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AP Senior Inter Economics – Study Material and Model Questions

Unit 2 - New Economic Reforms : International trade plays an important role in the economic development. It acts as an engine of growth. According to Haberler, it is most useful for under developed countries.

Role of International Trade:

1. Increases Output:
In International Trade, a country specialises in production of goods. So it will increase the output, income and growth of that country.

2. Market Expansion:
Wide range of production of various types of goods widen the scope for market expansion and increases the investment capacity in that country.

3. Employment generation:
Market expansion, high level investment capacity due to international gains can also create enough employment opportunities for growing population.

4. Increase Internal and External Economies:
More sophisticated and modern technology and huge investment utilisation in international trade can also provide internal and external economies to the country which controls the cost of production.

5. Indirect benefits:
It provide some indirect advantages like inventions and innovations, import of technology, capital accumulation, managerial talents etc. to the economy.

6. Import of Capital goods:
Under developed countries are scarce in capital goods. So they can developed their social and economic infrastructure by importing capital goods at cheap rate from other countries.

7. Educative effect:
Developing countries have lack of technical knowledge, managerial skills, entreprenuership etc. Due to low level education, this can be minimised by importing them through international trade.

8. Source of foreign capital:
A country gain advantages in international trade in exports and imports. It provide foreign capital as balance of payments.

9. Controls monopoly power:
Import of goods from other countries can control the development of monopolies in the economy and leads to healthy competition.

10. Promotes world peace:
It promote economic cooperation, brotherhoodness and mutual understanding between world countries which leads to world peace.

Evaluation of "LPG" Concept:
India followed a very restrictive economic policy upto 1991. Over dependency on public sector and neglegency on private sector badly effected the Indian Economy. To overcome such economic depression, the congress government introduced the "Rao-Manmohan Model" in 1991. This is popularly know as Liberalisation, Privatisation and globalisation (LPG) Model.

Relation of previous govt. restrictions in the areas of social and economic policies is called as liberalisation. It is nothing but liberalisation in trade restrictions on the flow of goods and services between countries.
(1) To make it free the Indian economy from the clutches of bureaucratic control.
(2) Integrating Indian economy with world economy.
(3) To remove restrictions on Foreign Direct Investment.
(4) To concise the unprofitable public sector units.
Govt. of India introduced New Economic Policy in 1991 to fulfil the aims of liberalisation by covering liberalised licensing, foreign direct investment, foreign capital and technology, MRTP Act and dilute of public sector.


According to Barbara Lee and John Nellis, privatisation is the general process of involving the private sector in the ownership or operation of state owned enterprises. It is nothing but the private purchase of all or part of a company.
1. It improves efficiency and performance of the company.
2. It develops individual responsibility.
3. It promotes discipline in capital market.
4. Avoid the political interference.
5. Practices succession planning.
6. Quick response and spot decision is possible.
7. Early remedies for problems.
8. Provide quality and better service.


The process of integrating various economies of the world without creating any obstacle in free flow of goods and services, technology, capital and human resources is called as globalisation. It is nothing but making the domestic economy a part and parcel of world economy.

Support in Factors:
Quality human resources, wide industrial base, growing specialised markets and entrepreneurship, expanded markets, economic liberalisation, growing GDP, NRI's etc in Indian economy favours globalisation.

High input cost, poor infrastructure, old technology, poor brand image, small sized companies, limited marketing research etc. are the obstacles of globalisation in India.

The General Agreement on Tariffs and Trade (GATT):
The General Agreement on Tariffs and Trade (GATT) was come into force on 1st, January 1948. Its main aim is to eliminate the trade restrictions in international trade. Its head quarters were situated at Geneva. It disappeared on 1st Jan. 1995 with the birth of World Trade Organisation.

1. To follow Most Favoured Nation Principle unconditionally.
2. To grand protection to domestic industry.
3. To carry on the trade on non-discrimination principle and transparency.
4. To liberalise tariff and non-tariff measures.

World Trade Organisation (WTO):
The World Trade Organisation (WTO) was came into force from 1st January 1995 and the general agreements were converted into permanent setup. Its head quarter is at Geneva. At present (2011) there are 153 member countries in WTO including India.
1. To improve standard of living, full employment and effective demand.
2. To expand trade and production.
3. To ensure optimum utilisation of world resources.
4. To reduce tariff and other barriers.
5. To eliminate discriminatory treatment in trade.
6. To develop integration among world countries.
1. Implementation of Multilateral agreements.
2. Make frame work for plurilateral agreements.
3. Decide future strategies of trade and tariffs.
4. Administrator rules and procedures of dispute settlement.
5. Cooperates with World Bank and International Monetary Fund.
Agreements under WTO:
1. Removal of quantitative restrictions on agricultural imports.
2. Reduce agricultural subsidy.
3. Reduction of tariffs.
4. Removal of restrictions on foreign investment.
5. Grant protection to TRIPs.
6. Agreements on Services.
7. Maintain the basic standards of human and environment in production.
8. Settlement of disputes.

Role of WTO in Indian economy`:

As a member of WTO, India agreed to bound to 67 percent tariff on agricultural
goods, 40 percent for non-agricultural goods and 25 percent for intermediary
goods, machinery etc.
As per WTO agreements, India removed quantitative restrictions on 714 items in 2000 and 715 items in 2001-EXIM POLICY.
The Patents Amendment Act 2005 provides patents to drugs, farm products and plant varieties.
Indian govt. allowed foreign investment in Pharma Products and 22 types of consumer goods.
India made commitment in 33 activities of service sector for foreign service providers.

Important VSAQ:

(1) Most Favoured Nation: It indicates that any concession given to any nation was automatically extended to all the member countries of GATT. It is one of the provisions of GATT.

(2) Disinvestment: The Sale of Public Sector equity to the private sector is called as disinvestment. It is part of evolution of privatisation in India.

(3) Foreign Direct Investment: Investment in a foreign country where the investor retain control over the investment is called as FDI. AT present 100 percent FDI permitted except retail trading, atomic energy, lottery business, gambling and betting.

(4) TRIPs: Trade Related Intellectual Property rights refers to the legal ownership of an invention or discovery attach to a particular product or process. it protects the owner against unauthorised copying. Eg: Copy rights, patent rights, trade mark etc.
(5) Liberalisation
(6) Privatisation
(7) Globalisation.

Important SAQ
1. What are the advantages of privatisation?
2. What are the objectives of GATT?
3. What are the functions of WTO?
4. Distinguish between WTO and GATT.

Important LAQ:
1. Role of International trade in economic development.
2. What are the obstacles of globalisation in India?
3. Explain the role of WTO in Indian Economy.

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