Classification of Economies

1.
2.
3.

Classification based on ownership:

Capitalist economy
Socialist economy
Mixed economy
Classification based on levels of economic
development:
1. Developed countries eg.USA, UAE, Singapore
2. Developing countries eg.India, China
3. Transition to market economies eg.Russia,
Poland

Economic Indicators
GDP(value of total final output of all goods and
services produced in a single year within a
countrys boundary)
GNP(GDP + income received by residents from
abroad - incomes claimed by nonresidents)
Income Distribution
Inflation
Interest Rates
Unemployment
Foreign Exchange Reserves

Economic Integration
Two or more countries from the same region
enter into agreements.
Objective of these agreements is to reduce trade
barriers among member countries.
Promotion of trade and investment
Forming economic union consisting of common
legislative, judicial and executive institutions.
RTAs between countries are significant
development.

Levels of Economic Integration

1.
2.
3.
4.

Based on the level and nature of

integration, RTAs can be classified into
four categories:
Free trade area
Customs union
Common market
Economic union

Free trade area

Cooperative arrangement among two or
more nations.
General agreement on Tariffs and Trade
Trade barriers are removed among
members
Members eliminate tariffs among
themselves but keep their original tariffs
against rest of the world.
Eg.NAFTA

Customs union
Two or more countries agree to remove all
barriers to free trade with each other, while
establishing a common external tariff against
other nations.
Free trade area lay tariffs separately against
non-members.
Does not allow flow of factors of production.
Permits only trade.
Eg. EU-Turkey customs union

Common market
Also referred as tariff union.
Regional grouping of countries that levies
common external duties on imports from
nonmember countries, but which eliminates
tariffs, quotas and other govt. restrictions on
trade among member countries.
Allows free flow of factors of production such as
labour, capital and technology among members.
Eg.Belgium-Luxembourg Economic Union,
Central American common market, East African
community.

Economic union
Members move beyond the common market to
unify their fiscal and monetary policy.
Eg. European Union shared political
institutions.
Benefits standardization of fiscal system,
product standards, competition.
One central bank, common currency.
Lead to loss of sovereignty from member
countries.

Advantages of Integration
Increases size of market
Increases aggregate demand for products and
services
Quantity of production,
Employment
Economic activity of the region
People of the region get a variety of products at
comparatively lower price
Resources of the region pooled
Rapid technological innovations and
development.

Trade creation
Refers to the expansion of trade between
the member countries of a Customs union.
Occurs when lower-cost partner country
imports displace higher-priced domestic
production
Decrease costs of production and
consumer prices within the country.
Benefits are greater

Trade diversion
Refers to the volume of trade that is
diverted due to the formation of a customs
union from the foreign country to the union
partners due to the elimination of intraunion tariff.
Happens when lower-cost imports from
outside the block are displaced by highercost imports from within the block.

Trade blocks
Purpose of trading blocks is to create a single largest
market.
Globalisation implies opening up the economy for rest of
the globe by liberalising the rules and regulations.
EU
NAFTA
ASEAN
SAARC
LAFTA
CACM
Andean Group

Opportunities
Business opened within the region
Efficient business firms can enter and expand to
all the countries within the region.
Challenges of less efficient business firms
helped by more efficient businesses.
Overall business performance will
increase(productivity, quality, price, customer
service)
Rise in Employment opportunities.

Threats
Less efficient firms face the problem of survival.
Price differentials vanish - leading firms with production
cost higher than industry average to be killed.
Resources of less efficient company exploited by firms of
advanced country.
Less developed countries of the region will mostly
become a consumption centre and advanced countries
becoming production centres.
Less developed countries become poorer and advanced
countries of the region becoming richer.

SAARC
South Asian Association for Regional Cooperation
Members: India, Bangladesh, Bhutan,
Pakistan, the Maldives, Nepal, Sri Lanka
and Afghanistan.
December 8, 1985
Afghanistan joined in April 2007

Objectives of SAARC
Improve quality of life and welfare of people of SAARC
member countries
Develop region economically, socially and culturally
Provide opportunity to people of the region to live in
dignity and to exploit their potentialities.
Enhance self reliance of the member countries jointly
Provide conducive climate mutual assistance among
member countries in economic, social, cultural and
technical fields.
Co-operation with other developed economies
Unity among member countries regarding issues of
common interest in international forums.
Extend co-operation with other trade blocks.

Organisation Structure
The Council
(Highest policy-making body)
Represented by the heads of the government of
member countries. Meets once in two years.
Council of Ministers
(Represented by the foreign ministers of the
member governments)
Formulates policies, reviews the functioning of
SAARC(consists of secretariat, secretarygeneral, directors and general staff)
Meets twice a year.

Cont
Standing Committee
(Represented by foreign secretaries of the
member governments)
Monitors and co-ordinates the programmes.
Meets as and when necessary, submits reports
to council of ministers.
Programming Committee
(Represented by the senior officials of the member
governments)
Scrutinizes budget and annual schedule

Cont
Technical Committees
(Comprises the representatives of all countries)
Formulates, implements and monitors projects. Agriculture,
Environment, Rural development, Tourism, transport,
science and technology.
SAARC Secretariat all secretarial work done, located in
Nepal. Co-ordinating, monitoring and implementing
SAARC activities. Communication link between SAARC
and other international forums.
Chief of the Secretariat : Secretary-General. Appointed by the
council of ministers on rotation basis among members for a
period of three years. Assisted by seven directors(one from
each member country) and general service staff.

SAPTA
SAARC Preferential Trading Arrangement
Signed on April 11, 1993
Objectives: gradually liberalize the trade
among SAARC member countries.
Eliminate trade barriers among SAARC
countries. Reduce tariffs. Promote and
sustain mutual trade and economic cooperation among member countries.

Cont
Product Areas: All raw materials, semifinished products, finished products.
Tariffs : Concession given in tariffs.
Providing technical assistance, enhancing
exports, entering long-term contracts of
less developed countries.

Cont
India economic liberalisation 1991
Seeds for integrated global economy sown
in 1940s
IMF, GATT
General Agreement on Tariffs and Trade

GATT
1947
23 countries
To revive economies from recession before
world war II.
Objectives: To raise standard of living, full
employment, develop full use of resources of the
world, expand production and international
trade.
Several rounds of negotiations held during 1947
to 1960.

Uruguay Round

Significant round Uruguay round, initiated in

1986 and concluded in 1991
Mr.Arthur Dunkel Director General of GATT.
Dunket proposals:
1. TRIMs Trade related investment measures
2. TRIPs Trade related intellectual property
rights
3. Textiles, clothing, agriculture subsidiaries.
Agreement regarding multilateral trading
system signed in Morocco, 1994.

Cont.
Results of Uruguay round strengthen the
world economy and lead to more trade,
investment, employment and income
growth throughout the world.
The World Trade Organization (WTO) was
established on January 1, 1995 to
implement the final act of Uruguay round
agreement of GATT.
Membership 151(2007)

Differences between GATT and

WTO
GATT

WTO

Set of rules and

multilateral agreement.

Permanent institution

Designed with an
attempt to establish
International trade
organisation.

Established to serve its

own purpose.

Applied on a provisional Full and permanent

basis
activities

Cont
Rules are applicable to
trade in merchandise
goods

Rules applicable to trade

in merchandise, services
and intellectual property.

Originally multilateral,
but plurilateral
agreements added

Agreements multilateral

Dispute settlement
system not faster and
automatic

Dispute settlement
system fast and
automatic.

WTO
Basic purpose is to promote international trade without
any discrimination.
Designed to play the role of a watchdog in the spheres of
trade in goods, services, foreign investment, intellectual
property rights etc.
Member countries should give equal treatment to the
products imported from any other member countries.
A member country should treat the foreign products once
they enter their country exactly equal to those of similar
domestic products.
Since 1995, WTO has become the engine as well as the
vehicle to promote globalization in all spheres of
economic life.

Functions of WTO

Administers 28 agreements contained in the final act

Oversees implementation of tariff cut and reduction of non-tariff
measures
Examines trade regimes of individual member countries
Watchdog of international trade
Provides Disputes Settlement Court
Acts as management consultant for world trade
Technical co-operation and training division established
WTO used as a forum by member countries for negotiations
Co-operates with other international institutions like IMF, World Bank
etc.
Oversees the national trade policies of member governments.

Organisation structure of the WTO

1.
2.
3.
4.

Four hierarchical levels:

Ministerial conference
General council
Councils
Committees and management bodies.

Cont

WTO related issues

Dispute settlement mechanism of WTO
WTO and Anti-dumping measures
WTO-The Third Pillar in Global Business

Globalization
Entire world is one country for business.
Erasing national and political boundaries for the
purpose of business is termed as globalisation.
Integration of the economy of a country with the
rest of the world economy is called globalisation.
Implies opening up the economy for FDI by
liberalising the rules and regulations by creating
favourable and encouraging industrial climate.

Cont
Increasing integration of economies around the
world, particularly through trade and financial
flows.
Movement of people (labour) and knowledge
(technology) across international borders.
Offers extensive opportunities for worldwide
development
Integrated countries have faster growth and
reduced poverty
Living standards, progress on democracy,
environment and working standards rose.

World Economic Trade and

Investment Trends
2004 sharp upturn in world economy.
Advanced and emerging market
economies.
USA, Japan, Asian countries, Europeon
union
Rise in investment and credit, volume of
reserves.
2008-2009 : Recession

FDI inflows trends in India

India being an emerging power, no
company interested in the Asia-Pacific
region can afford to ignore this
increasingly important market. It is a
country of contrasts where centuries old
traditions thrive side by side with modern
technology.
Post-1991 : Increasing trend

Comparison between India and

SAARC countries

India leading player

India attracted more FDI
Nepal not attractive
Bangladesh fluctuating trend
Bhutan minimal
Maldives no significant inflows
Pakistan and Sri Lanka better FDI
inflows

Comparison between India and

fastly developing Asian Economies
9 Asian economies considered as fastly
developing.
Higher growth in economic development
and foreign investments
They throw a red carpet for FDI into their
economies.
Hong Kong, South Korea, Malaysia,
Singapore, Thailand, Brunei, Indonesia,
Philippines, Taiwan.

Cont
Indias major competitor in Asian region is
China.
China most populated country. Started
economic reforms and opened up of the
economy in late 1970s.
Level of FDI inflow is greater.
Increasing trend