FOREIGN TRADE 

1. BALANCE OF PAYMENT : 

Systematic record of economic transactions in goods, services, transfer payments and capital between residents of a country with the rest of the world. There are two main accounts in BoP - The current account and The capital account.

i). The Current Account records exports and imports of goods ad services and transfer payments. Trade in services are denoted as invisible trade (because they are not seen to cross national borders). 

ii). The Capital Account records all the international purchase and sale of assets such as money, stocks, bonds etc.

2. CURRENT ACCOUNT DEFICIT : 

The current account measures the flow of goods, services and investments into and out of the country. We run into a deficit if the value of the goods and services we import exceeds the value of those we export. The current account includes net income, including interest and dividends, and transfers, like foreign aid.

3. BALANCE OF TRADE : 

Difference between the values of exports and imports of goods or merchandise for a country. It is a sub category of Balance of Payment (BoP) of the visible items of trade only. It is considered favourable when exports exceed imports and unfavourable when imports exceed exports.

4. FOREIGN EXCHANGE RATE : 

The price of one currency in terms of another currency is known as the exchange rate. That is the amount of domestic currency required to buy one unit of foreign currency. i.e. a rupee-dollar exchange rate of Rs 76 means that it costs Rs 76 to buy one dollar. This is also known as Nominal Exchange Rate. However, the measure of price of foreign goods (how expensive goods in London are) relative to goods in India captures the Real Exchange Rate. It is the ratio of foreign to domestic prices, measured in the same currency. It is defined as -

 Real Exchange Rate = Nominal Exchange Rate X Price Levels Abroad/Price Levels in India

5. PURCHASING POWER PARITY : 

The purchasing power of a currency refers to the quantity of the currency needed to purchase a given unit of a good, or common basket of goods and services. Purchasing power is clearly determined by the relative cost of living and inflation rates in different countries. Purchasing power parity means equalising the purchasing power of two currencies by taking into account the cost of living and inflation differences. If the purchasing power parity is 1, this means that goods cost the same in two countries when measured in the same currency. For instance, if a loaf of bread cost $4 in USA and the nominal exchange rate is Rs 76 per US dollar, then with purchasing power parity equal to 1, the same loaf of bread should cost Rs 304 (4X76) in India. 

6. EFFECTIVE EXCHANGE RATE :

Since a country interact with many countries, one may want to see the movement of the domestic currency relative to all other currencies in a single number rather than by looking at bilateral rates. This is a multilateral rate representing the price of representative basket of foreign currencies, each weighted by its importance to the domestic currency in international trade.

7. DEVALUATION AND DEPRECIATION : 

Devaluation is reduction in price of one currency against another under a fixed exchange rate system by the central bank of a country in order to correct the deficit in the balance of payments. Devaluation makes the imports more expensive, thereby reducing import demand and increasing exports by making them cheaper. Currency Depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system in which no official currency value is maintained.

8. REVALUATION AND APPRECIATION :

Revaluation is increase in price of one currency against another under a fixed exchange rate system by the central bank of a country. For example, if one dollar equals Rs 100 initially and then the government decides the value of rupee relative to dollar so that one dollar now equals only Rs 50. 

Currency Appreciation is the increase in the value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system in which no official currency value is maintained. This is a result of market forces. Appreciation of domestic currency makes the country’s exports more expensive and imports less expensive.

9. EXTERNAL DEBT : 

It refers to money borrowed from a source outside the country. External debt has to be paid back in the currency in which it is borrowed. External debt can be obtained from foreign commercial banks, international financial institutions like IMF, World Bank, ADB etc and from the government of foreign nations. Sometimes referred to as foreign debt, external debt can be procured by corporations as well as governments. In many instances, external debt takes the form of a tied loan, which means the funds secured through the financing must be spent back into the nation that is providing the financing. For instance, the loan might allow one nation to buy resources it needs from the country that provided the loan. 

10. TARIFF AND NON-TARIFF BARRIERS :

Tariff and Non-Tariff barriers are restrictions imposed on movement of goods between countries. It can be levied on import and export. Tariff Barriers can be import or export duty, transit duties, ad valorem duty etc. On the other hand, Non-Tariff barriers are non-tax restrictions such as government regulations and policies, government procedures with respect to overseas trade. It can be in the form of quotas, subsidies, embargos, quality control (product testing and standardization) etc.

11. ANTI DUMPING :

Dumping is an act of charging a lower price in a foreign market for a product than the price of the same product in the domestic market or a third country market. It is selling at less than “fair value”. Dumping is a kind of predatory pricing in international trade. To counter this, a penalty imposed on suspiciously low-priced imports, to increase their price in the importing country and so protect local industry from unfair competition is called an Anti-dumping duty.

12. COUNTERVALING DUTY : 

Countervailing Duties (CVDs) are tariffs levied on imported goods to offset subsidies made to producers of these goods in the exporting country. Countervailing Duties are applicable when a foreign government provides subsidies or assistance to a local industry. This can be in the form of low-rate loans, tax exemptions, or indirect payments. The assistance provided enables these suppliers and manufacturers to potentially export and sell the goods for less than domestic companies.

13. TAX HAVENS : 

A country that has a low tax liability compared to other countries or no taxes at all. Some countries deliberately set themselves up as tax havens in order to encourage international corporations to register themselves there. Some countries that are not tax havens have loopholes in their tax codes in order to allow certain persons and companies to place some of their assets in an account in a tax haven. There are two main types of tax haven arrangements-

a). Tax exempt companies beneficially owned by non-residents of a country which pay a small annual administration fee in return for being exempt from income and withholding taxes; there are no capital gains or inheritance taxes. Tax haven countries themselves ‘gain’ from the creation of local employment and the extra income this creates, often in an impoverished country or a country lacking other resources;

b). International business companies that are ‘accommodated’ by ‘designer’ taxation, whereby tax havens ‘tailor’ rates of tax to help individual MNEs to minimize their ‘onshore’ tax liability. MNEs negotiate low tax rates which in turn allows them to meet thresholds for tax exemptions in onshore jurisdictions.

14. FOREIGN DIRECT INVESTMENT  :

Foreign Direct Investment (FDI) implies an investment made with an intent of obtaining an ownership stake in an enterprise domiciled in a country by an enterprise situated in some other country. The investment may result in the transfers of funds, resources, technical know-how, strategies, etc. There are several ways, of making FDI i.e. creating a joint venture or through merger and acquisition or by establishing a subsidiary company.

15. FOREIGN PORTFOLIO INVESTIMENT (FPI)/ FOREIGN INSTITUTIONAL INVESTMENT (FII) :

Foreign Portfolio Investment (FPI), refers to the investment made in the financial assets of an enterprise, based in one country by the foreign investors. Such an investment is made with the purpose of getting short term financial gain and not for obtaining significant control over managerial operations of the enterprise. The investment is made in the securities of the company, i.e. stock, bonds, etc. for which the overseas investors deposit money in the host country’s bank account and purchase securities. FIIs are institutions established or incorporated outside India which proposes to make an investment in securities in India. They are registered as FIIs with SEBI. FIIs are a part of FPIs. They are allowed to trade in new securities as well as trade in already issued securities.

16. P-NOTES : 

Participatory notes or P-Notes are instruments used by foreign investors for making investments in the stock market. Participatory notes are popular because they provide a high degree of anonymity (now changed by SEBI order of KYC norms), which enables large hedge funds to carry out their operation without disclosing their identity and the source of funds. 

17. PROTECTIONISM : 

A policy where in a country tries to shield its own industries from international competition. These are formulated to give impetus to domestic economy and entails the adoption of certain practices to drive growth and allow for domestic development e.g. imposing import tariff to discourage import; creating domestic subsidies to encourage competition against foreign goods etc.  

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