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MS-03

Management Programme

ASSIGNMENT
SECOND SEMESTER
2013

MS-03: Economic and Social Environment

School of Management Studies

INDIRA GANDHI NATIONAL OPEN UNIVERSITY
MAIDAN GARHI, NEW DELHI 110 068

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ASSIGNMENT

Course Code

MS-03

Course Title

Economic and Social Environment

Assignment Code

MS-03/TMA/SEM-II/2013

Coverage

All Blocks

Note: Attempt all the questions and submit this assignment on or before 31st October, 2013 to
the coordinator of your study centre.

1. All modern economies have certain economic problems to deal with. Examine and
illustrate the statement.
Solution :
What is an Economic Problem?
In a broad sense, an economic problem can be defined as an abnormal and irrational or irrelevant
behavior by socio-economic units and market components. An economic problem can be
triggered by any case or causes or even another economic problem. Though there is no scale that
measures the level of abnormal behavior, an economic problem is said to have arisen when the
abnormal behavior by economic components tend to affect several institutions.

In this discussion, market components signifies 3 major constituents of the market, namely,
demand, supply and price. Though the magnitude of all the three components is small, it plays a
highly influential role at a macro level. The term institute defines individuals, organizations,
companies, government, governing bodies and any unit which is capable of conducting an
economic activity.

Meaning
There are several definitions that elaborate upon an economic problem. However, the simplest
definition that is accepted world wide is that a problem is an abnormality in economic
institutions or constituents that in the view of society at large has a negative influence on earning
and spending. The real gist is thus that a 'problem' is a subjective view of the entire society. Rise
in gas price by 1 cent is not an economic problem, but a rise by $10 is stated to be an economic
problem.

Scarcity

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Classical and neo-classical economists and also their school of though, have presented a very
practical explanation of the challenges facing any economy, the human wants are unlimited.
However, the volume of available resources that is used to fulfill them is very limited. Even the
alternatives that are present limited. This combination of limited resources and unlimited wants
results into problems. This approach is often termed as the scarcity approach. Thus, when you try
to find the solution to any economic crisis, you will have to focus on unlimited wants and limited
resources.

List of Economic Problems

Here is small list which is not totally complete and academic arguments to some elements in the
list are welcome.
Anti-competitive behavior, laws and practices
Mass bankruptcy filings and insolvency
Economic bubbles and mass business failure
Child labor and improper child welfare development
Commercial crimes and intentional or planned corporate offenses
Corporate crime and planned economic turmoil
Corporate scandals
Corruption
Uncontrolled debt
Economic disasters
Government or bureaucracy induced economic crisis
Mass economic inequality
Energy crises
Ethically disputed business practices
Financial crises (restricted to the financial sector)
Uneven income distribution
Inflation
Market failure (component failure)
Monetary hegemony
Monopoly

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Offshoring and outsourcing

Poverty
Economic recessions
Social inequality
Stock market crashes
Unemployment
Mass public affluenza
Abnormal (too long or too short) age stratification
Agflation
Asset price inflation
Bank run
Benefit shortfall
Biflation
GDP or market component contraction
Credit crunch crisis
Crony capitalism
Currency crisis
Cycle of poverty
Deflation
Deindustrialization
Demographic trap
High dependency ratio
Dominant minority
Dutch disease
Economic collapse
Economic mobility
Economic stagnation
Expenditure cascades
Exploitation

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Financial contagion
Flight-to-liquidity
Flight-to-quality
Free rider problem
Glass ceilings
Hahn's Problem
Horizontal inequality
Hyperinflation
Income deficit
Innovation butterfly
Insider trading
Kleptocracy
Liquidity crisis
Malthusian catastrophe and trap
Market abuse
Middle class squeeze
Monetary inflation
National bankruptcy
Crude oil depletion
Overcapitalisation
Overpopulation
Pandemic
Panic selling
Pensions crisis
Plutocracy (the rule of wealthy, or rather a combination of wealth and power, sufficing reach
other)
Population decline
Real estate bubble
Rural flight

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Societal collapse
Spending wave
Stagflation
State monopoly capitalism
Staycation (a time period where a person or a family takes off a non festive, or a non sick leave
from work to relax for a day or two)
Stock market bubble
Sunshine tax (a significantly lower wage rate in one region as a result of excessive tax)
Urban decay
Waithood (refers to the long time period between the date of completion of education and date of
employment in the lives of many young people)
In the recent past, a considerable number of problems have plagued the world's markets. Here are
some explanations.

Inflation
One of the biggest problems ever seen in the developing nations, inflation, involves the rise in
price levels of goods and services. The basic reason that can be pointed out is that the population
rise is not proportional and is excessive, in comparison to the available resources. Hence the
more number of people demand a limited number of goods which leads to price hike. In contrast
to this commonly observed theory, inflation is also seen when currency in circulation is
increased. Wars, natural disasters other calamities are also accused of inflation. Hyperinflation is
very, very fast and disproportional inflation. South east Asian economies are of date suffering
from this phenomenon.

Economic Bubble
An economic bubble is high trade and market values of commodities, goods and products, the
intrinsic prices of which are very low. The same opposite situation can also arise. Real estate
bubbles in United States were responsible for a great deal of reduction in economic activities.

Recession
The third prominent economic problem is recession, which was severely experienced in 2008.
This economic cycle is a product of several causes, where in market values, GDP, rate of
employment, economic growth stall or fall. This results into credit crunches, fall in rates of
employment and overall economic activities. A very prolonged recession is known as a
depression.

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It must be noted that since economics is a science and art that deals with man, there are several
economic challenges that overlap the scope of other social sciences. The reason being that, the
focal point of all these issues and other social sciences is mankind.

2. Briefly examine the growth of SSI in the post-reforms period.

Solution :
According to the committee of economic development USA, a small business is one which
possesses at least 2 of the following 4 characteristics:
Management of the firm is independent. Usually the managers are also the owners.
Capital is supplied and the ownership is held by an individual or a small group.
The area of operation is mainly local, with the workers and owners living in one
home community.
The relative size of the firm within its industry must be small when compared with
the biggest units in its field. These measures can be of sales volume, number of
employees or other significant comparisons.
The basic of distinction between the large, medium, and small scale industries is
generally the size, capital resources and labour force of the individual unit.
SSI Sector in India creates largest employment opportunities for the Indian populace,
next only to Agriculture. It has been estimated that a lakh rupees of investment in fixed
assets in the small scale sector generates employment for four persons.

Generation of Employment - Industry Group-wise

Food products industry has ranked first in generating employment, providing

employment to 4.82 lakh persons (13.1%).
The next two industry groups were Non-metallic mineral products with employment of
4.46 lakh persons (12.2%) and Metal products with 3.73 lakh persons (10.2%).
In Chemicals & chemical products, Machinery parts and except Electrical parts, Wood

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products, Basic Metal Industries, Paper products & printing, Hosiery & garments,
Repair services and Rubber & plastic products, the contribution ranged from 9% to 5%,
the total contribution by these eight industry groups being 49%.
In all other industries the contribution was less than 5%.
Production
The small scale industries sector plays a vital role for the growth of the country. It
contributes 40% of the gross manufacture to the Indian economy.
It has been estimated that a lakh rupees of investment in fixed assets in the small scale
sector produces 4.62 lakhs worth of goods or services with an approximate value
addition of ten percentage points. The small scale sector has grown rapidly over the
years. The growth rates during the various plan periods have been very impressive.

The number of small scale units has increased from an estimated 8.74 lakhs units in
the year 1980-81 to an estimated 31.21 lakhs in the year 1999.
From the year 1990-91 this sector has exhibited a comparatively lower growth trend
(though positive) which continued during the next two years. However, this has to be
viewed in the background of the general recession in the economy. The transition
period of the process of economic reforms was also affected for some period by
adverse factors such as foreign exchange constraints, credit squeeze, demand
recession, high interest rates, shortage of raw material etc.
When the performance of this sector is viewed against the growth in the manufacturing
and the industry sector as a whole, it instills confidence in the resilience of the smallscale
sector.
The estimates of growth for the year 1995-96 have shown an upswing. The growth of
SSI sector has surpassed overall industrial growth from 1991 onwards. The positive
trend is likely to strengthen in the coming years. This trend augurs a bright future for
the small-scale industry.
Export contribution
SSI Sector plays a major role in India's present export performance. 45%-50% of the

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Indian Exports is being contributed by SSI Sector. Direct exports from the SSI Sector
account for nearly 35% of total exports. The number of small-scale units that undertake
direct exports would be more than 5000.
Besides direct exports, it is estimated that small-scale industrial units contribute around
15% to exports indirectly. This takes place through merchant exporters, trading houses
and export houses. They may also be in the form of export orders from large units or
the production of parts and components for use for finished exportable goods.
It would surprise many to know that non-traditional products account for more than 95%
of the SSI exports. The exports from SSI sector have been clocking excellent growth
rates in this decade. It has been mostly fuelled by the performance of garment, leather
and gems and jewellery units from this sector.

Opportunities
Small industry sector has performed exceedingly well and enabled our country to
achieve a wide measure of industrial growth and diversification.

Economic Indicators
The Small Scale Industry today constitutes a very important segment of the Indian
economy. The development of this sector came about primarily due to the vision of our
late Prime Minister Jawaharlal Nehru who sought to develop core industry and have a
supporting sector in the form of small scale enterprises.
Small Scale Sector has emerged as a dynamic and vibrant sector of the economy.
Today, it accounts for nearly 35% of the gross value of output in the manufacturing sector and
over 40% of the total exports from the country.
In terms of value added this sector accounts for about 40% of the value added in
the manufacturing sector.
The sector's contribution to employment is next only to agriculture in India. It is
therefore an excellent sector of economy for investment.

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3. Critically analyze the achievements and adverse effects of regulatory framework in

the course of Indias industrialization.
Solution :

India's experience with regulation in the sense of control is not new. Till recently, all sectors of
the economy were regulated. For example, in the infrastructure sectors, the governments or their
instrumentalities owned, operated, and regulated services. The central government, the Central
Electricity Authority, state governments, and state electricity boards regulate the power sector
under the authority of the
Electricity (Supply) Act, 1948 and Indian Electricity Act, 1910; the Department of
Telecommunications regulates the telecom sector under the Indian Wireless Telegraphic Act,
1933 and the Indian Telegraphic Act, 1885; the central government, state governments,
Directorate General of Shipping, and dock labour boards regulate the port sector under the Ports
Act, 1908, the Major Port Trusts Act, 1963, the Merchants Shipping Act, 1958, and the Dock
Workers (safety, health and welfare) Act, 1986. In addition, there are other regulators created
under various other acts relating to environment, safety, labour, etc. Regulation as it existed then,
and still continues to exist in several areas, is rooted in the belief that only the public sector can
provide basic infrastructure services, that the entry of the private sector should strictly be
regulated if it cannot be altogether prevented, and that the public sector agencies providing
services should serve the interests and compulsions of the government. There was no attempt to
distance the government's role as the policy maker and
protector of public interest from its role as operator or provider of services. In fact,
considerations of efficiency, productivity, and consumer interests were not of any importance.
There was also the implied belief that accountability to the government and through the
government to the Parliament or the legislature was adequate to ensure transparency and that no
objectivity in regulation or disclosure to the public was necessary. This form of regulation or
control inevitably resulted in unlimited discretionary powers to the service providers operational
inefficiency and poor quality of service lack of transparency in the decision-making process and
of accountability high barriers to entry and negligible flow of private capital financial
mismanagement lack of protection of consumer interest with non-competitive prices at the
consumer end and highly restricted consumer choices.
Reforms and liberalization of the Indian economy started in 1991/92 with the power and telecom
being thrown open gradually to private investment and competition.
The telecom sector was opened up in 1991 with private investment being permitted in
the manufacture of telephone equipment. Value-added services were thrown open for
private investment in 1992, and in 1994, the National Telecom Policy reiterated the
government's commitment to further liberalize the sector. The guidelines of 1991
allowed private sector entry in the generation of power. This was followed by several
initiatives to attract and facilitate private investment in the power sector. Private sector

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participation by way of leasing port facilities was permitted in 1994 and investment in
the creation of new facilities in the existing ports or establishment of new ports in 1996.
However, regulation in the power and telecom sectors was not contemplated or
provided for as a part of the initial reforms process, unlike in the UK where the
electricity industry restructuring and positioning of the regulator were simultaneous. In
the case of the telecom and power sectors, the regulators came much later, whereas in
the case of the port sector the decision to set up a tariff regulatory authority was
announced as a part of the policy statement in 1996. In the insurance sector, the
regulatory authority has preceded the opening up of the sector. This sequence would
seem to indicate that progressively there is a realization in the government that reform
cannot be put into force without independent regulation and that a regulatory authority
should be set up. In the hydrocarbons sector, where the pace of reform is rapid, the
regulator is not yet in sight. To what extent do the laws setting up these regulatory
bodies incorporate the requisites of a sound regulation? Annex 1 sets out the
provisions of the TRAI (Telecom Regulatory Authority of India) Act, 1997; the PLA (Port
Laws [Amendment]) Act, 1997; the ERC (Electricity Regulatory Commissions) Act,
1998; and the IRA (Insurance Regulatory Authority) Bill, 1998 under the categories of
scope, autonomy, accountability, and powers. The scope of regulation in the four
sectors differs widely. Whereas TRAI has been specifically mandated to regulate the
telecom sector as a whole and advise on the timing of entry of players, licensing
conditions, technical capability, etc., the CERC (Central Electricity Regulatory
Commission) is essentially set up to regulate tariff for central generating agencies and
for interstate transmission of power. On the other hand, TAMP (Tariff Authority for
Major Ports) is only a tariff regulatory authority on the lines of a tariff commission and is
not a regulator of port activities at all. The IRA is being assigned a bigger mandate,
which is comparable with that of TRAI, in the insurance sector. Also TRAI and the IRA
at the bill stage have been specifically mandated to protect the interests of the
consumers, monitor the quality of service, and ensure compliance of minimum service
obligations, whereas in the case of the CERC, these have been left as objectives of the

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CAC (Central Advisory Committee), without any clear indication of the value of the
advice of the CAC or how such advice would be heeded. In the case of TAMP, these
issues have not been addressed at all.
The regulatory laws do not provide for any flexibility for speedy and effective response
to changing circumstances. Since a regulator facilitates the process of transition from
the monopolistic market to a competitive economy, its form, functions, and scope
cannot be static. It is possible that as services are unbundled and competition increases, certain
areas presently regulated may at some future date call for no regulation. For example, in the
power sector it is possible that at some stage generation or distribution may not require tariff
regulation. Secondly, as an economy matures and becomes sophisticated, the approach to
regulation may have to change.
The traditional practice of regulating the rate of return of the utilities is already
undergoing a change with concepts like performance-based regulation or marginal cost
approach being introduced. Technological advances may also alter the boundaries of
regulation, a possibility that is looming large with telecommunications and broadcasting
beginning to use the same pathways. Ideally, therefore, there should be some provision
in the laws or mechanisms to ensure that the scope and nature of regulation is
continuously under review.
India has had robust economic growth since 1991 when the government reversed its
socialist-inspired policy of a large public sector with extensive controls on the private
sector and began to liberalize the economy. Liberalization has proceeded in fits and
starts since then, mainly due to political pressures, but the economy has responded
well by posting strong growth in many sectors. A 2003 report by Goldman Sachs
predicts that India's economy would be the third largest by 2050.
With a GDP of $550 billion ($2.66 trillion at PPP) India has the world's 12th largest
economy in US dollar terms and the 4th largest in PPP terms. However, the large
population means that per capita income is quite low. In 2002 the World Bank ranked
India 145th in PPP per capita income and 159th in real terms, among 208 countries.
About 60% of the population depends directly on agriculture. Industry and services
sectors are growing in importance and account for 25% and 50% of GDP, respectively,
while agriculture contributes about 25.6% of GDP. More than 25% of the population live

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below the poverty line, but a large and growing middle class of 300 million has
disposable income for consumer goods.
India embarked on a series of economic reforms in 1991 in reaction to a severe foreign
exchange crisis. Those reforms have included liberalized foreign investment and
exchange regimes, significant reductions in tariffs and other trade barriers, reform and
modernization of the financial sector, and significant adjustments in government
monetary and fiscal policies.
The reform process has had some very beneficial effects on the Indian economy,
including higher growth rates, lower inflation, and significant increases in foreign
investment. Real GDP growth was 4.3% in 2002-03, mainly due to a severe drought.
Growth in 2003-2004 is expected to be above 6%. Foreign portfolio and direct
investment flows have risen significantly since reforms began in 1991 and have
contributed to healthy foreign currency reserves ($85 billion in August 2003) and a
moderate current account deficit of about 1% (2002-03). India's economic growth is constrained,
however, by inadequate infrastructure, cumbersome bureaucratic procedures, and high real
interest rates. India will have to address these constraints in formulating its economic policies
and by pursuing the second generation reforms to maintain recent trends in economic growth.

4. Distinguish between free trade and protection. Discuss the merits and demerits of
free trade vs. protection for a developing country like India.
Solution :
The global economy is set to decline for the first time since World War II. Economists have engaged in a
lively debate over the benefits and pitfalls of free trade and protectionism. Many economies have
adopted free-trade policy, or an economy in which trade tariffs and barriers have been lifted. allowing
for the free flow of trade between one or more nations. Protectionism refers to policies where nations
restrict imports and exports.
What is Protectionism?
Protectionism refers to policies, rules and regulations that help a nation place barriers in the form of
tariffs while trading with any other country. It is sometimes also a ploy by a country to safeguard the
interests of its domestic producers as cheap imported commodities tend to shut down factories making
that commodity inside the country. Though at times protectionism is adopted to serve national
interests, there are times when countries cry foul as they face non economic tariffs. For example,
carpets made in India are world famous and India exports them to many countries including Europe and
the US. But suddenly US chose to place barriers in this trade citing use of child labor in the manufacture
of carpets in India.

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One of the easiest ways to reduce imports of commodities is to raise the price of imports by putting in
place tariffs. This helps domestic producers as they remain competitive in the domestic markets. Other
ways of protectionism are to place quota restrictions on commodities so that the quantity entering the
country is miniscule which does not affect local producers.
Advantages of Trade Protectionism
If a country is trying to grow strong in a new industry, tariffs will protect it from foreign competitors.
This allows companies in the new industry time to learn how to produce the good efficiently, and
develop their own competitive advantages.
Protectionism also temporarily creates jobs for domestic workers. As domestic companies are protected
by tariffs, quotas or subsidies, they will hire locally. This will occur until other countries retaliate by
erecting their own protectionism within that industry.
Disadvantages of Trade Protectionism
In the long term, trade protectionism weakens the industry. Without competition, companies within the
industry won't innovate and improve their products or services. There's no need to. Eventually,
consumers will pay more for a lower quality product than they would get from foreign competitors. Job
outsourcing is a result of declining U.S. competitiveness, itself is a result of decades of the U.S. not
investing in education. This is particularly true for high tech, engineering, and science. Increased trade
opens new markets for businesses to sell their products. The Peterson Institute for International
Economics estimates that ending all trade barriers would increase U.S. income by $500 billion.
Increasing U.S. protectionism will further slow economic growth and cause more layoffs, not less. If the
U.S. closes its borders, other countries will do the same. This could cause layoffs among the 12 million
U.S. workers who owe their jobs to exports.
What is Free Trade?
The concept of Free trade on the other hand refers to a situation where there are no barriers in trade
between two countries. This not only helps both the nations, it also paves the way for cooperation and
trade in more areas and removing mistrust and ill will that is always there in an atmosphere riddled with
sanctions, tariffs and embargos. Free trade does not take place overnight and this is why nations are
entering into economic pacts and agreements to slowly and gradually remove all such artificial tariffs.
Free trade encourages transparency and healthy competition. Nations have come to realize that others
can be superior to them in production of certain goods and services while they can be superior in other
areas.
To help nations of the world prosper through international trade, GATT has paved the way for World
Trade Organization that sets the guidelines for international trade and puts into place a robust
mechanism for the resolution of disputes between member countries.
In brief:
Free Trade vs Protectionism
Free trade is an ideal situation while protectionism is the order of the day in international trade
Protectionism takes many shapes and sometimes, countries crying foul as they are made to suffer
hardships cannot even prove it
WTO has been set up to pave the way for free trade by gradually removing all artificial barriers
between member countries
Free trade encourages healthy competition whereas protectionism leads to jealousy and ill will.

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Advantages of free trade
Free trade occurs when there are no artificial barriers put in place by governments to restrict the flow of
goods and services between trading nations.
When trade barriers, such as tariffs and subsidies are put in place, they protect domestic producers from
international competition and redirect, rather than create trade flows.
Increased production
Free trade enables countries to specialise in the production of those commodities in which they have
a comparative advantage .
With specialisation countries are able to take advantage of efficiencies generated from economies of
scale and increased output.
International trade increases the size of a firms market, resulting in lower average costs and increased
productivity, ultimately leading to increased production.
Production efficiencies
Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to
higher productivity and increasing total domestic output of goods and services.
Increased competition promotes innovative production methods, the use of new technology, marketing
and distribution methods.
Benefits to consumers
Consumers benefit in the domestic economy as they can now obtain a greater variety of goods and
services.
The increased competition ensures goods and services, as well as inputs, are supplied at the lowest
prices. For example in Australia imported motor vehicles would cost 35% more if the 1998 tariff levels
still applied. Clothing and footwear would also cost around 24% more.
Foreign exchange gains
When Australia sells exports overseas it receives hard currency from the countries that buy the goods.
This money is then used to pay for imports such as electrical equipment and cars that are produced
more cheaply overseas.
Employment
Trade liberalisation creates losers and winners as resources move to more productive areas of the
economy. Employment will increase in exporting industries and workers will be displaced as import
competing industries fold (close down) in the competitive environment. With free trade many jobs have
been created in Australia, especially in manufacturing and service industries, which can absorb the
unemployment created through restructuring as firms close down or downsize their workforce. When
tariffs were increased substantially in the period 19741984 for textiles and footwear - employment in
the sector actually fell by 50 000, adding to overall unemployment.
Economic growth

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The countries involved in free trade experience rising living standards, increased real incomes and
higher rates of economic growth. This is created by more competitive industries, increased productivity,
efficiency and production levels.

Disadvantages of free trade

Although free trade has benefits, there are a number of arguments put forward by lobby groups and
protestors who oppose free trade and trade liberalisation. These include:

o With the removal of trade barriers, structural unemployment may occur in the short term. This can
impact upon large numbers of workers, their families and local economies. Often it can be difficult for
these workers to find employment in growth industries and government assistance is necessary.
o Increased domestic economic instability from international trade cycles, as economies become
dependent on global markets. This means that businesses, employees and consumers are more
vulnerable to downturns in the economies of our trading partners, eg. Recession in the USA leads to
decreased demand for Australian exports, leading to falling export incomes, lower GDP, lower incomes,
lower domestic demand and rising unemployment.
o International markets are not a level playing field as countries with surplus products may dump
them on world markets at below cost. Some efficient industries may find it difficult to compete for long
periods under such conditions. Further, countries whose economies are largely agricultural face
unfavourable terms of trade (ratio of export prices to import prices) whereby their export income is
much smaller than the import payments they make for high value added imports, leading to large CADs
and subsequently large foreign debt levels.
o Developing or new industries may find it difficult to become established in a competitive
environment with no short-term protection policies by governments, according to the infant industries
argument. It is difficult to develop economies of scale in the face of competition from large foreign
TNCs. This can be applied to infant industries or infant economies (developing economies).
o Free trade can lead to pollution and other environmental problems as companies fail to include
these costs in the price of goods in trying to compete with companies operating under weaker
environmental legislation in some countries.
o Pressure to increase protection during the GFC
During the global financial crisis and recession of 2008-2009, the impact of falling employment meant
that protection pressures started to rise in many countries. In New South Wales, for example, the state
government was criticised for purchasing imported uniforms for police and firefighters at cheaper prices
rather than purchasing Australian made uniforms from Australian companies. Similar pressures were
faced by governments in the United States, Britain and other European countries.
External Sector Management refers to Policies adopted by a country with
reference exports and imports. It can be free trade policy or restricted trade policy. A
restricted trade policy seeks to maintain a system of trade restrictions with the objective
of protecting domestic economy from competition of foreign products. A free trade
policy involves complete absence of tariffs, quotas, exchange restrictions etc.
Thus, external sector management strongly influences the direction, trend and growth
of foreign trade of country. This is an important economic instrument, which can be
used by a, country, with suitable modifications from time to time, to achieve its longterm
objectives.?
Trade policy is alternatively called as (EXIM) Export- Import policy. In India Trade
policy is a policy, which is adopted by a country with references to exports and imports.
FREE TRADE POLICY: A policy that doesnt impose any constraints on the

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interchange of goods and services between separate countries. A policy includes full
absence of tariffs, quotas; interchange constraints on production taxes and subsidies.
Case in favour of Free Trade
Most arguments for free trade have been built on the grounds of efficiency, economic
growth and welfare. According to Samuelson "trade promotes a mutually profitable
regional division of labour, greatly enhances the potential real national product of all
nations, and makes possible higher standards of living all over the globe"
Free trade policy is economically advantageous to the participating countries since it
maximizes their social product. Free trade is supposed to be carried out under the
conditions of free competition in which price mechanism " automatically ensures that
each country, specialized in the production of those goods, and those goods which it
can produce more cheaply, talking account of transport (cost)". Given the real
resources of a country, if it specializes in the production of goods in which it is
relatively more efficient, or its cost of production is comparatively lower, its total
national product will be much larger than if it spreads its limited resources over the
production of all goods, irrespective of the cost of production. With specialization in the
efficient sectors, a larger national product can be achieved; a larger exportable surplus
can be generated; and a larger volume of goods & services of the countrys
requirements can be imported from other countries at lower prices. This increases total
availability of goods and services and raises the standard of living of the people.
Possibly the mist attractive argument in favour of free trade is that it lowers the prices
of imported goods. Moreover, free trade in international market has an educative
effect in the sense that it compels countries to enhance their efficiency through better
management of resources and quick adoption of improved and more efficient
techniques of production.
In theoretical terms, free trade offers various MERITS in realistically below developed
countries where as DEMERITS in such a system of international trade. As an
inference, international economy survives a difficult period of protective trade policies.
Trade policies may be outward looking or inward looking.
(i) Outward looking: An outward looking trade policy encourages not only free trade
but also the free movement of capital, workers enterprises and students, a welcome to
the (MNC) organizations and an open system of communications
Primary outward Policies: Goaled at encouraging export of raw material and
agricultural.
Secondary outward Policies: Goaled at promoting manufactured exports
(ii) Inward looking: An inward looking true policy stresses the requirement for a
Country to its own style of development and to be the master of its own fate with
limitations on the movement of goods, services and people in and out of the Country.
Primary inward policies: Opinion is to get agricultural self-sufficiency
Secondary inward policies: By import substitution opinion is attaining
manufactured commodity self-sufficiency.
Merits of FREE trade
If free trade between nations did not exist, then economies would stagnate.
Free trade allows nations to flourish at what goods and/or services they excel at
providing, fits into this scenario like a hand to a glove.
Free trade gives consumers more, and cheaper, choices.
It also helps to facilitate co-operation between the weaker developing countries
and help the South build a joint economic perspective.
Demerits

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FREE trade affects every country in the world and every section of society within
those countries.
Industries face stiff competition from foreign companies.
Small scale industries, which already have very less resources have to face high
competition.
Protection
For some political reasons most countries had adopted a projectionist policy. Perhaps
the world market never provided the perfect conditions required for free trade on a
global scale. For the purpose of regulating foreign trade or protecting a countrys
interest in foreign trade, tariff is one of the most important tools.
Merits
1. A protective trade policy by a country seeks to maintain a system of trade limitations
with the opinion of protecting the domestic economy from the competition of foreign
products.
2. During the decades of 50, 60 and 70 and some enhanced in 80. Protective trade
policy constituted a significant plank (part) in the commercial policies of below
developed countries.
3. It helps in development of the industries in the country.
4. Local industries don't have to face high competition from the foreign countries.
DEMERITS
Many undeveloped countries continue to have protective trade policies.
The product prices are high due to protective trade policies.
Consumers have to feel the heat of protective trade policies.
The economy can't grow at high pace.
It also discourages foreign investments.
In a developing country like India, we cannot have a full-fledged free trade policy due
to the following reasons:
Several industries in a developing country like India are in the initial stage of
industrial growth, most industries are in their infancy. In infant industries are
exposed to competition with the industries of developed nations, which have
achieved a high level of technical efficiency , economies of scale and financial
strength, they would run the risk of dying out in their infancy. The infant industries
of developing economy need protection.
Promotion of employment: Tariff protection is also suggested as an effective
remedy to the serious unemployment problem in underdeveloped countries.
Imposition of tariffs on imports directly competing with the domestic products helps to
expand employment opportunities in the import-competing industries by
securing the domestic market

5. Collect data on foreign technical and financial collaborations for the period 2005-2012
and write a note on the trends of these collaborations.

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