymous OPEC delegate as saying “Saudi Arabia will meet the market’s demand. We will see what the market requires and we will not leave a customer without oil. The policy has not changed.”

UNIT – III International Movements - Meaning – Goods, Services, Unilateral transfers & capitals, Current account – Export and Import of merchandise and services – Role of International Movements. International Investments - Nature, Character, Policies and results. International Payments - Meaning,

Financing International Transactions, Regional monetary systems: Blocks, Areas & Zones – Rates of exchange.

International Movements Good (economics)

In economics, a good is something that is intended to satisfy some wants or needs of a consumer and thus has economic utility. It is normally used in the plural form—goods—to denote tangible commodities such as products and materials.Although in economic theory, all goods are considered tangible, in reality certain classes of goods, such as information, only are in intangible forms. For example, among other goods an apple is a tangible object, while news belongs to an intangible class of goods and can be perceived only by means of an instrument such as print, broadcast or computer.Goods are contrasted with services, which are intangible commodities.

A commodity, or a physical, tangible item that satisfies some human want or need, or something that people find useful or desirable and make an effort to acquire it. Goods that are scarce (are in limited supply in relation to demand) are called economic goods, whereas those whose supply is unlimited and that require neither payment nor effort to acquire, (such as air) are called free goods.'

Trading of goods

Goods are capable of being physically delivered to a consumer. Goods that are economic intangibles can only be stored, delivered, and consumed by means of media.

Goods, both tangibles and intangibles, may involve the transfer of product ownership to the consumer. Services do not normally involve transfer of ownership of the service itself, but may involve transfer of ownership of goods developed by a service provider in the course of the service. For example, distributing electricity among consumers is a service provided by an electric utility company. This service can only be experienced through the consumption of electrical energy, which is available in a variety of voltages and, in this case, is the economic goods produced by the electric utility company . While the service (namely, distribution of electrical energy) is a process that remains in its entirety in the ownership of the electric service provider, the goods (namely, electric energy) is the object of ownership transfer. The consumer becomes electric energy owner by purchase and may use it for any lawful purposes just like any other goods.

SERVICES:

In economics, a service is an intangible commodity. More specifically, services are an intangible equivalent of economic goods.

Service provision is often an economic activity where the buyer does not generally, except by exclusive contract, obtain exclusive ownership of the thing purchased. The benefits of such a service, if priced, are held to be self-evident in the buyer's willingness to pay for it. Public services are those society as a whole pays for through taxes and other means.By composing and orchestrating the appropriate level of resources, skill, ingenuity, and experience for effecting specific benefits for service consumers, service providers participate in an economy without the restrictions of carrying stock (inventory) or the need to concern themselves with bulky raw materials. On the other hand, their investment in expertise does require consistent service marketing and upgrading in the face of competition which has equally few physical restrictions. Many so-called services, however, require large physical structures and equipment, and consume large amounts of resources, such as transportation services and the military.Providers of services make up the tertiary sector of the economy

Service characteristics

Services can be paraphrased in terms of their generic key characteristics.1. IntangibilityServices are intangible and insubstantial: they cannot be touched, gripped, handled, looked at, smelled, tasted or heard. Thus, there is neither potential nor need for transport, storage or stocking of services. Furthermore, a service cannot be (re)sold or owned by somebody, neither can it be turned over from the service provider to the service consumer nor returned from the service consumer to the service provider. Solely, the service delivery can be commissioned to a service provider who must generate and render the service at the distinct request of an authorized service consumer.2. PerishabilityServices are perishable in two regards

The service relevant resources, processes and systems are assigned for service delivery during a definite period in time. If the designated or scheduled service consumer does not request andl,l. An empty seat on a plane never can be utilized and charged after departure.

When the service has been completely rendered to the requesting service consumer, this particular service irreversibly vanishes as it has been consumed by the service consumer. Example: the passenger has been transported to the destination and cannot be transported again to this location at this point in time.

3. InseparabilityThe service provider is indispensable for service delivery as he must promptly generate and render the service to the requesting service consumer. In many cases the service delivery is

executed automatically but the service provider must preparatorily assign resources and systems and actively keep up appropriate service delivery readiness and capabilities. Additionally, the service consumer is inseparable from service delivery because he is involved in it from requesting it up to consuming the rendered benefits. Examples: The service consumer must sit in the hair dresser's shop & chair or in the plane & seat; correspondingly, the hair dresser or the pilot must be in the same shop or plane, respectively, for delivering the service.4. SimultaneityServices are rendered and consumed during the same period of time. As soon as the service consumer has requested the service (delivery), the particular service must be generated from scratch without any delay and friction and the service consumer instantaneously consumes the rendered benefits for executing his upcoming activity or task.5. VariabilityEach service is unique. It is one-time generated, rendered and consumed and can never be exactly repeated as the point in time, location, circumstances, conditions, current configurations and/or assigned resources are different for the next delivery, even if the same service consumer requests the same service. Many services are regarded as heterogeneous or lacking homogeneity and are typically modified for each service consumer or each new situation (consumerised). Example: The taxi service which transports the service consumer from his home to the opera is different from the taxi service which transports the same service consumer from the opera to his home – another point in time, the other direction, maybe another route, probably another taxi driver and cab.

Each of these characteristics is retractable per se and their inevitable coincidence complicates the consistent service conception and make service delivery a challenge in each and every case. Proper service marketing requires creative visualization to effectively evoke a concrete image in the service consumer's mind. From the service consumer's point of view, these characteristics make it difficult, or even impossible, to evaluate or compare services prior to experiencing the service delivery.Mass generation and delivery of services is very difficult. This can be seen as a problem of inconsistent service quality. Both inputs and outputs to the processes involved providing services are highly variable, as are the relationships between these processes, making it difficult to maintain consistent service quality. For many services there is labor intensity as services usually involve considerable human activity, rather than a precisely determined process; exceptions include utilities. Human resource management is important. The human factor is often the key success factor in service economies. It is difficult to achieve economies of scale or gain dominant market share. There are demand fluctuations and it can be difficult to forecast demand. Demand can vary by season, time of day, business cycle, etc. There is consumer involvement as most service provision requires a high degree of interaction between service consumer and service provider. There is a customer-based relationship based on creating long-term business relationships. Accountants, attorneys, and financial advisers maintain long-term relationships with their clientes for decades. These repeat consumers refer friends and family, helping to create a client-based relationship.

Service specification

Any service can be clearly and completely, consistently and concisely specified by means of the following 12 standard attributes which conform to the MECE principle (Mutually Exclusive, Collectively Exhaustive)

1. Service Consumer Benefits2. Service-specific Functional Parameters3. Service Delivery Point4. Service Consumer Count5. Service Delivering Readiness Times6. Service Consumer Support Times7. Service Consumer Support Languages8. Service Fulfillment Target9. Service Impairment Duration per Incident10. Service Delivering Duration11. Service Delivery Unit12. Service Delivering Price

The meaning and content of these attributes are:

1. Service Consumer Benefits describe the (set of) benefits which are triggerable, consumable and effectively utilizable for any authorized service consumer and which are rendered to him as soon as he triggers one service. The description of these benefits must be phrased in the terms and wording of the intended service consumers.

2. Service-specific Functional Parameters specify the functional parameters which are essential and unique to the respective service and which describe the most important dimension(s) of the servicescape, the service output or the service outcome, e.g. maximum e-mailbox capacity per registered and authorized e-mailing service consumer.

3. Service Delivery Point describes the physical location and/or logical interface where the benefits of the service are triggered from and rendered to the authorized service consumer. At this point and/or interface, the preparedness for service delivery readiness can be assessed as well as the effective delivery of each triggered service can be monitored and controlled.

4. Service Consumer Count specifies the number of intended, clearly identified, explicitly named, definitely registered and authorized service consumers which shall be and/or are allowed

and enabled to trigger and consume the commissioned service for executing and/or supporting their business tasks or private activities.5. Service Delivering Readiness Times specify the distinct agreed times of every day of the week when

the described service consumer benefits are o triggerable for the authorized service consumers at the defined service delivery pointo consumable and utilizable for the authorized service consumers at the respective agreed

service level all the required service contributions are aggregated to the triggered service the specified service benefits are competely and terminally rendered to any authorized

triggering service consumer without any delay or friction.The time data are specified in 24 h format per local working day and local time UTC, referring to the location of the intended and/or triggering service consumers.

6. Service Consumer Support Times specify the determined and agreed times of every day of the week when the triggering and consumption of commissioned services is supported by the service desk team for all identified, registered and authorized service consumers within the service customer's organizational unit or area. The service desk is/shall be the so called the Single Point of Contact (SPoC) for any authorized service consumer inquiry regarding the commissioned, triggered and/or rendered services, particularly in the event of service denial, i.e. an incident. During the defined service consumer support times, the service desk can be reached by phone, e-mail, web-based entries, and fax, respectively. The time data are specified in 24 h format per local working day and local time UTC, referring to the location of the intended service consumers.

7. Service Consumer Support Languages specifies the national languages which are spoken by the service desk team(s) to the service consumers calling them.

8. Service Fulfillment Target specifies the service provider's promise of effectively and seamlessly deliver the specified benefits to any authorized service consumer triggering a service within the specified service delivery readiness times. It is expressed as the promised minimum ratio of the count of successful individual service deliveries related to the count of triggered service deliveries. The effective service fulfillment ratio can be measured and calculated per single service consumer or per service consumer group and may be referred to different time periods (workhour, workday, calenderweek, workmonth, etc.)

9. Service Impairment Duration per Incident specifies the maximum allowable elapsing time between

the first occurrence of a service impairment, i.e. service quality degradation, service delivery disruption or service denial, whilst the service consumer consumes and utilizes the requested service,

the full resumption and complete execution of the service delivery to the content of the affected service consumer.

10. Service Delivering Duration specifies the promised and agreed maximum allowable period of time for effectively rendering all specified service consumer benefits to the triggering service consumer at his currently chosen service delivery point.

11. Service Delivery Unit specifies the basic portion for rendering the defined service consumer benefits to the triggering service consumer. The service delivery unit is the reference and mapping object for the Service Delivering Price, for all service costs as well as for charging and billing the consumed service amounts to the service customer who has commissioned the service delivery.

12. Service Delivering Price specifies the amount of money the commissioning service customer has to pay for a distinct service delivery unit or for a distinct amount of service delivery units. Normally, the service delivering price comprises two portions

a fixed basic price portion for basic efforts and resources which provide accessibility and usability of the service delivery functions, i.e. service access price

a price portion covering the service consumption based on o fixed flat rate price per authorized service consumer and reference period for an

unlimited amount of consumed services,o staged prices per authorized service consumer and reference period for staged amounts

of consumed services,o fixed price per single consumed service delivering unit.

Service delivery

The delivery of a service typically involves six factors:

The accountable service provider and his service suppliers (e.g. the people) Equipment used to provide the service (e.g. vehicles, cash registers, technical systems,

computer systems) The physical facilities (e.g. buildings, parking, waiting rooms) The requesting service consumer Other customers at the service delivery location Customer contact

The service encounter is defined as all activities involved in the service delivery process. Some service managers use the term "moment of truth" to indicate that defining point in a specific service encounter where interactions are most intense.Many business theorists view service provision as a performance or act (sometimes humorously referred to as dramalurgy, perhaps in reference to dramaturgy). The location of the service delivery is referred to as the stage and the objects that facilitate the service process are called props. A script is a sequence of behaviors followed by all those involved, including the client(s). Some service dramas are tightly scripted, others are more ad lib. Role congruence occurs when each actor follows a script that harmonizes with the roles played by the other actors.In some service industries, especially health care, dispute resolution, and social services, a popular concept is the idea of the caseload, which refers to the total number of patients, clients, litigants, or claimants that a given employee is presently responsible for. On a daily basis, in all those fields, employees must balance the needs of any individual case against the needs of all other current cases as well as their own personal needs.Under English law, if a service provider is induced to deliver services to a dishonest client by a deception, this is an offence under the Theft Act 1978.

UNILATERAL TRANSFERS:A subset of the balance of payments current account that records the difference between gifts or

transfers received from other nations and transfers sent to other nations. In includes gifts or transfers between individuals, and perhaps more important, it includes transfers between governments. Two other subsets of the current account include the balance on merchandise trade and balance on services. Unilateral transfers are not included in the balance of trade, which is the sum of the balance on merchandise trade and the balance on services.

Unilateral transfers is one part of the current account of the balance of payments. It tracks the "one-way" transfer of funds from one country to another that are made without any counter flow or exchange or goods and services. These payments are merely gifts from one country to another. The gift might come from a person, business, or (frequently) government. Foreign aid payments from one government to another are an important part of unilateral transfers.

Like the international trading of goods and services that can be either exported or imported, unilateral transfers also flow in both directions. A given nation might give funds to one nation, and receive funds from another. Funds that flow to a nation are positive values in the unilateral transfer category (and balance of payments), and funds that flow from a nation are negative values.

Unilateral transfers are the one part of the current account that are not included in the calculation of the balance of trade. The balance of trade includes both the balance on services and the balance on merchandise trade and is officially termed the balance on goods and services in the balance of payments account. In addition to the current account, the balance of payments also includes the capital account, which tracks the flow of investment payments in to and out of a country.

Foreign Aid and Birthday Presents

Unilateral transfers are gifts or transfers among countries. They are "unilateral" because nothing is expected (that is, goods and services) in exchange for the paymentsA portion of these unilateral transfers are certainly gifts from one person to another. Perhaps your grandmother, who still lives in the "old" country sends you $25 as a birthday present. Alternatively, a newly immigrated resident of the country sends a portion of his paycheck to help feed family members remaining back home.However, a significant share of unilateral transfers is government aid given from one country to another. Commonly termed foreign aid, these transfers generally go from more developed or industrialized countries to lesser developed countries. Ideally the aid is a nothing more than a gift, with no strings attached, which can be used by the receiving country to advance development. However, in practice, the giving countries are prone to use the funds to achieve assorted political goals.

CAPITAL ACCOUNT:the capital account (also known as financial account) is one of two primary components of the balance of payments, the other being the current account. Whereas the current account reflects a nation's net income, the capital account reflects net change in national ownership of assets.A surplus in the capital account means money is flowing into the country, but unlike a surplus in the current account, the inbound flows will effectively be borrowings or sales of assets rather than earnings. A deficit in the capital account means money is flowing out the country, but it also suggests the nation is increasing its claims on foreign assets.The term "capital account" is used with a narrower meaning by the International Monetary Fund (IMF) and affiliated sources. The IMF splits what the rest of the world calls the capital account into two top level divisions: financial account and capital account, with by far the bulk of the transactions being recorded in its financial account.Breaking this down:

The International Finance Centre in Hong Kong. A nation's capital account records change in ownership of financial assets between it and the rest of the world. Foreign direct investment (FDI) , refers to long term capital investment such as the

purchase or construction of machinery, buildings or even whole manufacturing plants. If foreigners are investing in a country, that is an inbound flow and counts as a surplus item on the capital account. If a nation's citizens are investing in foreign countries, that's an outbound flow that will count as a deficit. After the initial investment, any yearly profits

not re-invested will flow in the opposite direction, but will be recorded in the current account rather than as capital.[1]

Portfolio investment refers to the purchase of shares and bonds. It's sometimes grouped together with "other" as short term investment. As with FDI, the income derived from these assets is recorded in the current account; the capital account entry will just be for any international buying or selling of the portfolio assets.[1]

Other investment includes capital flows into bank accounts or provided as loans. Large short term flows between accounts in different nations are commonly seen when the market is able to take advantage of fluctuations in interest rates and / or the exchange rate between currencies. Sometimes this category can include the reserve account.[1]

Reserve account. The reserve account is operated by a nation's central bank to buy and sell foreign currencies; it can be a source of large capital flows to counteract those originating from the market. Inbound capital flows (from sales of the account's foreign currency), especially when combined with a current account surplus, can cause a rise in value (appreciation) of a nation's currency, while outbound flows can cause a fall in value (depreciation). If a government (or, if authorized to operate independently in this area, the central bank itself) doesn't consider the market-driven change to its currency value to be in the nation's best interests, it can intervene.[2]

Central Bank operations and the reserve account

Conventionally, central banks have two principal tools to influence the value of their nation's currency: raising or lowering the base rate of interest and more effectively by the buying or selling of their currency. Setting a higher interest rate than other major central banks will tend to attract in funds via the nation's capital account, and this will act to raise the value of its currency. A relatively low rate will have the opposite effect. Since World War II, interest rates have largely been set with a view to the needs of the domestic economy and, anyway, changing the interest rate alone has only a limited effect.[3]

A nation's ability to prevent its own currency falling in value is limited mainly by the size of its foreign reserves: it needs to use the reserves to buy back its currency.[4] In contrast, there are no immediate limits preventing a nation from preventing its currency from rising in value - as it just needs to sell its own currency, and can always print more in order to do this - however this can cause inflation if additional mitigation measures are not implemented and can lead to political pressure from other countries if they consider the nation is making its exports excessively competitive. A third mechanism that Central Banks and governments can use to raise or lower the value of their currency is simply to talk it up or down, by hinting at future action that may discourage speculators. Quantitative easing (Q.E.) , a practice used by major central banks in 2009, is a mechanism that can exert a one way downwards pressure on a country's currency, although officially Q.E. has been deployed just to boost the domestic economy. As an example of direct intervention to manage currency valuation, in the 20th century Great Britain's central bank, the Bank of England, would sometimes use its

reserves to buy large amounts of pound Sterling to prevent it falling in value - Black Wednesday was a case where it had insufficient reserves of foreign currency to do this successfully. Conversely, in the early 21st century, several major emerging economies effectively sold large amounts of their currencies in order to prevent their value rising - and in the process building large reserves of foreign currency, principally the dollar.[5]

Sometimes the reserve account is classed as "below the line" and so not reported as part of the capital account.[2] Flows to or from the reserve account can substantially affect the overall capital account. Taking the example of China in the early 21st century, and excluding the activity of its central bank, China's capital account had a large surplus as it had been the recipient of much foreign investment. If the reserve account is included however, China's capital account has been in large deficit as its central bank purchased large amounts of foreign assets (chiefly US government bonds) to a degree sufficient to offset not just the rest of the capital account, but its large current account surplus as well.[5] [6]

Sterilization

In the financial literature, sterilization is a term commonly used to refer to a central bank's operations which mitigate the potentially undesirable effects of inbound capital - currency appreciation and inflation. Depending on the source, sterilization can mean the relatively straightforward re-cycling of inbound capital to prevent currency appreciation and/or a wide range of measures to check the inflationary impact of inbound capital. The classic way to sterilize the inflationary effect of the extra money flowing into the domestic base from the capital account is for the central bank to use open market operations where it sells bonds domestically, thereby soaking up new cash that would otherwise circulate around the home economy.[7] A central bank normally makes a small loss from its overall sterilization operations, as the interest it earns from buying foreign assets to prevent appreciation is usually less than what it has to pay out on the bonds it issues domestically to check inflation. However in some cases a profit can be made.[8] In the strict text book definition, sterilization refers only to measures aimed at keeping the domestic monetary base stable - an intervention to prevent currency appreciation that involved merely buying foreign assets without counteracting the resulting increase of the domestic money supply would not count as sterilization. [9]

The IMF definition

The above definition is the one most widely used in economic literature, [10] in the financial press, by corporate and government analysts (except when they are reporting to the IMF) and by the World Bank. In contrast, what the rest of the world calls the capital account is labelled the "financial account" by the International Monetary Fund (IMF), by the Organisation for Economic Co-operation and Development (OECD) , and by the United Nations System of National Accounts (SNA). In the IMF definition , the capital account

represents a small subset of what the standard definition designates the capital account, largely comprising transfers.[11] [12][13] Transfers are one way flows, such as gifts, as opposed to commercial exchanges (i.e. buying/selling and barter). The biggest transfers between nations is typically foreign aid, however that is mostly recorded in the current account. An exception is debt forgiveness, as that in a sense is the transfer of ownership of an asset. When a country receives significant debt forgiveness it will typically comprise the bulk of its overall IMF capital account entry for that year.The IMF's capital account does include some non transfer flows, which are sales involving non-financial and non-produced assets, e.g., natural resources like land, leases & licenses, and marketing assets such as brands - however the sums involved here are typically very small as most movement in these items occurs when both seller and buyer are of the same nationality.Transfers apart from debt forgiveness recorded in IMF's Capital account include the transfer of goods and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets, the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies, and uninsured damage to fixed asset.[12][13] In a non IMF representation, these items might be grouped in the other sub total of the capital account. They typically sum to a very small amount in comparison to loans and flows into and out of short term bank accounts.

CURRENT ACCOUNT

In economics, the current account is one of the two primary components of the balance of payments, the other being the capital account. The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).The current account balance is one of two major measures of the nature of a country's foreign trade (the other being the net capital outflow). A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.[1]

The balance of trade is the difference between a nation's exports of goods and services and its imports of goods and services, if all financial transfers, investments and other components are ignored. A Nation is said to have a trade deficit if it is importing more than it exports.Positive net sales abroad generally contributes to a current account surplus; negative net sales abroad generally contributes to a current account deficit. Because exports generate positive net sales, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports. This however is not always the case with secluded economies such as that of Australia featuring an income deficit larger than its trade deficit.[2]

The net factor income or income account, a sub-account of the current account, is usually presented under the headings income payments as outflows, and income receipts as inflows. Income refers not only to the money received from investments made abroad (note: investments are recorded in the capital account but income from investments is recorded in the current account) but also to the money sent by individuals working abroad, known as remittances, to their families back home. If the income account is negative, the country is paying more than it is taking in interest, dividends, etc.The various subcategories in the income account are linked to specific respective subcategories in the capital account, as income is often composed of factor payments from the ownership of capital (assets) or the negative capital (debts) abroad. From the capital account, economists and central banks determine implied rates of return on the different types of capital. The United States, for example, gleans a substantially larger rate of return from foreign capital than foreigners do from owning United States capital.In the traditional accounting of balance of payments, the current account equals the change in net foreign assets. A current account deficit implies a paralleled reduction of the net foreign assets.

current account = changes in net foreign assets

Balance on Merchandise TradeThis is the difference between the payments received for exports of merchandise trade to

other nations and the payments made for the imports of merchandise trade from other nations. This includes only tangible goods. Once again a summary balance is provided for merchandise trade, which for Northwest Queoldiola is positive, meaning that it exports more goods than it imports.

Balance on ServicesThis is the difference between the payments received for exports of services to other

nations and the payments made for the imports of services from other nations. This includes only intangible services. Once again a summary balance is provided for the trade in services, which for Northwest Queoldiola is negative, meaning that it exports fewer services than it imports.

SERVICES EXPORT PROMOTION COUNCIL 

Ministry of Commerce and Industry, Government of India, with a view to give proper direction, guidance and encouragement to the Services Sector, has set up an exclusive Export Promotion Council for Services in the name of Services Export Promotion Council (SEPC). SEPC was registered under the Societies Registration Act in November, 2006.  DGFT, vide Gazette Notification dated 5/3/2007, included SEPC in the list of the recognised Export Promotion Councils.

SEPC has been mandated to promote export of services in the following sectors

1Healthcare services including services by nurses, physiotherapist and paramedical personnel

8 Environmental Services

2 Educational Services 9 Maritime Transport Services

3Entertainment services including Audio-visual services

10 Advertising Services

4 Consultancy Services 11Marketing Research and Public Opinion Polling Services/Management Services

5 Architectural Services and related services 12 Printing & Publishing Services

6 Distribution Services 13 Legal Services

7 Accounting/Auditing and Book Keeping Services 14 Hotel and Tourism related services

Aims and objective for which Services Export Promotion Council is established are:

(A) To promote exports of Services from India by such methods as may be necessary or expedient and without prejudice to the generality of the premises by:-

Undertaking market studies in individual foreign countries on regular as well as an ad-hoc basis.

Organizing visits of delegations of members to explore opportunities for Services Organizing, participation in seminars, conferences and meets in India and abroad, trade

fairs/exhibitions/buyer-seller meets. Disseminating information regularly and continuously in foreign countries regarding the

potential image of Indian Services sector and informing the public in foreign countries the advantages of availing Services from India.

Compiling statistics and other relevant information regarding international trade in Services.

 Providing commercially useful information and assistance to members in developing and increasing export of Services.

 Disseminating information useful to members by literatures, discussions, books, correspondence or otherwise.

 Offering professional advise to members in areas such as technology upgradation, quality and design improving, standards and specifications of the products and Services;

  Maintaining liaison with agencies dealing in international trade and Services so as to promote export of Services from India.

Communicating with the chambers of commerce and other mercantile chambers of commerce, professional bodies, other mercantile and public bodies in India and abroad for promoting measures for the advancement of exports of Services from India.

To take up various issues/problems and suggestions connecting with Services, with government and International agencies to promote interest of Services Providers

(B)  Promoting interaction between Services providers and government both at central and state levels.(C)    To channelize financial assistance rendered by the central government to members for assisting their export market  development efforts.(D)    To collaborate in kindered activities with the other export promotion councils/export promotion organisations in India and similar bodies in foreign countries and with international organizations working in the field.  (E) To enter into contracts(F)    To draw, make, accept, endorse, discount and execute negotiable instruments.(G)  To invest the money of the Council in any Bank approved by the Governing Council and the money received from the Central government as per directions of that government.(H)    To subscribe for, become a member of and cooperate with any other Association, whether incorporate or not, whose objects are, altogether or in part, similar to those contained in this Memorandum and to obtain from and to communicate to any such Association such information as may be likely to fulfill the objects of this Council.(I)     To obtain from the members and to prepare for the Council as a whole, action plans for promotion of exports of Services, development of exports markets, generation of production for exports, setting of export target, generally and in relation to specific countries and sectors, on an annual basis and for such medium and long terms as may be considered desirable and to ensure/undertake execution of such plans.(J)    To construct building(s) and to furnish security by way of mortgage, charge, etc of the Council’s properties and assets. (K)   To avail of loans and financial facilities from banks, Financial Institutions, Companies or Corporations for construction of building(s) and to furnish Companies or Corporations for construction of building(s) and to furnish security by way of mortgage, charge, etc. of the Council’s properties and assets. (L)    To do all such other lawful acts as would be conducive for the promotion of exports and to the interests of the Council or incidental to the attainment of the above objects or of any of them.

Exports of Goods & Services – Regulations

Exports of goods and services (including software services) are regulated by DGFT & RBI and there are regulations both on the documentation and the payments part. Some of the regulations which cover these transactions are as follows: Master Circular on Export of goods and services Foreign Exchange Management Act (including FEMA 14 which talks about Manner of

Receipt of Payment in Foreign Currency and FEMA 23 which define the regulations related to Exports)

Some of the important points from the above regulations are as follows:Export Documentation Any exporter of goods / services out of India has to ensure the following: Exporter is registered with DGFT and has a valid Importer / Exporter Code (IEC). This is

mandatory for all exports out of India irrespective of the size of the transactions. The buyer has to be billed within 15 days from the date of providing the service. Exporter to declare the exports being made in the specified form with GR/SDF being the

form for physical exports and Softex form for exports of Software in non-physical form (if the software is being exported in a CD for e.g. it will be covered under the physical exports) within 30 days from the date of invoice to the certifying authority.

Exporter needs to send the documents related to the export to his bank within 21 days from the date of certification of the Softex form. For software exports it is normally the Softex form and the invoice.

If the declaration in form GR/Softex has been made, then the Banker’s copy of the form is to be submitted along with the documents.

Good part is that there are various points under which the declaration has been exempted. One of these, which I think will be applicable to many transactions, is the exemption for goods and services less than USD 25K in value. In these cases, the transaction can be submitted to the bank without the declaration form and instead the exporter can give a letter confirming that the goods are not more than USD 25K in value. The exporter will still need to have a valid IEC and expected to realize and get the funds into India.

Receipt of Payment Payment is to be received within a period of 12 months from the date of exports /invoice date RBI covers only transactions being routed through the banking system so it does not

specifically mention anything like a PayPal (which is not a bank) in its regulations. The options normally used by exporters to get the money into India are to get the buyer to

either remit directly to the exporter’s bank account in India using a wire transfer /SWIFT or get the buyer to issue a cheque /International DD.

Once the money comes into India and is processed by the bank, the Bank would issue an FIRC (Foreign Inward Remittance Certificate) which would mention the amount and conversion rate besides other details

Bank would report the transaction to RBI along with the necessary details FIRC to be submitted along with the documents which would be endorsed against the export

transaction and a BRC (Bank Realization Certificate) issued. If the documents have been submitted prior to the receipt of the funds, then the bank can

directly link the inward to the transaction and can directly issue the BRC without the FIRC being issued.

PayPal has mentioned about processing these transactions along with the code being mentioned but that would be over and above the IEC requirement. Also it is not clear under which regulation does the foreign currency account opened with PayPal is covered since normally RBI

restricts the holding of Foreign Currency accounts outside India by resident Indians. This would be only clear if RBI or PayPal speaks on this.

The other online money transfer sites like Xoom, money2india, remit2india are for P2P remittances normally and hence they permit you to transfer money from your own account outside India to an either your own or other personal accounts in India and are not the ideal ones for your business transfers.

INTERNATIONAL INVESTMENT

Foreign direct investment (FDI) Foreign investment refers to the net inflows of investment to acquire a lasting

management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.[1] It is the sum of equity capital,other long-term capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.[2]

FDI is one example of international factor movement

Types

A foreign direct investor may be classified in any sector of the economy and could be any one of the following:[citation needed]

an individual; a group of related individuals; an incorporated or unincorporated entity; a public company or private company; a group of related enterprises; a government body; an estate (law), trust or other social institution; or any combination of the above.

Methods

The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:

by incorporating a wholly owned subsidiary or company

by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise...

Foreign direct investment incentives may take the following forms:[citation needed]

low corporate tax and income tax rates tax holidays other types of tax concessions preferential tariffs special economic zones EPZ – Export Processing Zones Bonded Warehouses Maquiladoras investment financial subsidies soft loan or loan guarantees free land or land subsidies relocation & expatriation subsidies job training & employment subsidies infrastructure subsidies R&D support derogation from regulations (usually for very large projects)

Global foreign direct investment

The United Nations Conference on Trade and Development said that there was no significant growth of Global FDI in 2010. In 2010 was $1,122 billion and in 2009 was $1,114 billion. The figure was 25 percent below the pre-crisis average between 2005 to 2007

International PaymentsThe foreign exchange market (forex, FX, or currency market) is a global, worldwide-

decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.[1]

The foreign exchange market assists international trade and investment, by enabling currency conversion. For example, it permits a business in the United States to import goods from the United Kingdom and pay pound sterling, even though its income is in United States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation on the change in interest rates in two currencies.[2]

In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.The foreign exchange market is unique because of

its huge trading volume representing the largest asset class in the world leading to high liquidity;

its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT

on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit and loss margins and with respect to account size.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements,[3] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.

Financing International Transactions

International monetary systems are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected. The systems can grow organically as the collective result of numerous individual agreements between international economic actors spread over several decades. Alternatively, they can arise from a single architectural vision as happened at Bretton Woods in 1944.

Optimum currency area

In economics, an optimum currency area (OCA), also known as an optimal currency region (OCR), is a geographical region in which it would maximize economic efficiency to have

the entire region share a single currency. It describes the optimal characteristics for the merger of currencies or the creation of a new currency. The theory is used often to argue whether or not a certain region is ready to become a monetary union, one of the final stages in economic integration.

An optimal currency area is often larger than a country. For instance, part of the rationale behind the creation of the euro is that the individual countries of Europe do not each form an optimal currency area, but that Europe as a whole does form an optimal currency area.[1] The creation of the euro is often cited because it provides the most modern and largest-scale case study of the engineering of an optimum currency area, and provides a comparative before-and-after model by which to test the principles of the theory.

In theory, an optimal currency area could also be smaller than a country. Some economists have argued that the United States, for example, has some regions that do not fit into an optimal currency area with the rest of the country.

The theory of the optimal currency area was pioneered by economist Robert Mundell.[2][3] Credit often goes to Mundell as the originator of the idea, but others point to earlier work done in the area by Abba Lerner.

CFA franc

The CFA franc (in French: franc CFA [fʁɑ̃_ seɛfɑ̃], or colloquially franc) is the name of two currencies used in Africa which are guaranteed by the French treasury. The two CFA franc currencies are the West African CFA franc and the Central African CFA franc. Although theoretically separate, the two CFA franc currencies are effectively interchangeable.Both CFA Francs currently have a fixed exchange rate to the euro: 100 CFA francs = 1 former French (nouveau) franc = 0.152449 euro; or 1 euro = 655.957 CFA francs.Although Central African CFA francs and West African CFA francs have always been at parity and have therefore always had the same monetary value against other currencies, they are in principle separate currencies. They could theoretically have different values from any moment if one of the two CFA monetary authorities, or France, decided it. Therefore West African CFA coins and banknotes are theoretically not accepted in countries using Central African CFA francs, and vice versa. However, in practice, the permanent parity of the two CFA franc currencies is widely assumed.CFA Francs are used in fourteen countries: twelve formerly French-ruled African countries, as well as in Guinea-Bissau (a former Portuguese colony) and in Equatorial Guinea (a former Spanish colony). The ISO currency codes are XAF for the Central African CFA franc and XOF for the West African CFA franc.

Creation

The CFA franc was created on 26 December 1945, along with the CFP franc. The reason for their creation was the weakness of the French franc immediately after World War II. When France ratified the Bretton Woods Agreement in December 1945, the French franc was devalued in order to set a fixed exchange rate with the US dollar. New currencies were created in the French colonies to spare them the strong devaluation, thereby facilitating exports to France. French officials presented the decision as an act of generosity. René Pleven, the French minister of finance, was quoted as saying:

"In a show of her generosity and selflessness, metropolitan France, wishing not to impose on her far-away daughters the consequences of her own poverty, is setting different exchange rates for their currency."

Exchange rate

The CFA franc was created with a fixed exchange rate versus the French franc. This exchange rate was changed only twice: in 1948 and in 1994.Exchange rate:

26 December 1945 to 16 October 1948 – 1 CFA franc = 1.70 FRF (FRF = French franc). This 0.70 FRF premium is the consequence of the creation of the CFA franc, which spared the French African colonies the devaluation of December 1945 (before December 1945, 1 local franc in these colonies was worth 1 French franc).

17 October 1948 to 31 December 1959 – 1 CFA franc = 2.00 FRF (the CFA franc had followed the French franc's devaluation versus the US dollar in January 1948, but on 18 October 1948, the French franc devalued again and this time the CFA franc was revalued against the French franc to offset almost all of this new devaluation of the French franc; after October 1948, the CFA was never revalued again versus the French franc and followed all the successive devaluations of the French franc)

1 January 1960 to 11 January 1994 – 1 CFA franc = 0.02 FRF (1 January 1960: the French franc redenominated, with 100 "old" francs becoming 1 "new" franc)

12 January 1994 to 31 December 1998 – 1 CFA franc = 0.01 FRF (sharp devaluation of the CFA franc to help African exports)

1 January 1999 onward – 100 CFA franc = 0.152449 euro or 1 euro = 655.957 CFA franc. (1 January 1999: euro replaced FRF at the rate of 6.55957 FRF for 1 euro)

The 1960 and 1999 events were merely changes in the currency in use in France: the relative value of the CFA franc versus the French franc / euro changed only in 1948 and 1994.The value of the CFA franc has been widely criticized as being too high, which many economists believe favors the urban elite of the African countries, which can buy manufactured goods cheaply at the expense of farmers who cannot easily export agricultural products. The devaluation of 1994 was an attempt to reduce these imbalances.

Changes in countries using the franc

Over time, the number of countries and territories using the CFA franc has changed as some countries began introducing their own separate currencies. A couple of nations in West Africa have also chosen to adopt the CFA franc since its introduction, despite the fact that they were never French colonies.

1949: French Somaliland (Djibouti) leaves and begins issuing Djiboutian francs 1960: Guinea leaves and begins issuing Guinean francs 1962: Mali leaves and begins issuing Malian francs 1973: Madagascar leaves (in 1972, according to another source) and begins issuing its own francs

the Malagasy franc, which ran concurrently with the Malagasy ariary (1 ariary = 5 Malagasy francs)

1973: Mauritania leaves, replacing the franc with the Mauritanian ouguiya (1 ouguiya = 5 CFA francs)

1974: Saint-Pierre and Miquelon leaves for French franc 1975: Réunion leaves for French franc [2]

1976: Mayotte leaves for French franc [3]

1984: Mali rejoins (1 CFA franc = 2 Malian francs) 1985: Equatorial Guinea joins (1 "franco" = 4 bipkwele) 1997: Guinea-Bissau joins (1 "franco" = 65 pesos)

Note : Réunion, Mayotte, Saint-Pierre and Miquelon currently use euro as part of the French Republic.

European Monetary Union

In 1998, in anticipation of Economic and Monetary Union of the European Union, the Council of the European Union addressed the monetary agreements France has with the CFA Zone and Comoros and ruled that:

The agreements are unlikely to have any material effect on the monetary and exchange rate policy of the Euro zone

In their present forms and states of implementation, the agreements are unlikely to present any obstacle to a smooth functioning of economic and monetary union

Nothing in the agreements can be construed as implying an obligation for the European Central Bank (ECB) or any national central bank to support the convertibility of the CFA and Comorian francs

Modifications to the existing agreements will not lead to any obligations for the European Central or any national central bank

The French Treasury will guarantee the free convertibility at a fixed parity between the euro and the CFA and Comorian francs

The competent French authorities shall keep the European Commission, the European Central Bank and the Economic and Financial Committee informed about the implementation of the agreements and inform the Committee prior to changes of the parity between the euro and the CFA and Comorian francs

Any change to the nature or scope of the agreements would require Council approval on the basis of a Commission recommendation and ECB consultation

Euro zone

The Eurozone pronunciation (help·info)), officially called the euro area, is an economic and monetary union (EMU) of 17 European Union (EU) member states that have adopted the euro (€) as their common currency and sole legal tender. The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Most other EU states are obliged to join once they meet the criteria to do so.[8] No state has left and there are no provisions to do so or to be expelled.

Monetary policy of the zone is the responsibility of the European Central Bank (ECB) which is governed by a president and a board of the heads of national central banks. The principal task of the ECB is to keep inflation under control. Though there is no common

representation, governance or fiscal policy for the currency union, some co-operation does take place through the Euro Group, which makes political decisions regarding the eurozone and the euro. The Euro Group is composed of the finance ministers of eurozone states, however in emergencies, national leaders also form the Euro Group.Since the late-2000s financial crisis, the eurozone has established and used provisions for granting emergency loans to member states in return for the enactment of economic reforms. The eurozone has also enacted some limited fiscal integration, for example in peer review of each other's national budgets. The issue is highly political and in a state of flux as of 2011 in terms of what further provisions will be agreed for eurozone reform.Monaco, San Marino and the Vatican City have concluded formal agreements with the EU to use the euro as their official currency and mint their own coins.[9][10] Others, like Kosovo, Montenegro and Andorra, have adopted the euro unilaterally.[9] However, these countries do not formally form part of the eurozone and do not have representation in the ECB or the Euro Group.