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Managing a Business/Question on International economics


1.   What is a Net barter term of trade? According to the net barter terms of trade what is the position of India with SAARC countries? Explain.
2.   Enlist the contemporary issues of liberalization in Indian context. Compare the benefits of liberalization with globalization in the economic development of India in last 10 years.

1.   What is a Net barter term of trade? According to the net barter terms of trade what is the position of India with SAARC countries? Explain.

The rate at which one country's goods exchange against those of another is referred to as the Terms of Trade. Terms of trade depend on the prices of commodities entering into foreign trade.
Thus, terms of trade express the relation between export prices and import prices and are said to be favourable to a country when the prices of its exports are high relatively to the prices of its imports. When a country's prices of imports are high relatively to its export prices, the terms of trade are obviously unfavourable to that country.
Net Barter Terms of Trade
The ratio between the prices of exports and imports is called the net barter terms of trade Where
T stands for net barter terms of trade,
P stands for price index,
x for exports, and
m for imports.
When, however, we want to compare changes in terms of trade between two periods, the following ratio is applied:
where subscripts 1 and 0 stand for time, current year and base year respectively.
Here in the base year pm each of the two index numbers (or prices of exports and imports)
Now, if in the current year, the export price index is 160 and the import price index is 120, then the terms of trade will be:
This means, in the current year, the terms of trade show an improvement of 50 per cent. It follows that if export prices rise relative to import prices, the terms of trade rise or move favourably to the country. If import prices rise relative to export prices over a period of time, the terms of trade will fall or become unfavourable to the country.
The concept of net barter terms of trade has come to be widely accepted as a useful device for measuring short-term changes in trading positions. Further, it serves as an important index expressing the purchasing power of exports in paying for imports.
It is obvious that when a country's terms of trade improve, less of its real product exported will be able to purchase a given unit of real product of the rest of the world and vice versa.
However, the main drawback of this concept of terms of trade is that it reveals nothing about the behaviour of the balance of payments, as it ignores the quantum of trade.
Net barter terms of trade index (2000 = 100)
Net barter terms of trade index is calculated as the percentage ratio of the export unit value indexes to the import unit value indexes, measured relative to the base year 2000. Unit value indexes are based on data reported by countries that demonstrate consistency under UNCTAD quality controls, supplemented by UNCTAD’s estimates using the previous year’s trade values at the Standard International Trade Classification three-digit level as weights. To improve data coverage, especially for the latest periods, UNCTAD constructs a set of average prices indexes at the three-digit product classification of the Standard International Trade Classification revision 3 using UNCTAD’s Commodity Price Statistics, interna¬tional and national sources, and UNCTAD secretariat estimates and calculates unit value indexes at the country level using the current year’s trade values as weights.

Country name    2008
57.6    51.0    50.4    52.4       *
58.5    65.2    59.3    54.8       *
Korea, Rep.
62.0    68.2    68.0    63.1       *
67.4    72.0    68.6    64.7       *
73.7    78.5    76.9    77.9       *
Sri Lanka
70.0    81.1    76.3    72.1       *
Korea, Dem. Rep.
75.6    82.1    77.6    79.6       *
83.1    82.6    83.1    81.2       *
76.2    84.7    77.9    70.6       *
96.9    99.4    99.4    99.9       *
104.0    99.4    100.1    100.7       *
120.6    117.0    109.3    104.5       *
117.2    131.7    138.5    135.9       *
145.1    133.9    140.3    151.5       *
127.2    134.2    145.5    146.3       *


2.   Enlist the contemporary issues of liberalization in Indian context. Compare the benefits of liberalization with globalization in the economic development of India in last 10 years

Liberalisation means
ü Simplifying procedures of business, i.e. investment, trade etc. such as
doing away with the license, permit and quota raj.
ü Less interventionist and more co-operative role of the Government in
economic affairs, i.e. facilitating business rather than controlling it
Abolition of industrial licensing
The Industrial Policy of 1991 took most of the industries out of the licensing
framework except 18 industries, representing strategic sectors. In the revised
policy of 1998-99, all industries were de-licensed, leaving only five sectors
(on health, strategic and security considerations) in government purview but
recently private investment has also been allowed in defence sector selectively.
Foreign Direct Investment (FDI)
Over the years, specific measures are taken for further liberalising policies
and streamlining procedures pertaining to FDI. At present, all FDIs are
permitted under the automatic approval route, except for a small negative list.
For instance, the ceiling for FDI in oil refining sector has been increased to
100 percent from the existing 49 percent.
Similarly, FDI has been permitted up to 100 percent for all manufacturing
activities with certain exception in special economic zones.
Also, 100 percent FDI has been allowed, with certain conditions, in the
telecommunication sector for Internet service providers not providing gateways
for satellite and submarine cables.
The actual inflow figures of FDI have been increasing progressively. The
share of India in total inflow of FDI to developing countries has increased
from 0.5 percent in 1992 to 1.5 percent in 1998 as indicated in the following
Good news
• Increased transparency
• Better work culture
• Reduction in corruption
• Higher production
• More jobs
• Increased competition resulting
in better quality and lower
prices for consumers
Bad news
• Disadvantaged groups could
be vulnerable, as government
spending/subsidies will be
• Import competition could lead
to inefficient units closing
down thus throwing out labour
• Absence of government control
may lead to low quality goods
coming into the market
Privatisation means
ü Dis-investment of state assets
ü Transferring industry from public to private ownership
ü Permitting private participation in management of public sector
undertakings (PSUs)
Profitability of PSUs
Year 1991-1992 1998-1999
Capital employed in
the PSUs, (Rs. Crore) 117990 273700
Gross Profit,
(Rs. Crore) 13670 39770
Gross profit to
capital employed (%) 11.6 14.5

Disinvestment in PSUs
Year Target Achievement
(Rs. Crore) (Rs. Crore)
1991-1992 2500 3038
1999-2000 10000 1829

J Good news
• Real cost pricing, thus utilities
are becoming efficient
• Shortages will reduce
• Private investment will be
attracted in infrastructure
• Locked financial resources will
be freed for deployment in
other more necessary areas
L Bad news
• Poor will suffer when prices
• Private monopolies may be
more exploitative
• No job security
Globalisation means
ü Expansion of economic activities across the political boundaries of
nation states
ü Increasing economic openness and growing economic interdependence

between countries
ü Opening up of markets to foreign players and vice versa
Growth of Exports
Period Percent
to 7.4
to 10.1
GNP    5.5--------------------6.5

J Good news
• Wider markets for trade
• Larger private capital inflows
• Better access to technology
• Availability of a wider variety
of goods
Bad news
• Reduction in sovereignty
• Increase in competition may
lead to some firms closing
• Risk of being left behind
• Payoffs are larger, but so are
the penalties for policy
inaction or errors
India is fast becoming a part of the globalising economy. The table (1) given
below demonstrates how India has become increasingly closely connected
with the world economic and trading system in the last decade.
Economic Indicators 1990-91 1999-2000
India’s Share in World Exports 0.5% 0.6%*
India’s Share in World Imports - 0.8%
India’s Exports as percent of GDP 5.8 8.5
India’s Imports as percent of GDP 8.8 12.3
Foreign Direct Investment (million US$) 155 2155

Reasons for India to liberalise its economy:
• to be better equipped to improve the performance of the Government;
• to provide opportunities to launch development plans by securing longterm
foreign direct investment flows; and
• expand job opportunities, reduce poverty, create consumers in the market
Thereby make the circle of economic development virtuous rather than vicious.
India needs to bring reforms at the level of governance. With
decreased government protection and increased participation in the process
of globalisation, the government must provide an enabling environment and
infrastructure to get benefits out of the process. For instance:
• Availability of electricity at lower prices, in right quantity and quality;
• Good infrastructure facilities such as communications, roads, transport,
ports etc;
• Flexible labour market;
• Discipline and tightening of bureaucratic setup; and
• Effective system to guard against corrupt officials.

For globalisation to have a positive effect, all it requires is that countries respond
to opportunities and adjust to constraints with proper safety nets.
The real effect of growth has to be in terms of providing basic minimum
needs for which we do not have any specific strategy because ours is a reactive
liberalisation and not a proactive and planned liberalisation. Thus, what is
• the need to revisit our approach to globalisation and reforms on our terms,
keeping in mind our requirements and interests; and
• to make it an agricultural and people-led liberalisation rather than just a
corporate and business-led liberalisation.
It is also true that globalisation is commonly characterised as increasing the
gap between the rich and the poor, but it is a matter of looking at poverty in
relative terms.
Adopt the concept of ‘welfare economics’ i.e. target the overall national
net gain and design compensation mechanisms so that losers are adequately
• Domestic economic reforms as well as multilateral negotiations must be
undertaken as long as national net gains are positive.
• The sustainability of support from a majority of people for reforms would
require some compensation for losers through mechanisms such as
retraining, fast and guaranteed access to other jobs, financial support for
starting new businesses, etc.
Industries need to improve their products, overall marketing efficiency and
energy management and cut their costs to survive i.e. radical corporate
restructuring across the board.
• There is a need to focus on newer areas of growth apart from the traditional
markets for instance tourism, life science, fashion and real estate.
• State governments should support the development of industries and
infrastructure in the state.
• The Government should fund educational schemes on the process/impact
of globalisation. For instance, the Human Resource Development (HRD)
Ministry has initiated a campaign to educate people about Intellectual
Property Rights (IPRs) at its own cost.
• ‘Anti-globalisation’ protests reflect a lack of confidence in the system,
while better governance is the basis for the sort of globalisation, which
will benefit the majority in a sustainable manner.
• There is a need for rules and regulations to manage the economic process
of globalisation and establish well functioning legislative groups.
• Trade policy must work in partnership with other policy fields because
trade is a powerful factor capable of bringing benefits to many if managed
There is a need to find the right balance between the various forces at work,
governments, markets and other institutions, which take into account the
interests of all players. Perhaps, the answer is to look into all parts of the
system and tackle weaknesses and inadequacies of the same and reinforce
pillars of governance, creating organisations in the environmental and social
development fields that work to improve coherence in the system.

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