Globalisation, Trade and International Institutions
Globalisation is the growing integration of economies through trade, investment, technology and migration. This domain tests exports and imports, balance of trade, balance of payments, FDI, tariffs, exchange rates and the roles of the WTO, IMF and World Bank. Karnataka's IT exports and coffee exports are useful illustrations.
Core rules and concepts
- Balance of trade = exports of goods - imports of goods. A deficit means imports exceed exports.
- Balance of payments (BoP) records all external transactions: current account (goods, services, remittances) and capital account (loans, FDI, portfolio investment).
- FDI is long-term investment in productive assets; FPI is short-term investment in financial assets.
- Trade barriers: tariffs are taxes on imports; quotas limit quantities; subsidies support domestic producers.
- WTO (1995) supervises trade rules and replaced GATT; IMF lends to countries with BoP problems; World Bank finances development projects.
- Exchange rate is the price of one currency in another; depreciation makes exports cheaper and imports costlier.
Worked example
A country exports goods worth ₹500 crore and imports goods worth ₹650 crore, so the trade deficit is ₹150 crore. If services exports earn ₹80 crore and remittances are ₹40 crore, the current account deficit is 150 - 80 - 40 = ₹30 crore. If FDI inflows are ₹50 crore, the capital account surplus can cover the current account deficit. The BoP as a whole must balance through reserves or borrowing.
Traps that cost marks
A trade deficit is not a fiscal deficit. The BoP always balances in accounting terms, but individual accounts may be in deficit. FDI is not the same as FPI. The WTO is not a lending bank. Currency depreciation helps exporters but raises import costs and can fuel inflation.