Foreign Trade Policy

Introduction

Foreign Trade Policy is a tool used by the government to control imports and exports in order to fix problems of excess demand or deficient demand in the economy.
Simple words: If the economy has too much demand → bring in more goods from abroad. If the economy has too little demand → sell more goods to other countries.

Key Terms

Term	Meaning
Balance of Trade (BOT)	The difference between a country's exports and imports
Favourable BOT	Exports > Imports → called Export Surplus
Unfavourable BOT	Imports > Exports → called Import Surplus
Excess Demand	Total demand in the economy is MORE than total supply → causes inflation
Deficient Demand	Total demand in the economy is LESS than total supply → causes unemployment

Deficient Demand and Export Surplus

When there is a deficient demand, people are not spending enough. Factories produce more than people buy. Workers lose jobs. Prices fall. The economy slows down.

What is the Solution? → Increase Exports
When India sells more goods to other countries (exports), foreign buyers pay us money. This is like getting new demand from outside — it boosts production and employment inside India.
Easy Analogy: Think of exports like a new customer walking into a shop. Even if local people aren't buying, a foreign customer buying our goods keeps the factory running!
Why does Export = Investment?
An increase in exports has the same effect on aggregate demand as an increase in investment. Both inject new money into the economy.

3 Ways to Increase Exports

#	Factor	Explanation
1	Rise in foreign income	When other countries grow richer, they buy more of our goods
2	Lower export prices	If our goods are cheaper than others in the world market, more countries buy from us
3	Surplus production	When India produces more than it needs domestically, the extra can be exported

Result → Export Surplus = Favourable Balance of Trade

Excess Demand and Import Surplus

When there is excess demand, everyone is spending too much. There are not enough goods in the market. Prices shoot up. This is called inflation.

What is the Solution? → Increase Imports
When India brings in more goods from other countries (imports), the supply of goods in the market goes up. More goods available → prices come down → inflation is controlled.
Easy Analogy: Imagine a shop running out of sugar and the price skyrockets. Now imagine the shopkeeper gets extra sugar from another city — prices immediately come down. That is exactly what imports do for the whole country!
Result → Import Surplus = Unfavourable Balance of Trade

Ways India Covers Excess Imports

When India imports more, it has to pay foreign countries in their currency (foreign exchange). The government arranges this money in 3 ways:

#	Method	Simple Explanation
1	Decrease foreign capital assets	Use India's saved foreign exchange reserves (like using money from a savings account)
2	Borrow from international institutions	Take loans from the IMF or the World Bank (IBRD)
3	Foreign aid / grants	Receive financial help from friendly foreign governments (no repayment needed)

Key Points: Foreign Trade Policy

The Foreign Trade Policy corrects both excess demand and deficient demand
Balance of Trade = Exports − Imports
Export Surplus = Exports > Imports = Favourable BOT
Import Surplus = Imports > Exports = Unfavourable BOT
Exports fix deficient demand — they work just like investment in boosting aggregate demand
Three factors that raise exports: foreign income ↑, export prices ↓, surplus production ↑
Imports fix excess demand — more goods in market → prices fall → inflation controlled
Import surplus is financed by: foreign reserves, IMF/World Bank loans, foreign grants

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Topics

Microeconomics and Macroeconomics: Introduction

Microeconomic Theory

Theory of Income and Employment

Demand and Law of Demand

Theory of Consumer Behaviour: Marginal Utility and Indifference Curve Analysis

Money and Banking

Balance of Payment and Exchange Rate

Elasticity of Demand

Supply: Law of Supply and Price Elasticity of Supply

Public Finance

National Income

Market Mechanism: Equilibrium Price and Quantity in a Competitive Market

Laws of Returns: Returns to a Factor and Returns to Scale

Cost and Revenue Analysis

Forms of Market

Producer's Equilibrium

Equilibrium of Firm and Industry Under Perfect Competition

Producer's Equilibrium Under Perfect Competition

Determination of Equilibrium Price and Output Under Perfect Competition

Price Output Determination Under Monopoly

Price Output Determination Under Monopolistic Competition and Oligopoly

Theory of Income and Employment

Basic Concepts of Macro Economics

Aggregate Demand and Supply-Determinants of Equilibrium

Consumption Function (Propensity to Consume)

Concept of Investments-Types and Determinants

Multiplier - I : Static and Dynamic

Full Employment and Voluntary Unemployment

Problems of Deficient Demand and Excess Demand

Measures to Correct Deficient and Excess Demand

Money: Meaning and Functions

Banks: Commercial Bank and Central Bank

Balance of Payment and Exchange Rate

Fiscal Policy

Government Budget

National Income and Circular Flow of Income

National Income Aggregates

Methods of Measuring National Income

National Income and Economic Welfare