Business Economics TYBCOM Sem 6 notes university of mumbai

Business Economics TYBCOM Sem 6 full notes

What is commercial Trade policy? explain free trade policy 

  • Commercial policy refers to the government actions and decisions that regulate domestic trade and commerce within a country. This can include tariffs, regulations, subsidies, and other measures that affect the flow of goods and services within a country. The goal of commercial policy is often to promote the growth and development of domestic industries, protect domestic businesses, and ensure fair competition among companies.
  • The specific details of commercial policy can vary depending on the country and its political and economic system. It often includes a mix of protectionist and free-market oriented measures that are influenced by both domestic interest groups and international trade partners.
  • Free trade is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs, subsidies, or quotas.

Some advantages of free trade include:

  1. Specialization in production
    Free trade allows every country to specialize only in that commodity in which it has a comparative cost advantage. Such specialization will lead to optimum and efficient utilization of resources and increases the world output and this increase economic welfare of all trading countries.
  2. Optimum utilization of resources
    Free trade ensures optimum and efficient utilization of world resources. This in tum increases the world output.
  3. Promote competition
    Free trade encourages competition from foreign countries and this increase the efficiency in the domestic country. The domestic country adopt quickly any improvement in the methods of production and this will lead more production and more exports and increases profits.
  4. Increase in employment
    Free trade increase the production of goods and this will generate higher employment resulting in increase in income, savings and investment. This helps to raise the standard of living of the people in the world.
  5. Transfer of technology
    Free trade increases international diffusion of technology. Due to free trade technology is transferred from the developed countries to the developing countries. Such transfer of technology result in economic growth of the developing countries.
  6. Economic growth
    Free trade enhance trade and investment opportunities and this contribute to the economic growth of the developing countries.
  7. Increase in national income
    Free trade enables a country to import goods, technology etc. This will increase production and national income of the imported country. This in turn, increase output and promote economic growth.
  8. Improved relations: Free trade can also lead to improved relations between countries, as increased economic interdependence can foster cooperation and help to reduce the likelihood of conflict.

Disadvantages of Free Trade policy

  1. Unhealthy competition
    Free trade leads to unfair and unhealthy competition between advanced and developing countries. The developing countries suffer as they cannot compete with advanced countries. For eg : Free trade poliry in India adopted by the British Government proved that the one-time flourishing industries (handicrafts) of India., were completely wiped out due to foreign competition.
  2. Unfavourable Terms of trade
    Free trade is more advantageous to developed countries, but disadvantageous to underdeveloped countries due to unfavourable terms of trade. Under free trade, gains of trade are not equally distributed due to the unequal state of development of different countries.
  3. Unfavourable balance of paynents
    Free trade leads to unfavourable balance of payments in the developing countries due to excess of imports and limited exports.
  4. Reduce tax revenue
    Free trade means absence of taxes. As there is no taxes there is no revenue to the country and this further affect the economic growth of the trading countries.
  5. Cut – throat competition
    Free trade led to cut – throat competition in the world market, and so the exporters resort to dumping. Under dumping, the foreign countries sell their goods at lower price in the other country. Dumping destroy large number of industries if the affected countries.
  6. Harmful imports
    Free trade leads to no restrictions on imports and exporting of goods. But countries cannot allow free import of injurious and harmful products as this will have harmful effects on the health and welfare of the people. Hence trade restrictions become necessary on the import of harmful products.
  7. Kill infant industries
    Free trade affects the growth of domestic infant industries (new and upcoming industries). Infant industries should be protected from foreign competition.
  8. Lack of protection for vulnerable industries: Free trade can leave certain industries, such as small-scale agriculture or domestic manufacturing, exposed to international competition without adequate protection.
  9. Dumping in international trade refers to the practice of selling goods at a price that is lower in the export market than the price charged in the domestic market of the exporting country. This can occur when a country or company has excess production capacity and wants to dispose of surplus goods by selling them at a lower price in foreign markets. Dumping can be harmful to domestic industries in the importing country because it can lead to lower prices and reduced profits for domestic producers.

Protection trade policy

Protectionist trade policies are government actions and decisions that restrict or limit the import of goods and services into a country in order to protect domestic industries and businesses.

Some advantages of protectionist trade policy include:

  1. Infant industry protection: In some cases, protectionist policies may be used to support new or emerging industries that are not yet able to compete on the global market.
  2. Diversification of industry
    Every country should have industries producing diverse products. This reduces the risk and bring out a harmonious and balance growth and self – sufficiency. Thus it is necessary to bring about a diversification of industries through protection.
  3. Employment
    Protection encourage home industries and increase employment opportunities. This helps in solving the problem of unemployment. For eg : imposition of tariff will protect the home industries. As the protected industries expand, employment increases and income of the community increases.
  4. Balance of payments
    The developing countries have a deficit in the balance of payment due to excess of imports and limited exports. Protection in the form of tariff and quotas reduces imports. This helps in correcting deficit in the balance of payment.
  5. Dumping
    Foreign countries may resort to dumping in order to capture markets in another country. Dumping occurs when the foreign countries sell their goods in other countries at a price less than market price and sell the same goods at a higher price in their own country. Thus protection in the form of anti – dumping duty protect the home industries against dumping of foreign goods in the home market.
  6. Revenue
    Protection raises the revenue to government through tariffs. Thus Protection in the form of tariffs not only provide revenue to the government but also provide protection to the home industries.
  7. Development of domestic industries: By protecting domestic industries from foreign competition, protectionist policies can allow those industries to develop and grow without the pressure of international competition. This can lead to increased innovation and productivity in the long-term.
  8. Improving terms of trade: Governments may use protectionist trade policies as a bargaining tool to negotiate better terms of trade with other countries, such as opening up new markets for domestic goods, protecting intellectual property rights and ensuring fair labor standards.
  9. Promoting fair trade: Protectionist measures can be used to address trade imbalances and promote fair trade by addressing issues such as currency manipulation, subsidies, and other trade-distorting practices used by other countries.

Disadvantages of Protection trade policy

  1. Rise to monopoly
    Protection give rise to domestic monopolies. Under protection, foreign competition is eliminated and the home industries sell goods at high price and earn large profits by exploiting the consumer.
  2. Retaliation
    Protection can cause a retaliation reaction from other nations. Protection by one country can cause a retaliation reaction in the other countries whose exports are affected. Naturally the affected countries retaliate (counter – attack) and raise tariffs on other countries export. Such action and reaction decreases the volume of world trade.
  3. Inefficient industries
    Under protection policy, domestic countries are protected from foreign competition and therefore they may flourish in the short run, but in the long – run they may become less efficient. Over a period of time, innovation and quality will decline without foreign competition.
  4. Reduced economic growth: Protectionist policies can reduce economic growth by distorting market signals, reducing the competitiveness of domestic industries, and making a country less attractive to foreign investment.
  5. Negative impact on Small and Medium Enterprises (SMEs): Protectionist measures can make it more difficult for small and medium-sized enterprises to compete with larger, domestic firms.
  6. Damage to international relations: Protectionist policies can harm diplomatic relations between countries, particularly if they are seen as protectionist and contrary to fair trade principles.
  7. Higher consumer prices: Protectionist policies can lead to higher prices for consumers, as domestic producers are shielded from competition and do not have to compete on price.
  8. Reduced choice for consumers: Protectionist measures can limit the selection of goods and services available to domestic consumers, as they will have less access to imported goods and services.

What is international economics integration?

  • International economic integration refers to the process by which countries come together to reduce barriers to trade and investment and to cooperate on economic policy.
  • This process can take many forms, such as the formation of customs unions, free trade areas, and common markets, and it can be motivated by a desire to improve economic growth and competitiveness, to promote peace and stability, or to encourage greater cooperation on economic policy.

International economic integration can take different forms and levels, such as:

  1. Free Trade Agreements (FTA): a group of countries come together and sign a free trade agreement to remove all trade barriers (such as tariffs, quotas).  Free Trade Area completely removes all tariffs on goods traded and bring about free trade among the member countries.
  2. Customs Union: customs Union removes all restrictions on trade among the member countries and
    adopts a common tariff when trading with other non – member countries. Thus a customs union is a type of trade bloc which combines a free trade area with a common external tariff.
  3. Common Market: a group of countries come together and sign an agreement to have free trade and free movement of factors of production i.e. labour and capital among them, but adopt a common external tariff against the other non – member countries. Thus Common Market is a Customs Union with free movement of factors of production i.e. labour and capital within the common market. 
  4. Economic Union: Economic Union is a deep form of economic integration. In this type of economic integration a group of countries come together and enter into an agreement to have free trade and free movement of factors of production (labour and capital) among them and to adopt common external tariff and common economic policy while dealing with other non- member countries. 
  5. Monetary Union: When an economic union involves one common currency and common central bank it
    becomes economic and monetary union. Example Eurozone – European Union (the currency is Euro and the central bank is European Central Bank).

Objectives of Economics Integration

  1. Increased trade: Economic integration aims to reduce barriers to trade among participating countries, such as tariffs and quotas, in order to increase the flow of goods, services and investment among them, thus boosting economic growth and competitiveness.
  2. Economic growth: Economic integration also aims to promote economic growth by creating new markets and increasing competition, which leads to more efficient use of resources and increased productivity.
  3. Greater economic efficiency: Economic integration can lead to greater specialization and economies of scale, which can increase productivity and lower costs. This can improve the allocation of resources and increase overall economic efficiency.
  4. Competitiveness: Economic integration allows companies to increase their competitiveness by expanding into new markets, access to new resources and technologies and lower costs through economies of scale.
  5. Innovation and Technology Transfer: Economic integration also allows companies to access new technologies and transfer know-how between countries.
  6. Political stability: Economic integration can also contribute to political stability by creating mutual economic dependence among participating countries and promoting peaceful relations.
  7. Access to larger markets: Economic integration allows countries to access larger markets for goods and services, which can lead to increased exports and greater economic growth.
  8. Improved living standards: By increasing trade and investment, and fostering greater economic efficiency, economic integration can lead to increased prosperity and higher living standards for people in participating countries.
  9. Currency stability: Economic integration can lead to a more stable currency by reducing the risk of currency fluctuations and encouraging greater investment in participating countries.
  10. Regional coordination: Economic integration can lead to better regional coordination by encouraging participating countries to work together on issues such as transportation, infrastructure development, and regional security.

European Union

  • The first steps towards the creation of the EU were taken in the 1950s with the formation of the European Coal and Steel Community (ECSC) and the European Economic Community (EEC), which aimed to promote economic cooperation among European countries.
  • In 1957, the Treaty of Rome established the EEC, which was made up of six founding members: Belgium, Germany, France, Italy, Luxembourg and The Netherlands. The EEC created a common market among its members, with the goal of eliminating trade barriers and encouraging economic growth.
  • Over the next several decades, the EU expanded to include more members, and its areas of cooperation grew to encompass a wide range of issues, including political, social, and security concerns. The EU was renamed the European Union in 1993 with the signing of the Maastricht Treaty, which established the EU as a distinct legal entity and created the European Union.
  • The European Union (EU) is a political and economic union of 27 member states located primarily in Europe. The EU was established with the aim of promoting peace, stability, and economic cooperation among its member countries, and to foster a sense of shared identity and common purpose among Europeans
  • The European Union (EU) has 27 member countries. These countries are: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden.

The four Freedoms of the single market of the EU

  1. The free movement of goods: This freedom ensures that there are no tariffs, quotas, or other trade barriers between EU member countries, allowing goods to be bought and sold freely across the EU’s internal market.
  2. The free movement of services: This freedom allows service providers to offer their services to consumers and businesses in other EU member countries without facing any discrimination or other barriers.
  3. The free movement of capital: This freedom allows the free flow of investment, such as money and financial instruments, among EU member countries.
  4. The free movement of people: This freedom allows citizens of EU member countries to live, work, and study in any other EU member country without facing any discrimination or other barriers.

What is Brexit?

  1. Brexit refers to the United Kingdom’s (UK) withdrawal from the European Union (EU) after a vote on June 23, 2016, in which 51.9% of the British citizens who participated in the referendum voted in favor of leaving the EU.
  2. Brexit is the shorthand term used to describe the United Kingdom’s (UK) withdrawal from the European Union (EU). The term is a combination of the words “Britain” and “exit.” The UK voted to leave the EU in a referendum held on June 23, 2016, by a margin of 51.9% to 48.1%.
  3. While England and Wales voted to leave, Scotland and Northern Ireland voted to remain.
  4. Article 50 of the Treaty of Lisbon, which started a two-year period for the UK and the EU to negotiate the terms of withdrawal.
  5. The Process of exiting EU began in the UK on 29th March 2017, Making the exact date of Brexit 29th March 2019.

The main reasons why people of Britain voted to leave EU

There were several main reasons why many people in the United Kingdom (UK) voted to leave the European Union (EU) in the Brexit referendum held on June 23, 2016. Some of the key reasons include:

  1. Immigration: Many people in the UK were concerned about the high levels of immigration from other EU countries, and felt that leaving the EU would allow the UK to better control its borders and reduce the number of people coming to the country.
  2. Sovereignty: Many people in the UK felt that being a part of the EU meant that the country was giving up too much control over its own affairs to Brussels, and that leaving the EU would restore the UK’s ability to make its own laws and govern itself.
  3. Frustration with the EU: Some people in the UK felt that the EU was a bureaucratic and undemocratic institution, and that it was not in the UK’s best interest to be a part of it.
  4. Global trade: Some supporters of the Leave campaign argued that leaving the EU would allow the UK to negotiate more favorable trade deals with countries outside of the EU, and to be more independent in terms of global trade policy.
  5. Economic concerns: Other people felt that the cost of membership and the perceived negative impact on the economy were reasons to leave the EU.
  6. Euroscepticism: There had been a historical scepticism and opposition towards the EU in the UK, mainly from the Conservative party and some parts of the press, which was further amplified by the ongoing issues with the EU on the levels of integration and political power distribution among the member countries.

The Association of Southeast Asian Nations (ASEAN)

The Association of Southeast Asian Nations (ASEAN) was established on August 8, 1967, in Bangkok, Thailand. The organization was founded by five countries: Indonesia, Malaysia, the Philippines, Singapore, and Thailand. The initial goal of ASEAN was to promote economic cooperation and to reduce the potential for conflict in the region.

ASEAN has grown to include ten member countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

ASEAN has expanded its areas of cooperation and has become an important regional organization, with a focus on maintaining peace and stability, promoting economic growth and development, and fostering regional cooperation and integration.

The main objectives of the Association of Southeast Asian Nations (ASEAN) are to promote regional stability and economic growth, to encourage cultural development, and to strengthen regional cooperation among its member states.

Some specific goals of ASEAN include:

  1. The main aims of the Association of Southeast Asian Nations (ASEAN) are to promote regional stability and economic growth, and to strengthen cooperation among its member countries. This includes promoting cooperation in political, economic, and social areas, as well as in the fields of culture, education, and security.
  2. To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region.
  3. To maintain close and beneficial cooperation and mutual support with other developing countries.
  4. ASEAN also seeks to promote regional peace and stability by addressing security concerns, including transnational crime and terrorism, and by promoting dialogue and cooperation with other countries and regions. Additionally, ASEAN works to increase economic cooperation among its member states, including through the establishment of a free trade area and the promotion of investment and tourism.
  5. To promote active collaboration and mutual assistance on matters of common interest in the economic, social, cultural, technical, scientific and administrative fields.
  6. To provide assistance to each other in the form of training and research facilities.
  7. To collaborate more effectively for the greater utilization of their agriculture and industries, the expansion of their trade and the improvement of their communication and transportation.
  8. To maintain close and beneficial cooperation with existing international and regional organizations with similar aims and purposes.

Initiatives taken by the ASEAN towards achieving economic integration

  1. ASEAN Free Trade Area (AFTA): Established in 1992, the AFTA aims to reduce tariffs and other trade barriers among ASEAN member countries, with the goal of creating a single market and production base in the region.
  2. ASEAN Economic Community (AEC): Established in 2015, the AEC aims to create a single market and production base among ASEAN countries, with the goal of increasing economic integration and competitiveness in the region. The AEC includes measures to liberalize trade in goods, services and investment, and to promote the free flow of capital.
  3. Food security is a key concern for the Association of Southeast Asian Nations (ASEAN) and its member countries. Food security refers to the ability of a population to access sufficient, safe, and nutritious food to meet their dietary needs and food preferences for an active and healthy life. Achieving food security is a complex issue that involves ensuring the availability, accessibility, and stability of food supplies, as well as ensuring that food systems are sustainable and resilient to shocks and external factors.
  4. The ASEAN Banking Integration Framework (ABIF) is a set of measures and initiatives aimed at integrating the banking sector within the Association of Southeast Asian Nations (ASEAN). The goal of the ABIF is to promote greater connectivity and cooperation among ASEAN banks, and to create a more seamless and integrated market for financial services in the region.

Purchasing Power Parity Theory

Introduction/ Meaning:

  • Purchasing power parity (PPP) is an economic theory of exchange rate determination. It explains that the price levels between two countries should be equal. if they are measured in a common currency.
  • PPP theory explains the determination of long-run equilibrium exchange rate based on the relative price of two countries.
  • It originated in the School of Salamanca in the 16th century. The concept was developed into theory by Gustav Cassel in 1918.
  • For instance, a product of the same quality and size is produced both by India and China. As per the theory, if measured in common currency the price of the product in India will be equal to that of China.
  • The Theory has two versions: (1) Absolute version and (2) Relative version

Assumptions of Purchasing power parity:

  • There are no Trade barriers
  • Same basket of goods to calculate the Price index
  • Identical Goods
  • All the prices should be indexed to the same year
  • Law of one price

Absolute version of Purchasing power Parity

  • According to the absolute version of the PPP theory, the exchange rate will be determined at the point where the internal purchasing powers of the two currencies become equal.
  • The identical basket of goods in two different countries must sell for the same price when expressed in the same currency.
  • The exchange rate is equal to the ratio of the price index of the basket of commodities in the home market to the price index of the basket of commodities in the foreign market.


  • Purchasing power of money cannot be measured in absolute terms because the price changes and fluctuates.
  • Different quality of goods and different countries can not be measured because quality may differ.
  • Difficult to select a basket of goods or commodities due to different preferences and different lifestyles.
  • Problem associated with index numbers
  • No direct and precise link between the purchasing power of currencies f two countries and the exchange rate.
  • Capital account transactions are neglected.

RELATIVE VERSION of Purchasing Power Parity

  • The relative version of the Purchasing Power Parity theory is propounded by Gustav Cassel as a means for measuring changes in the equilibrium exchange rate.
  • The relative version of the PPP theory states that the changes in the equilibrium rate of exchange will be determined by the changes in the ratio of their respective purchasing power.
  • The primary focus is the comparison between the past (base rate) equilibrium exchange rate with the current equilibrium exchange rate.
  • Change between two equilibrium rates is primarily due to changes in the internal purchasing power of the two currencies over a period of time.

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