Transcription
Hello everyone, how are you all? Welcome to ID Fusion by TR Academy. As you all know, our International Business series is ongoing. Unit number one and two we have already covered in the last video. Whoever has not watched it, can go to the playlist and watch it. So, let's start today's video without any delay. Before the video starts, please like the video, subscribe to the channel, and whoever wants to purchase notes, you can go to Telegram and purchase notes from us on Telegram. And the link to Telegram will be available in the description box, on the i-button, and in the pinned comment, all three places. You can go there and purchase notes for only ₹150. For ₹150, you can purchase notes from Unit One to Unit Five of International Business. And besides this, whatever other units you might need, they are also already available on our channel. You can go and purchase the notes. So, Unit Number Three is International Trade and BOP. So, let's look at the theories. First of all, what are the theories related to International Trade? Let's look at all those theories. So, the theories of international trade explain why countries trade with each other. What is the reason why one country is selling goods to another country, and what are the goods? What goods do they produce? And what goods do they export? What goods do they import? All these things are explained within what? All these things are explained within the theories of international trade. So, we will understand all the theories one by one. So, the first theory that comes in your syllabus is the Theory of Absolute Advantage. So, the Theory of Absolute Advantage was developed by Mr. Adam Smith. So, within the Theory of Absolute Advantage, it was stated that a country should produce and export those goods that can be produced more efficiently by it. Okay? Meaning, it can use fewer resources and produce better than other countries. For example, it is directly stated within this that any country should produce only those goods, or export only those goods, which are easily produced within your country. Meaning, if you try to sell the same goods to another country, it will be very difficult for you. But these things are easily made within your country. So, you should make such things. If you make such things, then obviously your business will run well. So, if we understand in simple words, a country has an absolute advantage. Meaning, it has an advantage in this thing. What is the advantage? That it has a good that is produced at a lower cost within its country, and its productivity is good within that country, and better than other countries. So, what will we call this? We will call this our Theory of Absolute Advantage, that a country is getting the benefit of this, that it has a good there that is produced better than other countries. So, what are the main assumptions taken here? Here, the assumption taken is that we assume that there are only two countries in the world and only two goods are produced in the world. And here, we do not consider any transportation cost. Transportation cost is not taken into assumption here. And here, we also assume that there is free trade, and whatever resources there are, we are using them completely to make a product. So, these are the assumptions taken here. For example, it is given that India is producing 10 units of clothes using one resource. In India, 10 units are made using one resource. If we use the same one resource in the USA, only five units of clothes are made. So, in India, 10 clothes are made using one resource, and in the USA, five clothes are made using one resource. So, we will say that India has an absolute advantage in clothes, because in India, double the units are made from one resource, and for example, if the USA produces eight units of machines and India produces four units of machines, then we will say that the USA has an absolute advantage in the case of machines, because machines are easily made in the USA. So, we will say that the USA has an absolute advantage in the case of machines, and India has an absolute advantage in the case of clothes. So, the conclusion from this is that India should produce clothes. Because India's absolute advantage is in clothes. And the USA should produce machines. Because the USA's absolute advantage is in the case of machines. And both countries should trade with each other. Meaning, they should do business with each other, so that clothes are bought from India in the USA, and machines are bought from the USA in India. Okay? So, things will become easier. And the benefits of this theory are that our total production will increase because these people will start making clothes. This is making 10 clothes, this is making 8 machines. So, this production will increase. And if it were the other way around, that this was making five and that was making four, it would only remain up to nine. Now this nine has become 18 directly. So, total production has increased, and we are also using resources completely, both in India and in the USA. So, this encourages specialization, that India will specialize in clothes, and the USA will specialize in machines. So many clothes will be made in India, and machines will be made in the USA. Next comes our limitation, what are its shortcomings? Here, it is not explained that what happens if one country has an advantage in all goods. It is possible that there is a country where all goods are made cheaply. There is no such good there that needs to be ordered from another country. That country has all the resources. So, what will happen in that case? So, here, transportation cost is not considered. If we are getting machines made from outside. Okay? We are ordering eight machines, so the total cost will be 12. So, such high transportation costs are incurred. And here, we assume that there are two countries and only two goods. So, this does not happen, right? There are only two countries in the whole world, or only two goods are being produced. So, this is a shortcoming here. Now, after Adam Smith, comes David Ricardo's theory. What theory did David Ricardo give? David Ricardo gave the Theory of Comparative Advantage. So, what comes under the Theory of Comparative Advantage? It is stated that a country will specialize in producing goods in which it has the lowest opportunity cost. Okay? Even if it does not have an absolute advantage. It does not have an absolute advantage, but it has the lowest opportunity cost, so it will produce those things. So, if we understand this in simple words, a country will produce those goods that it can produce relatively more efficiently than others. Okay? I will give an example of this, and then you will understand it easily. So, the key concept focused on here is opportunity cost. So, what is opportunity cost? We said that the country does not have an absolute advantage. There is no such good in that country that it can produce better than another country. So, it will produce things with opportunity cost, where its opportunity cost is higher. So, what is opportunity cost? Opportunity cost means what you give up to produce one good instead of another. Meaning, you have two things. You have two things: you can make cloth one, or you can make clothes of cloth two. You chose cloth one. So, cloth two, which you did not choose, which you are not working on, will be called your opportunity cost. Let's understand with an example. Suppose in India, clothes are made in 10 units. Machines are made in five units. In the USA, clothes are made in six units. Machines are made in four units. So, it is clearly visible here that India is making both goods well. India has an absolute advantage in both goods. India can make more clothes than the USA, and India also has more machines. So, we can see that India has an absolute advantage in both, meaning India is better than the USA in every way. But India sacrifices less to produce clothes, and the USA sacrifices less to produce machines. Okay? So, the conclusion from here is that India should specialize in clothes. Because here it is six units and here it is 10 units, so there is a difference of four units. And here it is four units and here it is five units, so there is only a difference of one unit. So, you are not sacrificing more in machines, right? The USA is far behind in clothes, only four units can be made. In machines, there is only a difference of one unit. So, we understood that India is more specialized in clothes, because there is a difference of four units, which is quite significant. And the USA, we understood that the USA should specialize in machines, because it has four units, and they are around this. So, if they both trade with each other, both will benefit. This is called the Theory of Comparative Advantage. So, the advantages of this theory are that here it is explained that if a country is better at making all things. Okay? Then what should other countries make? What should they produce, how should they get them, we get to know these things here. And here, efficient allocation of resources is being promoted, meaning all resources should be distributed efficiently. This is being promoted here, and global production should be increased. Okay? These things are being focused on here. And our limitations are these. Our limitations are these. Here, we assume that there is no transportation cost. We are ignoring all government rules and regulations here. We are not paying attention to those things. And here, we are assuming constant costs, meaning the cost is the same everywhere. But this is not the case. The cost of transporting things in the USA will be different. It will be different in India. And here, we assume free trade. And the benefits are these, its benefits and shortcomings. This theory explains trade based on the availability of resources. How many resources are available, how much you can make, according to that, this theory works for us. And it is more realistic than the older theories, like the Theory of Absolute Advantage and Comparative Advantage. Well, it is better than them. In those, something is being said in a way. Even in this, mostly we are wrong, meaning it is not that correct. But the meaning of a theory is to check whether it is correct or not. The limitations are these. Its shortcomings are these, that it has ignored technological differences. It assumes that the technology of India, USA, America, China, Pakistan, Bangladesh, every country is the same. But this is not the case, the technology is different everywhere. And the assumptions taken here are unrealistic. I mentioned all three or four. These are not realistic assumptions, it seems like anything has been written. And this is not applicable in the real world. If you want to implement this in your real life, you want to do things where labor is cheap in India, then you cannot do such things. Such things are very difficult. Next comes our Factor Proportion Theory, which we also call the Heckscher-Ohlin Theory. Why? Because it was made by two people. Their names were Eli Heckscher and Bertil Ohlin. Okay? Whether it is called Heckscher-Ohlin Theory or Factor Proportion Theory, you have to write the same theory. So, this theory states that countries should produce and export goods that use their abundant, meaning easily available resources, and import goods that require scarce resources. Meaning, a country should make those goods. Meaning, it should produce those goods and export those goods which are abundant for it. Meaning, those resources are easily available to it. Okay? That this thing is found in our country. So, I should make goods related to this, and whatever things are scarce in that country, whatever resources are scarce, and whatever things are made from them, should be imported from other countries. This is called the Factor Proportion Theory. Meaning, a country exports goods that it has more of, and imports goods that it has less of. Meaning, what you have in good quantity, you make yourself, and what you have less of, you get from others. This will be called the Factor Proportion Theory. So, the main idea is that different countries have different factors of production. Somewhere land is cheap, somewhere labor is cheap, somewhere capital is abundant. So, goods where these factors are used in different proportions everywhere. Okay? So, the example will be that in India, for example, there is more labor. For example, there is more labor. So, in India, we will make labor-intensive goods. Meaning, things that require more labor, because labor is cheap in your country, so you should make labor-intensive goods like textiles and sell them, because labor is cheap for you. And in the USA, there is a lot of capital, they have a lot of money, so they will make capital-intensive goods, like machines, which require money to make. So, this is India's advantage in labor, and the USA's advantage in capital. So, the assumption taken is that there are only two countries in the whole world and only two goods are made. And here, it is also assumed that the factors are immobile between countries, meaning labor cannot go from India to the USA, and capital cannot come from the USA to India, which is incorrect. And we assume that technology is the same everywhere, but this is also not the case, that the technology of the USA is the same as the technology of India. This is not the case. Technology is different everywhere. And we assume free trade, that there is free trade. And the benefits are these, its benefits and shortcomings. This theory works by explaining trade based on the availability of resources. How many resources are available, how much you can make, according to that, this theory works for us. And it is more realistic than the older theories, like the Theory of Absolute Advantage and Comparative Advantage. Well, it is better than them. In those, something is being said in a way. Even in this, mostly we are wrong, meaning it is not that correct. But the meaning of a theory is to check whether it is correct or not. The limitations are these. Its shortcomings are these, that it has ignored technological differences. It assumes that the technology of India, USA, America, China, Pakistan, Bangladesh, every country is the same. But this is not the case, the technology is different everywhere. And the assumptions taken here are unrealistic. I mentioned all three or four. These are not realistic assumptions, it seems like anything has been written. And this is not applicable in the real world. If you want to implement this in your real life, you want to do things where labor is cheap in India, then you cannot do such things. Such things are very difficult. Next comes our Leontief Paradox. The Leontief Paradox was given by Wassily Leontief, which is known as the Leontief Paradox. Leontief found out this thing, discovered this thing, that the USA, you know, is a capital-rich country. The USA has a lot of capital, and it is exporting labor-intensive goods and importing capital-intensive goods, which is the opposite of the Heckscher-Ohlin Theory. What was stated in the Heckscher-Ohlin Theory? It was stated that India has more labor, so it will make things made by labor, and the USA has more capital, so it will make things made by capital. But in the Leontief Paradox, it was observed that the opposite is happening, that the USA, which has more capital, is making labor-intensive goods, and is importing capital-intensive goods, which it should be making. Leontief observed this and considered it strange. So, according to this theory, it is explained that the USA should directly export its capital-intensive goods. Okay? Because it has more capital, so what should it make? Capital-intensive goods. But what is actually happening? The USA is making labor-intensive goods. So, this contradiction is called the Leontief Paradox. Something should be done, but something else is happening in real life. This is called the Leontief Paradox. Something should have happened, but something else is happening. Leontief Paradox. So, what are the reasons? What are the reasons? The first reason is that the labor in the USA is skilled labor. It is not like in India, where they have no skill. The labor there also has skills, and their labor is very productive, meaning they can work better than people in India. So, when they get productive and skilled labor, why would they come to India and, meaning, hire labor? And there are technological differences, their technology is so good. Government policies there are easy, and demand is also high there. So, these are the four reasons. So, the conclusion is that the paradox is
This shows that the factor proportion theory is not always correct in real life. Sometimes the opposite also happens. Next comes our Product Life Cycle Theory. This was given by Raymond Vernon, our Product Life Cycle Theory. And this theory explains that a product goes through different stages in its life. Right? And how production happens between two countries from time to time. It was explained in the Product Life Cycle Theory what are the stages through which a product has to go. First, let's look at our very first stage in the Product Life Cycle, the Introduction Stage. Let's understand with a graph. Let's draw a big graph. This is our introduction stage. Right? Introduction Stage. What will happen in the introduction stage? A new product is developed in a developed country, the USA. USA came up with a new thing, let's say it was introduced well here. And the product is small and expensive. Production is small and expensive. So what you did was, you are selling it in your domestic market, in your country's market. So the introduction is done, this is the first stage. After this will come the Growth Stage. People saw that this product is good, people started buying it. So when people started buying, its demand kept increasing. Obviously, now its demand increased. So this is its growth stage. Right? And now it started being exported to other countries too. So now it is being sold in America, China, India, China, everyone. And production [nasal sound] has also increased. So this is now your growth stage. And then comes a Maturity Stage. Meaning the product has become standardized. Meaning it has become so big that it has reached a standardized level, and everyone is now buying it, and it is also going to developing countries because it is now being made at a lower cost and competition related to it has increased. So a stage of maturity has arrived, the maturity stage. This is the final stage, where nothing more can be done with this product. After the maturity stage will come the Decline Stage because now the demand for that product has started decreasing. Right? So the decline stage has arrived, and production has started happening in low-cost countries where the expense is less, and developed countries have started importing this product. So now its decline has begun. Right? Now comes the decline stage, and in this way our product moves. So the example is that all electronic products are first made in developed countries. Then they are later made in China and India as well. Right? Something. America first made it. Now India and China are both making it and making it cheaper. So this is our Product Life Cycle. So its benefits are also that here we understand the changing pattern, that what is the changing pattern of the way of doing business, of trade. And it also shows the role of innovation. And its drawbacks are that it is not applicable to every product. It is possible that the demand for some increases, so it always remains at maturity, not everyone's. Because you have seen that if a product has grown, it has also fallen. It's not like that. Some products keep growing and growing. And technology keeps changing quickly. And here globalization is not fully considered. We are talking about international business, talking about globalization. And these things are not even being considered here. Next comes our Theory of National Competitive Advantage, also called the Porter Diamond Model. Porter Diamond Model, and what is the other name? Theory of National Competitive Advantage. And this was made by Michael Porter. So this theory explains why some countries have a competitive advantage. Why is any country competitive in certain industries? You see, some country is better at making something than other countries. So why is that? So Porter made a diamond model. In the diamond model, there are four main factors. The shape of a diamond is like this. So he took four factors here. Right? Four factors. He took four factors. First, he said Factor Conditions, meaning availability of resources. Meaning, the country that has skilled labor, where people know how to work well, has infrastructure built, and good technology, will obviously have an advantage. So the first factor condition came. Second came Demand Conditions, the nature of domestic demand. Right? Meaning, if the demand for the product you are making is high in a country, then innovations related to that thing will keep happening there. New changes will keep happening, and the quality of that product will also keep improving. And the third thing that comes is Related and Supporting Industries. Meaning, whatever product you are making, you need raw material for that product, its suppliers should be strong. Meaning, you are making a good product, a great product. But you are not getting raw material from behind, or all the related industries in which you have to get work done are not functioning properly, then the situation is bad in those countries. And if your suppliers are strong, sending you goods on time, and you are making things on time, then obviously you will have a competitive advantage. Fourth is Firm Strategy, its Structure, and its Rivalry. Meaning, the entire business environment comes under our fourth point. What strategies is the firm making to grow its business? What structure has the firm created? Who are the firm's rivals? What are they called in that? Next comes our Level of Competition within Countries. How much competition is there within our country, in our country? Related to the product we are making. Right? Apart from this, we have Additional Factors. What comes under additional factors? Government rules, government policies, as we saw in the last unit, and Chance, meaning unexpected events. Sometimes some things happen that increase a lot. Like the LPG crisis that happened in India, then the demand for induction cooktops, you see how much the demand for it suddenly increased. So this was an unexpected event. No one thought that the normal business of an induction cooktop would grow so much so suddenly. So for example, Germany is strong in automobiles. All these four things are found in it. And Japan is strong in electronics because all these four things related to electronics are found in it. So its benefits are that it tells the competitiveness of nations, that which country is how much better at what. Right? And here, only one thing is not being considered. Here we saw four factors and talked about them. And those four factors are themselves very big concepts. And they are very useful for today's modern global trade, for today's business. Limitations, meaning drawbacks, are that this theory is very complex to understand. It's not for everyone to understand. And it is not equally applicable in all countries. It might be applicable in some countries. It might not be applicable in some countries. Next comes our Instruments of Trade Control. Instruments of Trade Control are the tools that a government regularly uses to regulate the international trade of any country. Meaning, how much goods should be imported, how much goods should be exported, to decide this, whatever tools the government uses are called Instruments of Trade Control. So, in simple words, the government controls trade to protect its domestic industries, control imports, and maintain economic stability in the country. So for these reasons, the government controls all these things. First among these is Tariffs. Tariffs or Customs Duties, both things are the same. Don't get confused. So a tariff is a type of tax that is levied on imported goods. If you are importing goods from another country, then the tax you pay on it is called your tariff. There are two types of tariffs. One is Specific Tariff, and the other is Ad Valorem Tariff. Yes, a specific tariff is a fixed amount per unit. If you are bringing 1 kg of goods, then you have to pay, for example, ₹100 per kg. This is called a specific tariff. And there is an ad valorem tariff. Meaning, this is levied on a percentage of its value. If you have to pay a 1% tariff, for example, then if you are bringing goods worth 1 lakh, then ₹1000 will directly become the tariff on it. This is called an ad valorem tariff. So its effects are that it increases the price of imported goods, meaning the goods being imported. If it's 1 lakh, it becomes 1 lakh and 100 rupees more per kg. And these are imposed to protect domestic industries. If all goods start being imported from other countries, then the things being made in our country will not be bought. All things will have to be imported from outside, and then people from outside will capture our country, as happened before. Second is Quotas. Quota means a limit on the quantity of goods that we have imported or exported. You cannot bring more than 20 kg of goods, or there is a limit of 100 kg, you cannot bring more than 100 kg. So this limit is called your quota. So its effects are that quotas act as a barrier to the supply of foreign goods. Meaning, they work to prevent too much goods from coming into our country from other countries. And they help local producers. Since goods are not coming from outside, local producers can make their goods and sell them in our country. Third is Import Licensing. Meaning, the government needs permission. Meaning, a license is needed to import any goods. Right? So you have to get that license from the government, and only after getting that license can you import those things. Otherwise, you cannot. So its effect is that if you want to control how much of something is being imported, then import licensing controls it. And import licensing works to prevent unnecessary imports of extra things. Fourth is Subsidies. In subsidies, the government provides financial support to domestic producers. Meaning, producers in our country who make and sell goods, the government helps them, gives them money. So what is that money called? What is that financial support called? It is called subsidy. Its effects are that their cost of production decreases. Meaning, the expense they were incurring before, that expense decreases for making things. And domestic goods become competitive internationally. Meaning, the things made in your country, you can now sell them internationally too, because your products have become good and cheaper. Next is Exchange Control. Meaning, the government also controls foreign exchange. Meaning, it also controls currency. What should be the value of the dollar in relation to the Indian rupee? So if you have to spend money in foreign currency, then the work of limiting the spending of too much money in dollars is also its work. And controlling all imports is also its work. Sixth is Embargo. Embargo means that there is a complete ban on doing business with any specific country. Meaning, you cannot import any goods from this country. This situation is called an embargo. This country is permanently banned. You cannot import anything from here. So it will be called an embargo. So its effects are that whatever goods you have to import from here, or sell here, you cannot sell at all. It is completely banned. And this happens due to political reasons. If you have a dispute with that country, then you can neither import goods from that country nor send them there. Right? Next is Voluntary Export Restraint. VER, as it is called. Meaning, exporting countries voluntarily limit exports to other countries. Right? How much goods should come into our country from there. Right? How much goods will go, we ourselves are limiting those things. The exporting country itself is limiting that thing. That more than this much goods will not be sold to this country. For example, India has limited that only 1000 kg of goods will go to America per day. Not more than that. So this is our Voluntary Export Restraint. After this come our Standard Rules and Regulations. Our standards, regulations. That the government has made quality standards. If the goods are of this quality, then you can send them to our country. Otherwise not. Or there are many safety rules that the government has made. So its effect is that low-quality foreign goods, those that are of poor quality, do not come into our country. They are stopped before they can come. Right? Now comes our topic of Balance of Payments. So Balance of Payments is a record of all economic transactions. Meaning, the transactions that happen between a country and all the countries in the world in one year are called Balance of Payments, or BOP. Meaning, how much money is coming into our country and how much money is going out of our country. That is what is called our BOP. How much money is coming, how much money is going, keeping a record of all these things in one year is called Balance of Payments. So its specialty is that it is a complete systematic record. Things work in a systematic way. And it depends on the double-entry system. Debit what comes in, credit what goes out. Balance of Payments. So you have been studying economics since, I think, 11th class. And all your international transactions will be included here. How much goods are coming, how much goods are going, all those things will be included here. So what are the components of BOP? So there are two main accounts in BOP. Right? So which are the two accounts? First is our Current Account. In the current account, deals are made with trade in goods and services and income. Meaning, whatever deals are made in income and goods and services will come under our current account. Now, within this, there are also two separate components. One is our Visible Items, meaning goods that we can see. All physical goods, exporting and importing them will come under our current account. We are exporting textiles, or importing oil. Right? Oil is coming into our country, or textiles are going out of our country. So they will come under our visible items, meaning goods. And under invisible items will come our services. Those things are not visible to us. Like services, banking services, tourism services, insurance services. You are getting something from here, but you are not physically seeing that thing. Giving and receiving. And what will come under income? It is possible that you are receiving interest from some country, or you are earning profit from another country, or you are receiving a dividend from a company that is a foreign company. Or transfers. Your relative lives abroad, and they are sending you gifts, remittances. They are coming to you. Or you are sending them to another country. All those will come under our invisible items. They will come under services. So what is the balance? How is it seen in the current account? If your country's exports are more and your country's imports are less, then what will you say? Our surplus is running. It's a surplus BOP. And when will we say there is a deficit? When imports are more in your country, meaning things are coming in more, and you are able to sell less outside, then we will call it a deficit. The second thing, apart from the current account, is the Capital Account. All capital transactions happening in our country. Meaning, how much money is being invested in our country. How much loan is our country taking. All those things are our capital transactions. They will come under our capital account. So what are its components? All Foreign Direct Investment (FDI) coming in. Portfolio investment, how many shares? How many bonds? How much loan has been taken? How much borrowing? All these things will come under our capital account. Apart from this, there is Banking. Excuse me, Banking Capital. So the balance of the capital account is that if there is an inflow of capital, meaning money is coming into your country, then it is a positive capital account. And if there is an outflow, meaning money is going out of your country, then it is your negative capital account. And apart from this, there are also Official Reserve Accounts. Meaning, these accounts are maintained by the Central Bank. And in these, all your foreign exchange reserves, all the foreign exchange money, all the gold, all those things are kept in these reserve accounts. Now let's look at the BOP equation with simple ideas. Total receipts should be equal to total payments. If the money coming to you and the money going from you are both equal, then your Balance of Payments is in balance. Because according to the accounting system, how much is coming in and how much is going out. And when will there be disequilibrium? This is the situation of equilibrium, where your receipts and payments are equal. So it will be Balance of Payments. And when will there be disequilibrium? In BOP, when your payments and receipts are not equal. The payments coming in and the receipts coming in are not equal in practical terms. Now this can happen in two ways. One is deficit, and the other is surplus. Now what are the causes? What are the reasons for disequilibrium? First is that imports are more in your country. Exports are less. Inflation is high. Economic instability. The economy is not stable. So these are all the reasons for disequilibrium. Next comes our Measures. What are the ways to correct disequilibrium? What are the measures? First is Monetary Measures. Under monetary measures, what can we do? First, what can we do related to money? We can devalue our currency, reduce the value of our currency, or change the interest rate. So by changing the interest rate in this way, or by reducing the value of your currency, disequilibrium can also be corrected. Second is Fiscal Measures. Meaning, government spending, all expenditures are reduced, or taxes are increased. So with these also, our country's disequilibrium is corrected. Third is Trade Measures. That exports are being promoted, and barriers are being put on imports. Charges are being levied on them. This is our trade measures. So that is all for today, guys. If you liked the video, like the video, subscribe to the channel, and stay with Infusion. We will meet you in the next video with the next unit, Unit Number Four. And whoever wants to purchase our notes, the Telegram link will be available in the description box, i-button, and pinned comment, all three places. And for only ₹150, you can purchase notes from Unit One to Unit Five. Thank you so much for watching. See you in the next video with the next topic.