What is WTO

World Trade Organization. An international lagency which encourages trade

between member nations, administers global trade agreements and
resolves disputes when they arise.UN multilateral trade organization formed
on January 1, 1995 (after culmination of the Uruguay Round) as
the successor to GATT and the court of final settlement in trade disputes.
Its objectives included (1) removal of all barriers to international
trade in goods, services, and intellectual property, (2) equitable and
speedy resolution of disputes between trading partners, and (3) identification
of non-compliance with trade agreements.
Advantages of Wto

World Trade Organization helps member states in various ways and this enables them
to reap benefits such as:

Helps promote peace within nations:

Peace is partly an outcome of two of the most fundamental principle of the trading
system; helping trade flow smoothly and providing countries with a constructive and
fair outlet for dealing with disputes over trade issues. Peace creates international
confidence and cooperation that the WTO creates and reinforces.

Disputes are handled constructively:

As trade expands in volume, in the numbers of products traded and in the number of
countries and company trading, there is a greater chance that disputes will arise. WTO
helps resolve these disputes peacefully and constructively. If this could be left to the
member states, the dispute may lead to serious conflict, but lot of trade tension is
reduced by organizations such as WTO.

Rules make life easier for all:

WTO system is based on rules rather than power and this makes life easier for all
trading nations. WTO reduces some inequalities giving smaller countries more voice,
and at the same time freeing the major powers from the complexity of having to
negotiate trade agreements with each of the member states.

Free trade cuts the cost of living: Protectionism is expensive, it raises prices, WTO
lowers trade barriers through negotiation and applies the principle of non-
discrimination. The result is reduced costs of production (because imports used in
production are cheaper) and reduced prices of finished goods and services, and
ultimately a lower cost of living.

It provides more choice of products and qualities:

It gives consumer more choice and a broader range of qualities to choose from.
Trade raises income: Through WTO trade barriers are lowered and this increases
imports and exports thus earning the country foreign exchange thus raising the
country's income.

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Arguments against Free Trade / Disadvantages
1. Infant Industry Argument.
If developing countries have industries that are relatively new, then at the moment these industry’s
would struggle against international competition. However if they invested in the industry then in the
future they may be able to gain Comparative Advantage.

 This shows that comparative advantage can change over time

 Therefore protection would allow them to progress and gain experience to enable them
to be able to compete in the future.

2. The Senile industry argument.

If industries are declining and inefficient they may require large investment to make them efficient
again. Protection for these industries would act as an incentive to for firms to invest and reinvent
themselves. However protectionism could also be an excuse for protecting inefficient firms

3. To diversify the economy

Many developing countries rely on producing primary products in which
they currently have a comparative advantage. However relying on agricultural products has several
disadvantages

Prices can fluctuate due to environmental factors

Goods have a low income elasticity of demand. Therefore with economic growth demand will only increase
a little

4. Raise revenue for the govt.

Import taxes can be used to raise money for the govt however this will
only be a small amount of money

5. Help the Balance of Payments

Reducing imports can help the current account. However in the long term this is likely to lead to
retaliation

6. Cultural Identity
This is not really an economic argument but more political and cultural. Many countries wish to protect
their countries from what they see as an Americanisation or commercialisation of their countries

7. Protection against dumping

The EU sold a lot of its food surplus from the CAP at very low prices on the world market. This caused
problems for world farmers because they saw a big fall in their market prices

8. Environmental
It is argued that free trade can harm the environment because LDC may use up natural reserves of raw
materials to export. Also countries with strict pollution controls may find consumers import the goods
from other countries where legislation is lax and pollution allowed.

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World Trade Organization and Globalization Help Facilitate Growth in Agricultural
Trade

In simple terms, globalization refers to the closer integration of countries and people around the
world. It is the product of numerous factors, including reduced trade barriers, lower transportation
and communication costs, and increased movements of capital, knowledge, technology, culture, and
people across borders. To many, these changes imply progress, but globalization is an issue of
multiple dimensions that has sparked heated debates and protests around the world.

Proponents argue that globalization results in increased consumer choices and access, enables
countries to use resources more efficiently, leads to the introduction of new technologies, creates
new industries, and promotes more rapid economic growth.

Critics maintain that globalization has exposed vulnerable economies to economic and financial
shocks not of their making, contributed to environmental degradation, led to unemployment and
downward pressure on wages, and strained the ability of poor countries to adapt.

In recent years, the World Trade Organization (WTO) has become a focal point of the globalization
controversy, largely due to its visible role in reducing barriers to trade in goods and services. The
massive protests at the 2001 WTO meeting in Seattle took many by surprise and thrust both
globalization and the WTO into the world spotlight.

Critics of the WTO are not limited to anti-globalization protesters; proponents of free trade and
globalization have also criticized the WTO. Some see the 7-year long negotiation of a new
multilateral trade agreement as evidence that too many countries are unwilling to reach the
compromises needed. Others cite the differences in expectations for developed and developing
countries as a sign that the WTO is not even-handed. Still others see unacceptable threats to
vulnerable industries and even to national sovereignty resulting from the disciplines required for
membership.

Yet, since 1948, when the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT),
was launched, membership has grown from 23 to 151 countries. Another 30 countries hold observer
status while they wait to become members. Given the criticism of the organization, why have so
many countries joined?

China’s development.

Since founded in 1995, the World Trade Organization (WTO) has made great
contribution to the world economy. “The WTO is the only global international
organization dealing with the rules of trade between nations. Its goal is to help
producers of goods and services, export, and import conduct their business” (What is
WTO 1995). By the middle of 2007, the WTO already had 151 member countries, its
enormous number of members provide a broad springboard for world trade. The WTO
is also making an effort to offer the developing countries, which are playing an
increasing important and active role in the global economy, a chance to share the
opportunities and interests brought about by economic globalization. As one of the

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fastest growing economics and developing countries in the world, China joined the
WTO in 2001. With the membership of the WTO, China has acquired numerous
benefits. Worker’s rights are improving, more job opportunities are provided, and the
amount of export has increased.

Bretton Woods Agreement

What Does Bretton Woods Agreement Mean?
A 1944 agreement made in Bretton Woods, New Hampshire, which helped to establish a fixed
exchange rate in terms of gold for major currencies. The International Monetary Fund was also
established at this time.

Investopedia explains Bretton Woods Agreement

This agreement governed currency relationships until the early 1970s, when a floating exchange rate
system was adopted. Before its breakdown, the agreement was useful in maintaining order
and accomplishing common objectives among the states that created it.

Set of multilateral agreements on international economic relations, negotiated at

the UN Monetary and Financial Conference held in July 1944 (in
the aftermath of second world War) attended by the finance ministers of the UK,
US, and other Allied countries. The major objectives of this conference included

(1) financing the reconstruction of the postwar Europe, and

(2) avoiding unstable exchange rates and competitive-devaluations of pre-
Second World War Western economies by instituting fixed exchange rates.
World Bank (then called International Bank for Reconstruction & Development or
IBRD) was established to serve the first objective, and International Monetary
Fund (IMF) for the second. The System, however, collapsed in 1971 when the
US suspended the Dollar's convertibility ($20.67 per ounce) to gold in August,
devalued it in December, and thereafter opted for a floating exchange rate.
Despite the demise of the System, both World Bank and IMF continue to play
important (albeit altered) roles in today's international finance. Bretton Woods is
the name of the township in the US state of New Hampshire where
the negotiations were conducted.

Fiscal Policy
What Does Fiscal Policy Mean?

Government spending policies that influence macroeconomic conditions. These

policies affect tax rates, interest rates and government spending, in an effort to control
the economy.

Objectives of Fiscal Policy

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There are following objectives of fiscal policy :-

1. Development of Country :-
For development of Country , every country has to make fiscal policy . With this policy , all work
work is done govt. planning and proper use of fund for development functions . If govt. does not
make fiscal policy , then it may happen that revenue may be misused without targeted expenditure
of govt.

2. Employment :-

Getting the full employment is also objective of fiscal policy . Govt. can take many action for
increase employment. Government can fix certain amount which can be utilized for creation of new
employment for unemployed peoples .

3. Inequality :-

In developing country like India , we can see the difference one basis of earning . 10% of people are
earning more than Rs. 100000 per day and other are earning less than Rs . 100 per day . By making
a good fiscal policy , govt. can reduce this difference . If govt makes it as his target .

4. Fixation of Govt. Responsibility :-

It is the duty of Govt. to effective use of resources and by making of fiscal policy different minister's
accountability can be checked . I was seeing the Episode of Chanakya on YouTube in which I found
that in old time fiscal policy was made and treasury officer and even prime minister are also
responsible for any shortage of govt .fund .

Monetary policy

The regulation of the money supply and interest rates by a central bank, such as the
Federal Reserve Board in the U.S., in order to control inflation and stabilize currency.
Monetary policy is one the two ways the government can impact the economy. By
impacting the effective cost of money, the Federal Reserve can affect the amount of
money that is spent by consumers and businesses.

Monetary policy is the regulation of interest rates and the availability of money in order
to provide sustainable growth and prevent hard crashes in the market. In the United
States, monetary policy is set by an agency known as the U.S.Federal Reserve. Other
countries may use a similar system or some other sort of centralized agency, up to
and including the federal government itself. The value of monetary policy is somewhat
debatable, but is used in many free market economies as a way for the government to
provide some oversight in the market.

United Nations
The United Nations, or UN, is an international organization made up of 191 statesestablished in 1945.
Almost all countries are members. UN membership is open to all "peace-loving states" that accept the
obligations of the UN Charter and, in the judgment of the organization, are able and willing to fulfil these

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obligations. The General Assembly determines admission upon recommendation of the Security
Council. As of January 2005 there have been 191 members; see United Nations member states. The
organization's headquarters is in New York City; see United Nations headquarters.

The term was coined by Franklin Delano Roosevelt during World War II, to refer to the Allies. Its first
formal use was in the 1942 Declaration by the United Nationswhich committed the Allies to the
principles of the Atlantic Charter and pledged them not to seek a separate peace with the Axis powers.
The name was transferred to the UN as it was founded by the victorious powers in the war as a
condition of the Atlantic Charter and other wartime agreements. Initially, the body was known as
the United Nations Organization or UNO but by the 1950s English speakers were referring to it as the
United Nations or UN.

The United Nations System is based on six principal organs, part of what is collectively called
the United Nations System:

 UN General Assembly
 UN Security Council
 UN Economic and Social Council
 UN Trusteeship Council
 UN Secretariat
 International Court of Justice

World Bank

Popular name for the International Bank for Reconstruction and Development
(IBRD). Established together with International Monetary Fund (IMF) in 1944 as
part of Bretton Woods system to rebuild the Western economies shattered
by second world War through financing of commercial and
infrastructural projects. Though it does not compete withcommercial banks, it
may participate in loan syndication, and its lending policies are based largely
on strict commercial criteria. Its member countries must also be members of the
IMF, and (as in IMF) have voting power weighted according to
their contribution to the Bank. For example, the US has about 20 percent of the
voting power and always chooses the bank's president. See also World Bank
system.

IMF

International Monetary Fund. An organization set up in 1944 to lower trade barriers

between countries and to stabilize currencies by monitoring the foreign exchange
systems of member countries, and lending money to developing nations.

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The purpose of the IMF is to promote the health of the world economy. The IMF
pursues this aim through a focus on monetary policies and activities that promote
international cooperation, expansion of international trade, and stability of foreign
exchange rates. The IMF also provides technical assistance to governments that need
help creating better policies, and lends funds in the event of a financial crisis. In
addition, the IMF works to alleviate poverty. The IMF is funded by a quota system of
contributions from its members. The United States has by far the largest IMF quota.
IMF quotas are reviewed every five years. Today, the majority of the world's countries
participate in the IMF. The IMF is headquartered in Washington, DC.

International Bank for Reconstruction and Development (IBRD)

organization set up by the Bretton Woods Agreement of 1944 to help finance the
reconstruction of Europe and Asia after World War II. That task accomplished,
the World Bank, as IBRD is known, turned to financing commercial and infrastructure
projects, mostly in developing nations. It does not compete with commercial banks,
but it may participate in a loan set up by a commercial bank. World Bank loans must
be backed by the government in the borrowing country.

Socialist economics
Any economic system must decide how to approach inevitable economic choices
concerning production, technology, and income distribution. This chapter will deal
with theoretical models of a socialist economy and with practical problems that an
actual regime would be forced to consider. These are vital issu,es that must be
treated before a wide-ranging critique of so cialism can be made.

It will be recalled that our discussion of capitalism began with an abstract

idealized version in which perfect competition prevailed, in which all prices were
flexible, and in which all factors of production were re warded according to their
contribution to the productive process. These conditions have never occurred fully
in the real world, but the pure model of capitalism proved useful because it
enabled us to see the resulting har mony of the entire system if market prices
were given full rein.

The operation of the capitalist model resulted in a set of prices and quantities for
each of the product and factor markets in the system. Our goal is to establish a
corresponding model for socialism. If, in the pro cess of manipulating prices and
quantities under socialism, behavior in each individual market corresponds to that
under capitalism, then the abstract socialist model is equally as efficient or
optimal as the theoretical model of capitalism.

Advantages of Socialism

1. Market entities’ independence and equality. Whether individuals or enterprises are equal and independent
economic entity, they have own economic decision-making powers, and independent undertake the risk of
their decisions. This fundamental different from the economic model under the planned economic system
which economic policy-making and undertake responsibility by government departments.

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2. Market plays a basic role in allocating resources. In the condition of market economy, establish a variety
of markets, form a unified and open market system, the formation of prices is market, to ensure the free
movement of goods and factors of production, various economic resources from the market play a basic role
in allocating. This is fundamentally different from the allocation of resources by the government under the
planned economic system.

3. Indirect government's macro-control system. In he condition of market economy, government mainly

through various no-administrative means to indirect macro-control economic activities. This is
fundamentally different from the direct administrative measures to manage the economy under the
traditional planned economy.

4. The market economy is an economy based on the legal system. The various activities of market economy
are mainly regulated by various rules and regulations.

5. In international exchanges, it is necessary to follow the implementation of international conventions and

guidelines.

Disadvantages of Socialism

• Since there is no culling and no economic advantage to working harder, socialistic

systems provide no inherent incentive to participate. This makes socialism internally
unstable.
• Due to a lack of incentives, socialistic systems tend not to be competitive, making them
externally unstable.
• In times of plenty, immigrants are drawn to the free resources offered by socialistic
systems, while potentially adding nothing economically productive.
• In times of scarcity, resentment of non-economically-productive members of society
increases, causing a destabilizing effect on the society and economy.

Capitalist Economy: Definition

'What is a capitalist economy?' is quite a common question and every student of economics must know
its meaning, as capitalism led to development of the modern era in which we live today. Any economy
that is dominated by capitalists is often termed to be a capitalist economy. In the pre-world war I era,
most of the economies in Europe were capitalist is nature. Even today, many economies have reformed
their demerits but have remained capitalist. It must be noted that 100% capitalist economy countries,
where the government plays a laissez faire role no longer exist.

A capitalist economy is an economy where the government does not take part in almost any kind of
production process. Capitalist entrepreneurs are encouraged by the government. The government does
the duty of collecting taxes and safeguarding the security of the country. In fact, some essential public
functions such as public transport, taking up construction of roads or dams were also handed over to
the private sector. Such an economy is known as a pure capitalist economy.

Advantages and Disadvantages of Capitalist Economy

There are some advantages as well as disadvantages of capitalist economies that were realized during
the industrial revolution itself. Such advantages and disadvantages have been enlisted in the following
paragraphs.

Advantages:

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The first and foremost advantage of a capitalist economy is that there are rapid economic growth that is
observed in the nation.

The second advantage is that all capitalists make an attempt to dominate the overseas markets. This
brings in large amounts of wealth into the nation.

Capitalist economy also mobilizes almost all possible resources, monetary and non-monetary, by
enslaving it into the production process.

The capitalist system has also lead to the development of science and technology which enhances the
standard of living of an economy.

Disadvantages: The advantages of a capitalist economy always seem charming. However, there are
certain social flaws in such an economy.

The capitalist system first of all makes a huge gap in between the rich and the poor. Exploitation of
labor is often noticed in such an economy.

In addition to that there are also cases where strikes and intense class violence is observed. A capitalist
economy often puts a lot of pressure on the natural resources and the environment.

A looming energy crisis is often a grave threat to the economy. Fraudulent, unethical and often life-
threatening practices by capitalists are observed in the economy.

In the debate on socialist economy vs capitalist economy, there are many politicians who observed
that having a totally capitalistic economy is not exactly very healthy. However, there are many different
mixed capitalist economy systems that have evolved as a result. There are many such mixed capitalist
economies that concentrate on the phenomenon of capitalism but maintain appropriate legislation in
order to curb all the ill effects of capitalism. In addition to that such governments also undertake all
tasks that are considered an absolute necessity. Such tasks include, eduction, health, defense and
infrastructure. The remaining sectors are open for the private sector.

Mixed Economy: Definition

There is no specific or concrete definition of mixed economies that can be put forth. The definition and
also the advantages of a mixed economy can be better elaborated by stating that such an economy is a
mixture of one or more economic ideologies that are predominantly conceived from a collaboration of
capitalism and socialism. Some defining features of a mixed economy include the following.

• Centralized economic planning and legislature

• Decentralized execution of policies and legislation
• Participation of grassroots level government in policy formulation
• Government ownership of key industries such as communications and infrastructure, defense
productions, steel production, mining, energy, etc.
• Stringent economic and labor laws
• Decentralization of economic concentration and even distribution of wealth
• In case, if the nation is a democratic republic, members of legislature can be of different
ideologies

These might not be all the features of the mixed economies as there are several other unique features
that can be found within the economy itself. However, the basic feature of liberty in business and
regulation by the government is found. Mixed economy examples include several national economies
such as India, Germany, Canada, Australia, etc.

Advantages of Mixed Economic System are:

• It grows the creativity of society.

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 • The demand and supply is balance.
• Wealth is distributed very well.
• People are happy with the variety of products.
• Low production costs.
• Not monotonous
• Cover each other weakness
• It will be assimilated with new system that creates superior
• Economy compiled by the principle of kinship
• Basic needs like water or other natural resources used by the state for public purposes
• Citizens have the freedom to choose their desired job

Disadvantages.

A mixed economy, as viable as it may be, is not without some disadvantages. The biggest
disadvantage is that the line between the public and private sectors easily becomes blurred, or shifts
one way or another from time to time. In the long run, mixed economies usually evolve in the direction
of more government control and less individual freedom. Even most of those who favor a degree of
government control would likely concede that there must be a line drawn somewhere, but it is very
difficult for a society as a whole to know where that point is. A mixed economy, therefore, is always in
an evolutionary proces

Globalization and its Benefits

To ascertain the various benefits from globalization we need to consider the entire scope of the term.
This is not a temporary occurrence that will pass us by in a few decades. Instead, this is a permanent
shift in the domain of knowledge which enabled any individual from any country to access large
databases of resources and information. With that in mind, here are some of the benefits of
globalization that are widely known, yet hesitantly accepted.

Rise in Competition

Rise in Technology and Know How

Rise in Opportunities

Rise in Tolerance

Rise in Investment Levels

Marginal propensity to consume

The proportion of additional disposable income devoted to consumption spending
rather than savings. For example, a person who spends $95 of a $100 monthly
increase in disposable income has a marginal propensity to consume of 0.95.

Marginal rate of substitution

Measure of how much of a commodity a consumer will give up to get one
or more units of another commodity, while maintaining the same level
of satisfaction.
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Marginal propensity to save

Proportion of a small change in disposable income that would be saved,

instead of being spent on consumption. It is computed by dividing the
change in savings by the change in disposable income that caused the
change.

Autonomous investment
Capital investment effected by the profit and interest rate levels in an economy, and
which is not related to the economy's growth reflected in its output levels. See
also induced investment.

Induced investment
Investment effected by a growing national economy that stimulates demand.
As output levels rise, capacity utilization increases resulting in additional capital
investment. See also autonomous investment.

Complementary good
Material or good whose use is interrelated with the use of an associated or paired
good such that a demand for one (tires, for example) generates demand for the other
(gasoline, for example). If the price of one good falls and people buy more of it, they
will usually buy more of the complementary good also whether or not its price also
falls. Similarly, if the price of one good rises and reduces its demand, it may reduce
the demand for the paired good as well. Also called complementary product.

Substitute good,
in economics, one kind of good (or service) is said to be a substitute good for another kind insofar as
the two kinds of goods can be consumed or used in place of one another in at least some of their
possible uses. Classic examples of substitute goods includemargarine and butter,
or petroleum and natural gas (used for heating or electricity).

ECONOMIC GROWTH

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 Economic Growth is basically an increase in the amount of goods and services that is produced
by a country's economy over a specific period of time. It is calculated in terms of real gross
domestic product or real GDP. It is the increase of per capita gross domestic product (GDP) or
other measure of aggregate income

IMPACT OF LIVING STANDARD

The impact of Growth on Living Standards are
1. Reduce Unemployment
2. Per-capita Income increase
3. Purchase power increase
4. More consumption of goods and services
5. Reduce in Poverty
6. Increase in Education
7. Increasing in Health

IMPACT OF TRADE DEFICIT ON GROWTH OF THE COUNTRY

Trade deficit causes a country's exchange rate to depreciate. this is because as a country
supplies more of its currency in forex market to buy the other currency to pay for the goods
and services bought, the price of the country's currency goes down.

• Higher Imports
• Lower Export
• Lower inflow of funds in country
• Lower Production
• Rise in Poverty
• Decrease in Foreign Direct Investment
• Demand of Product /Services will decrease

THEORY OF COMPERATIVE ADVANTAGE

• The theory of comparative was given by David Ricardo.

• According to this theory a country should focus on production of those things in which
it should have more expertise.
• He has given this concept like:
• UK should focus on producing cloth and Portugal should focus on producing wine
• The principle of comparative advantage holds that each country will benefit if it
specializes in the production and export of those goods that it can produce at relatively
low cost.
• Conversely, each country will benefit if it imports those goods which it produces at
relatively high cost.
• This simple principle provides the unshakable basis for international trade.

HECHSHER OHLIN THEORY

The Heckscher-Ohlin model assumes huge importance in the context of international trade.
Developed by two renowned Swedish economists named Eli Heckscher and Bertil Ohlin, this
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general equilibrium model of international trade is based on four economic theorems. The
Heckscher-Ohlin model has been developed on the Ricardian theory of international trade,
considering the fact that pattern of trade is guided by the endowments of factors of product

The Heckscher-Ohlin theorem states that a labor-abundant country will specialize in and export
labor-intensive commodity, whereas a capital-abundant country will specialize in and export
capital-intensive commodity.

Assumptions of Heckscher-Ohlin Model

The Heckscher-Ohlin model is based on the following assumptions:

• Countries involved in international trade differ in terms of factor abundance. One

country needs to be labor-abundant and the other country being capital-abundant.
• Commodities can be categorized in terms of factor intensity. One commodity is labor-
intensive and the other commodity is capital-intensive. This in turn implies that there is
no possibility of factor intensity reversal.
• Both the countries involved in trade use same production technology and identical
ranking of factor intensity of commodities.

• Both countries are assumed to have identical demand conditions.

• Production is carried out as per the CRS production function.

• Perfect competition persists in both countries.

• Open trade or free trade policy is followed in both the countries.

The Heckscher-Ohlin proposition is as follows:

The capital-abundant country will export capital-intensive commodity and import labor-
intensive commodity and the labor-abundant country will export labor-intensive commodity
and import capital-intensive commodity.

Heckscher-Ohlin model assumes huge importance in the field of international trade. However,
there are contradictions of this model as well. Wassily Leontief has come up with a
contradiction of Heckscher-Ohlin model. He has shown that in spite of being capital
abundant, USA mostly exports labor-intensive goods and imports capital-intensive goods.

POVERTY
Fundamentally, poverty is a denial of choices and opportunities, a violation of human dignity.
It means lack of basic capacity to participate effectively in society. It means not having
enough to feed and clothe a family, not having a school or clinic to go to, not having the land
on which to grow one’s food or a job to earn one’s living, not having access to credit. It means
insecurity, powerlessness and exclusion of individuals, households and communities. It means
susceptibility to violence, and it often implies living on marginal or fragile environments,
without access to clean water or sanitation”

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Vicious Cycle of Poverty
Poverty for them, once started, is likely to continue because of certain set of factors or events
unless there is outside intervention. These factors are together called vicious cycle of poverty.

Due to little landholding, the income generating ability of this class is low, further because of
having little assets ownership, their ability to provide collateral for loans is limited, resulting in
lower capital available for income generation. Further this leaves them no other resort than
moneylenders who charge exorbitant rates to access credit in case of emergency, often
resulting in further deterioration of their financial health.

As it can be observed, lack of capital & skills are the key reasons for perpetuation of poverty,
hence attacking these reasons is the key to improving economic status of poor people and
making them active players in mainstream economic activity. Access to affordable and timely
credit is primary requirement to break out of this vicious cycle.

FDI

FDI occurs with the purchase of the “physical assets or a significant amount of ownership
(stock) of a company in another country in order to gain a measure of management control.”

FDI is also often accomplished through “merger and acquisition” activities or through
international franchising.

TYPES OF FDI

FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This
classification is based on the types of restrictions imposed, and the various prerequisites
required for these investments.

An outward-bound FDI is backed by the government against all types of associated risks.
This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk
coverage provided to the domestic industries and subsidies granted to the local firms stand in
the way of outward FDIs, which are also known as 'direct investments abroad.'

Different economic factors encourage inward FDIs. These include interest loans, tax breaks,
grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the
growth of FDIs include necessities of differential performance and limitations related with
ownership patterns.

Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place
when a multinational corporation owns some shares of a foreign enterprise, which supplies
input for it or uses the output produced by the MNC.

Horizontal foreign direct investments happen when a multinational company carries out a
similar business operation in different nations.

IMPACT OF FDI ON ECONOMICS PROGRESS

• Increase in domestic employment/drop in unemployment

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 • Investment in needed infrastructure (through either boos or bots)
• Positive influence on the balance of payments
• Development of domestic suppliers
• New technology and “know how” transfer
• Increased capital investment
• Targeted regional and sectoral development

BALANCE OF TRADE

The difference between a country's imports and its exports. Balance of trade is the largest
component of a country's balance of payments. Debit items include imports, foreign aid,
domestic spending abroad and domestic investments abroad. Credit items include exports,
foreign spending in the domestic economy and foreign investments in the domestic economy.
A country has a trade deficit if it imports more than it exports; the opposite scenario is a trade
surplus

ABSOLUTE ADVANTAGE v/s COMPERATIVE ADVANTAGE

Comparative advantage-The ability of one person or nation to produce a good at a lower

opportunity cost than another person or nation.

Absolute advantage-The ability of one person or nation to produce a product at a lower

resource cost than another person or nation.

GDP
Total value of products & Services produced within the territorial boundary of a country

GDP = consumption + investment + (government spending) + (exports − imports)

GNP

Total value of Goods and Services produced by all nationals of a country (whether within or
outside the country)

GNP = GDP + NR (Net income from assets abroad (Net Income Receipts))

FIXED COST v/s VERAIBLE COST

In economics, fixed costs are business expenses that are not dependent on the level of goods or
services produced by the business [1] They tend to be time-related, such as salaries or rents
being paid per month. This is in contrast to variable costs, which are volume-related (and are
paid per quantity produced).

REVENUE v/s PROFIT

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Revenue is the money that comes into your business. It does not take into account expenses
and cash outflow. As a result, revenue is not a good measure of sustainable success. This is
especially true when the necessary cost of doing business is high.

Profit is that money that your business retains after all expenses have been paid and accounts
have been settled. Profitability (and not revenue) is a much more accurate measure of the
potential sustainability of your business success.

CAPITAL OUTFLOW
Capital outflow is an economic term describing capital flowing out of (or leaving) a particular
economy. Outflowing capital can be caused by any number of economic or political reasons
but can often originate from instability in either sphere.

Capital inflow an economic term describing capital flowing into (or entering) a particular
economy

TRADE DEFICIT V/S TRADE SURPLUS

A country has a trade deficit if it imports more than it exports; the opposite scenario is a trade
surplus

• Economic integration is a process where barriers to trade are reduced

or eliminated to facilitate trade between regions or nations. There are varying degrees
of economic integration ranging from theoretically completely free trade to the use of
preferential trade agreements to stimulate relationships between specific trade partners.
Removing trade barriers comes with costs and benefits, depending on the degree of
economic integration and the level of cooperation between member regions or nations.

Many economies have attempted some degree of economic integration. Some nations use free
trade zones, for example, to stimulate trade with partners. Others sign free trade agreements

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like the North American Free Trade Agreement (NAFTA). In the European Union (EU), a high
degree of economic and monetary integration has been accomplished between member nations.
Various EU nations may also have trade agreements with nations outside the union.

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