Balance of Payments –

The balance of payments (BOP) is the method countries use to monitor all international monetary
transactions in a specific period. The BOP is usually calculated every quarter and every calendar
year.
All trades conducted by both the private and public sectors are accounted for in the BOP to
determine how much money is going in and out of a country. If a country has received money, this
is known as a credit, and if a country has paid or given money, the transaction is counted as a debit.
Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should
balance, but in practice, this is rarely the case. Thus, the BOP can tell the observer if a country has
a deficit or a surplus and from which part of the economy the discrepancies are stemming.
The balance of payments (BOP) is the record of all international financial transactions made by
the residents of a country.
There are three main categories of the BOP: the current account, the capital account, and the
financial account.
The current account is used to mark the inflow and outflow of goods and services into a country.
Earnings on investments, both public and private, are also put into the current account.
The capital account is where all international capital transfers are recorded. This refers to the
acquisition or disposal of nonfinancial assets (for example, a physical asset such as land) and non-
produced assets, which are needed for production but have not been produced, such as a mine used
for the extraction of diamonds. The capital account is broken down into the monetary flows
branching from debt forgiveness, the transfer of goods, and financial assets by migrants leaving or
entering a country, the transfer of ownership on fixed assets (assets such as equipment used in the
production process to generate income), the transfer of funds received to the sale or acquisition of
fixed assets, gift and inheritance taxes, death levies, and, finally, uninsured damage to fixed assets.
In the financial account, international monetary flows related to investment in business, real estate,
bonds, and stocks are documented. Also included are government-owned assets, such as foreign
reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund (IMF),
private assets held abroad, and direct foreign investment. Assets owned by foreigners, private and
official, are also recorded in the financial account.
The current account should be balanced versus the combined capital and financial accounts,
leaving the BOP at zero, but this rarely occurs.
We should also note that with fluctuating exchange rates, the change in the value of money can
add to BOP discrepancies.
If a country has a fixed asset abroad, this borrowed amount is marked as a capital account outflow.
However, the sale of that fixed asset would be considered a current account inflow (earnings from
investments). The current account deficit would thus be funded.
When a country has a current account deficit that is financed by the capital account, the country is
actually foregoing capital assets for more goods and services. If a country is borrowing money to
fund its current account deficit, this would appear as an inflow of foreign capital in the BOP.

Balance of Trade –
Balance of trade (BOT) is the difference between the value of a country's exports and the value of
a country's imports for a given period. Balance of trade is the largest component of a country's
balance of payments (BOP). Sometimes the balance of trade between a country's goods and the
balance of trade between its services are distinguished as two separate figures.
The balance of trade is also referred to as the trade balance, the international trade balance, the
commercial balance, or the net exports.
A country that imports more goods and services than it exports in terms of value has a trade deficit
while a country that exports more goods and services than it imports has a trade surplus.
Viewed alone, a favorable balance of trade is not sufficient to gauge the health of an economy. It
is important to consider the balance of trade with respect to other economic indicators, business
cycles, and other indicators.
The United States regularly runs a trade deficit, while China usually runs a large trade surplus.
The formula for calculating the BOT can be simplified as the total value of exports minus the total
value of its imports. Economists use the BOT to measure the relative strength of a country's
economy.
A positive balance of trade indicates that a country's producers have an active foreign market.
After producing enough goods to satisfy local demand, there is enough demand from customers
abroad to keep local producers busy. A negative balance of trade means that currency flows
outwards to pay for exports, indicating that the country may be overly reliant on foreign goods.
A favorable balance of trade, also known as a trade surplus, occurs when a country exports more
goods than it imports. This means that the country is earning more from its exports than it is
spending on its imports, and it is generally seen as a sign of economic strength. A trade surplus
can be a result of a country having a competitive advantage in the production and export of certain
goods, or it can be the result of a country's currency being relatively undervalued, making its
exports cheaper for foreign buyers.
On the other hand, an unfavorable balance of trade, also known as a trade deficit, occurs when a
country imports more goods than it exports. This means that the country is spending more on
imports than it is earning from exports, and it can be a cause for concern if it persists over a long
period of time. A trade deficit can be the result of a country having a comparative disadvantage in
the production of certain goods, or it can be the result of a country's currency being relatively
overvalued, making its imports cheaper and its exports more expensive.
Special Considerations
A country with a large trade deficit borrows money to pay for its goods and services, while a
country with a large trade surplus lends money to deficit countries. In some cases, the trade balance
may correlate to a country's political and economic stability because it reflects the amount of
foreign investment in that country.
A trade surplus or deficit is not always a viable indicator of an economy's health, and it must be
considered in the context of the business cycle and other economic indicators. For example, in a
recession, countries prefer to export more to create jobs and demand in the economy. In times of
economic expansion, countries prefer to import more to promote price competition, which limits
inflation.

Balance of Trade vs. Balance of Payments

The balance of trade is the difference between a country's exports and imports of goods, while the
balance of payments is a record of all international economic transactions made by a country's
residents, including trade in goods and services, as well as financial capital and financial transfers.
The balance of trade is a part of the balance of payments and is represented in the current account,
which also includes income from investments and transfers such as foreign aid and gifts. The
capital account, which is another part of the balance of payments, includes financial capital and
financial transfers.
It's important to note that the balance of trade and the balance of payments are not the same thing,
although they are related. The balance of trade measures the flow of goods into and out of a
country, while the balance of payments measures all international economic transactions, including
trade in goods and services, financial capital, and financial transfers.
A country can have a positive balance of trade (a trade surplus) and a negative balance of payments
(a deficit) if it is exporting more goods than it is importing, but it is also losing financial capital or
making financial transfers. Conversely, a country can have a negative balance of trade (a trade
deficit) and a positive balance of payments (a surplus) if it is importing more goods than it is
exporting, but it is also receiving a large amount of financial capital or making financial transfers.

How Do Changes in a Country's Exchange Rate Affect the Balance of Trade?

When the price of one country's currency increases, the cost of its goods and services also increases
in the foreign market. For residents of that country, it will become cheaper to import goods, but
domestic producers might have trouble selling their goods abroad because of the higher prices.
Ultimately, this may result in lower exports and higher imports, causing a trade deficit.
Disequilibrium in BOP-
A disequilibrium in the balance of payments refers to a situation where a country's total payments
differ from its total receipts leading to an overall deficit or surplus.
A country faces a deficit in its balance of payments when its total payments exceed its total
receipts.
A surplus balance of payments arises when a country's total receipts exceed its total payments.
In simple terms, a country's balance of payments is in equilibrium when the below mentioned
terms.
 Total exports = Total imports
 Total debit flows = Total credit flows
 Total outward payments = Total inward payments
Disequilibrium in balance of payments refers to an imbalance where a country's total payments do
not equal its total receipts. There are two types of disequilibrium.

1. Balance of payments deficit - When a country's total payments exceed its total receipts.
This means more money is flowing out of the country than coming in.
2. Balance of payments surplus - When a country's total receipts exceed its total payments.
Extra money is coming into the country than going out.

Balance of payments deficit-

This occurs when a country's total payments exceed its total receipts. This means more money is
flowing out of the country than coming in. A BOP deficit can occur due to the following.
1. Higher imports than exports, leading to a trade deficit
2. More outward investment and loan repayments than inward investment and loans
3. Higher interest payments on foreign debt.
4. More tourism spending abroad by residents than spending by foreign tourists in the
country.

A BOP deficit puts pressure on a country's foreign exchange reserves and currency value. The
government may need to devalue the currency or raise interest rates to correct the deficit.
Balance of payments surplus-
This happens when a country's total receipts exceed its total payments. Extra money is coming into
the country than going out. A BOP surplus can occur due to the following.
1. Higher exports than imports, creating a trade surplus
2. More inward investment and loans than outward investment and loans
3. Lower interest payments on foreign debts
4. More tourism spending in the country by foreign tourists than spending abroad by
residents.

Though less problematic, a large BOP surplus can put appreciative pressure on the currency and
lead to an overheating economy. The government may need to pursue policies to redistribute
demand and reduce the surplus.

Measure to Correct Disequilibrium in BOP

The measures taken to correct the disequilibrium in BOP can be better understood from the
explanation below.
For a Deficit following are the facts are applicable.
1. Devalue the currency –
This makes exports cheaper and imports costlier, improving the trade balance. However, it
can lead to higher inflation.
2. Raise interest rates –
This attracts more foreign capital inflows and reduces capital outflows, helping correct the
deficit. But it can slow economic growth.
3. Impose capital controls –
Restricting capital outflows through rules and regulations can reduce the deficit. But it
limits free capital movement.
4. Subsidize exports –
Providing subsidies and incentives to exporters can boost export earnings and correct the
deficit. But it increases government spending.
5. Restrict imports –
Putting quotas, tariffs or bans on selected imports can reduce import spending and the
deficit. But it limits consumer choices.
For a surplus the following are applicable.
1. Appreciate the currency - This makes exports costly and imports cheaper, reducing the
surplus. But it makes domestic goods uncompetitive internationally.
2. Lower interest rates - This reduces capital inflows and increases outflows, correcting the
surplus. But it can fuel inflation.
3. Provide import subsidies - Subsidizing selected imports can boost import demand and
reduce the surplus. However, it increases government spending.
4. Impose export restrictions - Putting quotas or taxes on some exports can reduce export
earnings and the surplus. But it limits industry growth.

Foreign exchange-
Foreign exchange, or forex, is the conversion of one country's currency into another. In a free
economy, a country's currency is valued according to the laws of supply and demand. In other
words, a currency's value can be pegged to another country's currency, such as the U.S. dollar, or
even to a basket of currencies. A country's currency value may also be set by the country's
government.
However, many countries float their currencies freely against those of other countries, which keeps
them in constant fluctuation.
Factors Affecting Currency Value
The value of any particular currency is determined by market forces based on trade, investment,
tourism, and geopolitical risk.
Every time a tourist visits a country, for example, they must pay for goods and services using the
currency of the host country. Therefore, a tourist must exchange the currency of their home country
for the local currency. Currency exchange of this kind is one of the demand factors for a particular
currency.
Another important factor of demand occurs when a foreign company seeks to do business with
another in a specific country. Usually, the foreign company will have to pay in the local company's
currency.
At other times, it may be desirable for an investor from one country to invest in another, and that
investment would have to be made in the local currency as well.
All of these requirements produce a need for foreign exchange and contribute to the vast size of
foreign exchange markets.
How Inflation Affects Foreign Exchange Rates
Inflation can have a major effect on the value of a country's currency and its foreign exchange
rates with other currencies. While it is just one factor among many, inflation is more likely to have
a significant negative effect on a currency's value and foreign exchange rate.
A low rate of inflation does not guarantee a favorable exchange rate, but an extremely high
inflation rate is very likely to have a negative impact.
Inflation is also closely related to interest rates, which can influence exchange rates. The
interrelationship between interest rates and inflation is complex and often difficult for currency-
issuing countries to manage. Low interest rates spur consumer spending and economic growth,
and generally positive influences on currency value.
If consumer spending increases and demand grows to exceed supply, inflation may ensue, which
is not necessarily a bad outcome. However, low interest rates don't usually attract foreign
investment the way higher interest rates can. Higher interest rates attract foreign investment, which
is likely to increase demand for a country's currency.

Exchange rate-
An exchange rate is the rate at which one currency can be exchanged for another between nations
or economic zones. It is used to determine the value of various currencies in relation to each other
and is important in determining trade and capital flow dynamics.
The rates are impacted by two factors:
The domestic currency value
The foreign currency value
In addition, the rates can be quoted either directly or indirectly or with the use of cross-rates.
Direct Quotation vs. Indirect Quotation
Direct quotation of exchange rates involves quoting the price of a unit of foreign currency directly
in terms of the number of units of domestic currency that are exchanged.
Indirect quotation of exchange rates involves expressing the price of a domestic currency in terms
of the number of units of foreign currency that are exchanged.

Cross Rates
Cross rates are a method of quoting exchange rates in which various foreign currency exchange
rates are used to imply a domestic exchange rate, e.g., if you wanted to determine the EUR/USD
exchange rate but can’t access a direct quote. You could use the EUR/CAD exchange rate and the
CAD/USD exchange rate to infer the EUR/USD rate.
Importance of Exchange Rates
Exchange rates capture a lot of economic factors and variables and can fluctuate for various
reasons. Some of the reasons that exchange rates can fluctuate include:
1. Interest Rates
Changes in interest rates impact currency value and exchange rates. All else being equal, a higher
interest rate in a domestic country will increase the demand for a domestic currency since more
foreign investors will seek to invest at the higher interest rate, thereby investing foreign capital
into the domestic currency. However, in practice, it is balanced out by inflationary pressures.
2. Inflation Rates
Changes in inflation rates impact currency value and exchange rates. All else being equal, a higher
inflation rate in a domestic country will decrease the demand for the domestic currency since the
value of the currency depreciates relatively faster over time than other foreign currencies.
3. Government Debt
Government debt is the amount of debt owed by a federal government. It impacts currency value
and exchange rates since a country with higher debt is less likely to acquire foreign capital, which,
in turn, leads to inflation. It puts downward pressure on the domestic currency and decreases its
value in exchange rates.
4. Political Stability
The political state of a country influences the currency value and exchange rates since a country
with higher political turmoil is less likely to attract foreign investors. Political instability fosters
more risk for investors, as they are unsure of whether they will see their investments protected via
fair market practices or a strong legal system.
5. Export or Import Activities
A country’s net exports or imports impact currency value and exchange rates. A domestic country
that exports more goods than it imports will experience a higher demand for its currency, and
thereby, will see its exchange rate increase relative to other foreign currencies.
6. Recession
A country that experiences a recession is less attractive to foreign investors. Firstly, it is due to the
increased risk of investing in an economy with a poor economic outlook. Secondly, when a
recession occurs, interest rates typically decrease, which decreases the foreign demand for
domestic currency.
7. Speculation
If a country’s currency is expected to rise for any reason, investors will demand more of the
currency to realize a profit based on that expectation. It can cause immediate demand increases for
domestic currency relative to foreign currencies.
8. Special Considerations
There are other special considerations when exchange rates are determined. For example, various
“safe-haven” currencies are believed to be stable and attract foreign capital when the global
economic outlook is uncertain. It includes currencies such as the U.S. dollar, euro, Japanese yen,
and Swiss franc.
Another special consideration for the U.S. dollar is that it is the global Federal Reserve currency,
which increases the baseline demand for the U.S. dollar relative to other currencies.

Currency devaluation and revaluation

Under a fixed exchange rate system, devaluation and revaluation are official changes in the value
of a country’s currency relative to other currencies.
Devaluation is when the price of the currency is officially decreased in a fixed exchange rate
system.
Revaluation is when the price of the currency is increased within a fixed exchange rate system.
For example, suppose a government has set 10 units of its currency equal to one rupee. To devalue,
it might announce that from now on 20 of its currency units will be equal to one rupee. This would
make its currency half as expensive to Indian, and the Indian Rupee twice as expensive in the
devaluing country.
To revalue, the government might change the rate from 10 units to one rupee, to five units to one
rupee. This would make the currency twice as expensive to Indians, and the rupee half as costly at
home.
Reasons of currency devaluation
Untenable fixed exchange rate system: To sustain a fixed exchange rate, a country must have
sufficient foreign exchange reserves, often dollars, and be willing to spend them, to purchase all
offers of its currency at the established exchange rate. When a country is unable or unwilling to do
so, then it must devalue its currency to a level that it is able and willing to support with its foreign
exchange reserves.
Boost aggregate demand: Rather than implementing unpopular fiscal spending policies, a
government might try to use devaluation to boost aggregate demand in the economy in an effort
to fight unemployment.
Effects of devaluation
Cheaper exports: Devaluation makes the country’s exports relatively less expensive for foreigners.
Expensive imports: Devaluation makes foreign products relatively more expensive for domestic
consumers, thus discouraging imports.
Rise in inflation: For an import dependent country like India, Currency depreciation would mean
increase in prices of imports, thus leading to inflation.
Lower investor confidence: Devaluation may dampen investor confidence in the country’s
economy and hurt the country’s ability to secure foreign investment.

Currency appreciation
Currency appreciation refers to the increase in value of one currency relative to another in the forex
markets.
Reasons of currency appreciation
In a floating rate exchange system, the value of a currency constantly changes based on supply and
demand in the forex market. This change allows traders and firms to increase or decrease their
holdings and profit over them.
Thus, a currency appreciates when the value of one goes up in comparison to the other.
Appreciation is directly linked to demand. If the value appreciates (or goes up), demand for the
currency also rises.
Effects of currency appreciation
Export costs rise: If the Indian Rupee (INR) appreciates, foreigners will find Indian goods more
expensive because they have to spend more for those goods in INR. That means that with the
higher price, the number of Indian goods being exported will likely drop. This eventually leads to
a reduction in gross domestic product (GDP).
Cheaper imports: If Indian goods become more expensive on the foreign market; foreign goods,
or imports, will become cheaper in India. The length to which 1 INR will stretch will go further,
meaning one can buy more goods imported from abroad. That leads to a benefit of lower prices,
leading to lower overall inflation.

Currency depreciation
Currency depreciation is a fall in the value of a currency in a floating exchange rate system.
Currency depreciation in one country can spread to other countries.
Reasons of currency depreciation
Economic fundamentals: Countries with weak economic fundamentals like burgeoning current
account deficits and high rates of inflation can lead to currency depreciation.
Interest rate differentials: Easy monetary policy and high rates of inflation are two of the leading
cause of currency depreciation. When interest rates are low, investors, both domestic and foreign,
will chase the highest yield. Expected interest rate differentials can also lead to currency
depreciation. Central banks will increase interest rates to combat inflation as too much inflation
can lead to currency depreciation.
Political instability: In both, unstable policy regime and instable government, investors are
suspicious about the market forces.
Effects of currency depreciation
Improves export competitiveness: Currency depreciation, if orderly and gradual, improves a
nation’s export competitiveness and may improve its trade deficit over time.
May lead to pulling of foreign investment: An abrupt and sizable currency depreciation may scare
foreign investors who fear the currency may fall further, leading them to pull portfolio investments
out of the country... Read more at: https://www.adda247.com/upsc-exam/exchange-rate-
appreciation-depreciation-devaluation-revaluation/

Purchasing power parity

Purchasing power parity is a popular metric used by macroeconomic analysts that compares
different countries' currencies through a "basket of goods" approach.
PPP allows economists to compare economic productivity and standards of living between
countries.
Some countries adjust their gross domestic product (GDP) figures to reflect PPP.
Some feel that PPP does not reflect reality due to differences in local costs, taxes, tariffs, and
competition.

Convertibility –
Currency convertibility refers to how liquid a nation's currency is in terms of exchanging with
other global currencies.
A convertible currency can be easily traded on forex markets with little to no restrictions.
A convertible currency (e.g., U.S. dollar, Euro, Japanese Yen, and the British pound) is seen as a
reliable store of value, meaning an investor will have no trouble buying and selling the currency.
Non-convertible and blocked currencies (e.g. Cuban Pesos or North Korean Won) are not easily
exchanged for other monies and are only used for domestic exchange with their respective borders.
Free Trade vs. Protection –
Free trade and protectionism represent two opposing approaches to international trade.
Free trade emphasizes the removal of trade barriers, promoting economic efficiency and market
access.
Protectionism aims to protect domestic industries but can lead to higher prices and reduced
consumer choice.
The balance between free trade and protectionism remains a subject of ongoing policy discussions,
with countries adopting varying degrees of openness and protectionism based on their economic
priorities and circumstances.
Free Trade
Free trade promotes the unrestricted flow of goods and services across borders.
Its proponents argue that removing barriers to trade leads to economic growth, efficiency, and
consumer benefits.
Free trade agreements, such as the North American Free Trade Agreement (NAFTA) and the
Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), aim to reduce
trade barriers and promote market access.
According to the World Trade Organization (WTO), the average applied tariff rate for industrial
goods globally was 6.7% in 2019. Free trade agreements have contributed to the reduction of tariff
barriers, facilitating trade between participating countries.
Protectionism
Protectionism, on the other hand, seeks to shield domestic industries from foreign competition by
imposing trade barriers. This can take the form of tariffs, which are taxes on imported goods, or
non-tariff measures such as quotas, subsidies, and local content requirements.
Protectionist policies are often implemented to safeguard domestic employment, industries, and
national security interests.
Figures vary depending on the specific policies implemented by countries. For instance, the U.S.
International Trade Commission reported that the United States imposed an average tariff rate of
2.0% on imported goods in 2020. However, the use of non-tariff measures and subsidies can have
a significant impact on trade flows.
Economic Implications
The economic implications of free trade and protectionism are subject to ongoing debates.
Proponents of free trade argue that it promotes competition, efficiency, and innovation, leading to
lower prices and a wider variety of goods for consumers. It also allows countries to specialize in
industries where they have a comparative advantage, leading to increased productivity and
economic growth.
Protectionism, on the other hand, aims to protect domestic industries and jobs. Advocates argue
that it shields domestic producers from unfair competition, prevents dumping of goods at
artificially low prices, and supports strategic industries. However, critics argue that protectionist
measures can lead to higher prices, reduced consumer choice, and inefficiencies in resource
allocation.
Trade War and Global Trade Tensions
In recent years, there has been a rise in trade tensions and the use of protectionist measures, leading
to trade conflicts between major economies. The trade dispute between the United States and
China, characterized by tit-for-tat tariffs, exemplifies these tensions. According to the International
Monetary Fund (IMF), the average tariff imposed by the United States on Chinese imports
increased from 3.1% in 2017 to 19.3% in 2019.

Absolute Advantage theory & Comparative advantage theory-

Absolute advantage and comparative advantage are two concepts in economics and international
trade.
Absolute advantage refers to the uncontested superiority of a country or business to produce a
particular good better.
Comparative advantage introduces opportunity cost as a factor for analysis in choosing between
different options for production diversification.
Economist Adam Smith helped develop the concepts, suggesting that countries can specialize in
goods they can produce efficiently and trade with others for goods they can't produce nearly as
well.
David Ricardo built on Smith's concepts by introducing comparative advantage, saying countries
can benefit from trade even when they have absolute advantage in producing everything.

Absolute Advantage
The differentiation between the varying abilities of companies and nations to produce goods
efficiently is the basis for the concept of absolute advantage. As such, absolute advantage looks at
the efficiency of producing a single product. It also looks at how to produce goods and services at
a lower cost by using fewer inputs during the production process when compared to the
competition.
This analysis helps countries avoid producing goods and services that would yield little to no
demand, which would ultimately lead to losses.
A country’s absolute advantage (or disadvantage) in a particular industry can play an important
role in the types of products it chooses to produce. Some of the factors that can lead an entity to
absolute advantage include:
1. Lower labor costs
2. Access to an abundant supply of (natural) resources
3. A larger pool of available capital
As an example, if Japan and Italy can both produce automobiles, but Italy can produce sports cars
of a higher quality and at a faster rate with greater profit, then Italy is said to have an absolute
advantage in that particular industry.
On the other hand, Japan may be better served to devote limited resources and labor to other types
of vehicles (such as electric cars) or another industry altogether. This may help the country enjoy
an absolute advantage rather than trying to compete with Italy's efficiency.

Comparative Advantage
Comparative advantage takes a more holistic view of production. In this case, the perspective lies
in the fact that a country or business has the resources to produce a variety of goods and services
rather than focus on just one product.
The opportunity cost of a given option is equal to the forfeited benefits that could have been
achieved by choosing an available alternative in comparison. In general, when the profit from two
products is identified, analysts would calculate the opportunity cost of choosing one option over
the other.
For example, let's assume that China has enough resources to produce either smartphones or
computers such that China can produce either 10 computers or 10 smartphones. Computers
generate a higher profit. The opportunity cost is the difference in value lost from producing a
smartphone rather than a computer. If China earns $100 for a computer and $50 for a smartphone
then the opportunity cost is $50. If China has to choose between producing computers over
smartphones it will probably select computers because the chance of profit is higher.

Tariff and Non Tariff Barrier

Trade barriers are limitations that governments impose on international trade. There are two main
types of trade barriers - tariffs and non tariff barriers.
Tariff Barriers
Tariffs are direct taxes on imported goods. When a country imposes tariffs, it makes imported
products more expensive. This makes domestic products relatively cheaper and more competitive.
Tariffs are taxes. They are fees that a country places on imported goods or services.
When a business from Country A sells a product to Country B, Country B might make the business
pay a tariff, or tax, on the product. This makes the product more expensive in Country B.
Types of Tariff Barriers
 Import duties:
Besides simply increasing the cost of imported goods, import duties distort trade by making
traders divert imports to countries with lower duties. This reduces overall trade efficiency.
 Import quotas:
They restrict the number of imports, creating artificial needs and higher prices in the
domestic market. Quotas also boost importers to bid up the prices of the limited quota
licenses.
 Surcharges:
They deepen the economic costs of import duties by further raising import prices beyond
normal tariff levels. This disproportionately shields local producers.
Example of Tariff Barrier
Let's say America (Country B) imposes a 10% tariff on imported cars from Germany (Country A).
If a car is worth $30,000, the Tariff would add $3,000 to the price, making the car cost $33,000 in
America.
Non-Tariff Barriers
Non-tariff barriers are other rules or regulations that a country uses to control trade. They don't
involve a tax, but they can still make it more difficult or expensive for businesses to sell their
products in other countries. Some common types of non-tariff barriers include quotas, licensing
requirements, and standards.
Import bans: While aimed at legitimate purposes, they can be misused as protectionist measures
by technicalities in their implementation. They also impose high costs on consumers who lose
access to banned products.
Product standards: Foreign exporters often face high compliance costs to meet unknown product
standards of importing nations. It gives an advantage to domestic producers already familiar with
the standards.
Import licenses: The discretionary power of officials in approving or rejecting import licenses can
be misused for protectionist reasons. It raises uncertainty and raises costs for importers.
Export subsidies: They distort world prices and discriminate against exporters from countries that
do not provide subsidies. This harms free and fair global competition.
Wider Effects of Trade Barriers
Trade barriers reduce potential gains from trade based on comparative advantage. Less
specialization means forgoing higher productivity and economic growth.
Consumers face higher prices and less variety due to limited competition from imports. This
especially hurts the poor, who spend much of their income on protected goods.
Exporters in countries imposing trade barriers also face retaliation from other nations, hurting their
export competitiveness.
Global living standards can be lower if the most efficient producers are prevented from giving
certain goods and services globally.
Overall, tariffs and non-tariff barriers aim to protect local industries by reducing foreign
competition. However, they also have economic costs in terms of higher prices, reduced consumer
choice, less trade and lower productivity gains from the field.
This is why countries negotiate trade deals and participate in organizations like the WTO to
mutually reduce unnecessary trade barriers as much as possible while addressing legitimate
concerns about unfair trade practices. The ultimate goal is to maximize the benefits of international
trade.

Quotas-Types and Impact-

Countries use quotas in international trade to help regulate the volume of trade between them and
other countries.
Within the United States, there are three forms of quotas: absolute, tariff-rate, and tariff-preference
level.
Tariffs are taxes one country imposes on the goods and services imported from another country.
Because tariffs increase the cost of imported goods and services, they make them less attractive to
domestic consumers.
Highly restrictive quotas coupled with high tariffs can lead to trade disputes and other problems
between nations.
Quotas are different from tariffs or customs, which place taxes on imports or exports. Governments
impose both quotas and tariffs as protective measures to try to control trade between countries, but
there are distinct differences between them.
Quotas focus on limiting the quantities (or, in some cases, cumulative value) of a particular good
that a country imports or exports for a specific period, whereas tariffs impose specific fees on those
goods.
Governments design tariffs (also known as customs duties) to raise the overall cost to the producer
or supplier seeking to sell products within a country. Tariffs provide a country with extra revenue
and they offer protection to domestic producers by causing imported items to become more
expensive.
Highly restrictive quotas coupled with high tariffs can lead to trade disputes, trade wars, and other
problems between nations.
For example, in January 2018, President Trump imposed 30% tariffs on imported solar panels
from China. This move signaled a more aggressive approach toward China's political and
economic stance. It was also a blow to the U.S. solar industry, which was responsible for
generating $18.7 billion of investment in the American economy and which at the time imported
80% to 90% of its solar panel products

WTO organizational functioning Agreements - Impact on various aspects of

Indian Economy- Government and Economy.
The full form of the WTO is the World Trade Organization, and its function is to control and
maintain trade across the world.
Generally, this organization makes the rules for trading between countries. At present, 159
countries are members of the WTO. It ensures that trade between the nations runs smoothly and
peacefully and is profitable for both countries.
As everything has advantages and disadvantages, the WTO also has good and harmful effects on
India, and we will study both.
The World Trade Organization is an international organisation that was established on 1 January
1995 to help its members uplift their living standards, create employment, and improve people’s
lives by using trade. It forms the rules and regulations regarding trading across the nations and
ensures that the rules are correctly followed to avoid any kind of harm and violence.
The primary role of the WTO is as follows:
1. WTO trade agreement administration.
2. Providing a trade negotiation forum.
3. Resolving trade disputes.
4. Monitoring national trade policies.
5. Helping technical support and training to developing countries.
6. It allows open communication between its members regarding trade.
Effect of the WTO on India
Trading is an excellent weapon for any developing country, and one who uses it rightly wins
prosperity and wealth for their country. India, as a developing nation, does the same. India is an
agricultural country, and most of its GDP depends upon agriculture, as it exports agrarian products
across the world. Trading can play a huge role in developing any nation, if adequately used,
because it also has harmful impacts.
Positive impacts of the WTO on India
India is a developing country and has a vast geographical area and population. That’s why it needs
more capital to feed its citizens. India is good in agriculture, as its geographical condition is very
good for crops, so they are self-sufficient in feeding their people and exporting edible products,
but some things are imported. So, it has a perfect balance of imports and exports, and India, as one
of the founding members of the WTO, has a very positive impact on it. There are some points
listed below that helped in the development of India through the World Trade Organization:
 India’s export competitiveness has been improved by the WTO.
 The lower tariff has helped integrate with the global economy more efficiently.
 India’s growth and development have been pursued by transferring and exchanging
technology and ideas.
 There is a reduction in cost and time due to market access.
 The WTO helped better settle trade disputes in a well-defined and structured manner.

Negative impacts of the WTO on India

 The TRIPs agreement went against the Indian Patents Act (1970).
 The introduction of product patents in India by MNCs caused a hike in drug prices, which
left no generic option for the poor.
 India and its research institutions have been negatively affected by the extension of
intellectual property rights to agriculture.
 The MFN (most favoured nations) clause proved detrimental to India’s interests and
provided grounds for the Chinese invasion of the Indian market through dumping.
 India’s service sectors are backward compared to those in developed countries.