Trends in economy development

KROK Economics and Law University

International Relations Faculty

 

International Economics and Business Department

Research Paper:

„The role of foreign trade for the Ukraine’s economy”

 

4nd year student of “International Economics  KROK Exclusive” Programme:         Anna Posikera       _____________________ (signature)       KYIV - 2012

Scientific advisor:   _________________       Alkhovitska Olena Evgenivna   _________________   _____ (resolution „For defense”)   __________  ___________ (date)  (signature)

PLAN

Introduction................................................................................................................3

CHAPTER 1. Foreign trade as system of economic relations...................................5

1.1. Essence and theories of foreign trade........................................................ ......5-8

1.2. Government control of foreign trade...............................................................9-10

Conclusions to Chapter I……………………………………………………….......11

CHAPTER 2.The position of Ukraine in modern foreign trade…… …….....….…12

2.1. Factors of Ukraines foreign trade development…………………………...12-15

2.2. Evaluation of import and export potencial of Ukraine …………………...16-19

2.3. Trade of Ukraine at the international markets………………………….....20-31

Conclusions to Chapter II…………………………………………………..…..…32

CHAPTER 3. The problems of Ukraine's foreign trade development.…………...33

Conclusions to Chapter III……………………………………………………..…35

Conclusion…………………………………………………………………....…...36

References…………………………………………………………………….…..37

 

 

 

 

 

 

 

Introduction

 

Foreign trade is a major driver of economic growth in any country of the world. From the value of net exports depends not only the state of the balance of payments of the country, the situation in its foreign exchange market, the dynamics of the exchange rate and gross international reserves, but the country's ability to maintain economic independence, maintain external public debt at a safe level for the country, preventing the achievement of critical value of borrowings the global financial market. Therefore, effective management of export-import activities of economic actors at the macro level in order to maintain its rational structure and commodity trade balance at an optimum level for the economy is an urgent task of economic policy.

Background in modern terms is quite important, because that foreign trade is the basis of trade between countries. The general form of international trade is the means by which countries can develop specialization, to improve the productivity of their resources and thus increase total production. Sovereign state, as some regions of the country, can benefit through specialization of products, what they can do with the greatest relative efficiency and the subsequent exchange of goods that they are not in a position to effectively do.

The subject of the course work is foreign trade as a factor in economic development.

The object of study is an export-import operations in Ukraine.

The aim is to identify ways of improving Ukraine's foreign trade.

The urgency of the work is that at this time in our country, the real prospects for a truly open economy, its effective integration into the world economy. Active use of external factors contributes to overcoming the negative processes in the economy and further development of market relations.

The work consists of three parts, which consistently explored the role of foreign trade in economic development of Ukraine.

In the first chapter I will tell you about “Foreign trade as system of economic relations”. After that I will move on to “Analysis of the role of Ukrainian foreign trade at the present stage”. And then I will give you some background about “Trends and problems in development of Ukraine's foreign trade”.

To conclude I would like to say that today the issue of foreign trade of Ukraine is very important and needs special attention, that is why I chose the topic for my course work, named „The role of foreign trade for the Ukraine s economy ”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CHAPTER 1

Foreign trade as system of economic relations

1.1. Essence of foreign trade

Foreign policy of any state concentrates on such questions: what goods to export and import that with which further improve information: what products to export and import that with which countries to trade and to what extent, if you want the state to intervene in free flow of goods, and if so, to what extent?

Today, developed two types of trade theory, which in many ways answer these questions. According to the theories of the first type of state is be involved in trade. These theories and study explain which products and to what extent the country and who will traded without any government restrictions. These theories include: the theory of absolute advantage, comparative advantage, country size, proportion of production, product life cycle, similarity of countries' international competitiveness of nations and so on. The second type of theories involves government intervention in the free flow of goods between countries to change the volume, composition and direction of trade.       The purpose of theories of international trade was and is to help companies and governments in choice of specialization and the most expedient option strategies to promote deliberate use of national resources.[12]

Theory of absolute advantage

The founder of classical school of economic thought was Adam Smith (1723-1790). He declared that the basis of wealth nations and peoples is an international division of labor and an appropriate specialization of different countries in producing those goods for which they have absolute advantage.

The theory of absolute advantage is based on two assumptions: 
1) the only factor of production is labor;

2) full employment, that all available labor used in producing goods;

3) global economy has two countries, so international trade involved only two countries that produce and sell with each other only two goods;

4) production costs - permanent and their reduction increases demand for goods;

5) the price of one good expressed in amount of labor required to produce other;

6) transportation costs of transportation of goods from one country to another is zero; 
7) foreign trade is free from restrictions and regulations.

The advantage of the theory of absolute advantage is that it is based on labor theory of value and confirms the advantages of division of labor not only nationally but also internationally.

The disadvantage of this theory to explain international trade is that it does not answer the question why countries trade among themselves even the absence of absolute advantage in producing certain goods, is when one country has absolute advantage in producing all goods.

The theory of comparative advantage

The theory of absolute advantage A. Smith, David Ricardo developed (1772-1823), proving that absolute advantage is only a partial case of general rules.

Advantages of the theory of comparative advantage:

1) first described the balance of aggregate demand and aggregate supply. Although It was envisaged that the cost of goods determined by the amount of work, necessary for its production, the theory of comparative advantage showed that the cost really depends on the ratio of aggregate demand and offers the goods on the domestic and foreign markets;

2) proved existence of gains from specialization and trade for all member countries, not just one country due to the fact that others suffer losses;

3) allows you to conduct scientifically based foreign policy;

Shortcomings of the theory of comparative advantage resulting from these assumptions, the which it is based.

Therefore, applying it to analyze foreign economic relations should take into account that it:

1) No takes into account transport costs.

2) Ignores the impact of foreign trade on income distribution within countries, fluctuations in prices and wages, inflation and international capital flows.

3) Based on the assumption existence of only one factor of production - labor.

4) Ignore existence of such important conditions of international trade, the differences in the provision of inputs.

5) Based on the premise full employment, which means that one industry workers freed can immediately find jobs in other, more productive. In other words, an assumption about fixed costs and therefore ignored law costs are rising.

6) Do not explain trade between approximately equal in economic development, none of which has relative advantage over another.[23]

Current theories of international trade

Current theories of international trade can be grouped in two main areas: Keynesianism and Monetarism (neoclassicism).

Keynesianism - macroeconomic theory, which emerged as a response 
economic theory on the Great Depression in the United States. Of this work was work “General Theory of Employment percent and Money” by John Maynard Keynes.

The essence of Keynesianism. The market is characterized by balance, which provides full employment. The reason is - a tendency to keep some profits which leads to the fact that the total demand less than the total supply.

Keynes proposed the following output. If the mass consumer is not able revive the total demand in the scale of national economy, it should make state. If the state will do (and pay) great entrepreneurs order that will cause additional hiring labor. Getting salaries cost, past unemployed will increase their spending on consumer goods and this will increase overall economic demand, and this in turn will increase total supply of goods and services and economic recovery.

Monetarism - macroeconomic theory, one of the main areas neo-conservative economic thought. It appeared in 1950 as a series empirical research in the field of currency circulation.

Key provisions

1. Regulating role of state in the economy should be limited to control over monetary circulation.

2. Market economy - self-regulatory system. All the negative signs related to stay overweight state in the economy.

3. Money supply to affect the consumers' firms. Increase 
money supply leads to the growth of production, and after full 
loading of opportunities - to inflation and prices.

4. Inflation must be overcome by any means, including a 
by reducing social programs.

5. When choosing a money growth rate should rule "Mechanical" money supply growth, which would reflect two factors: level of expected inflation and the growth rate of public product.

According to the views of monetarist money is the main area which sets the movement and production development. The demand for money is constant tend to increase and to ensure consistency between the demand for money and their proposal to conduct a course for gradual increase money in circulation. State regulation should be limited to control over money turnover.[2]

 

 

 

 

 

 

 

 

 

 

 

 

1.2. Government control of foreign trade

Foreign trade policy subdivided into following basic groups: tariff (custom duties) and non-tariff (quantitative restrictions, other non-tariff methods, trading - political methods of stimulation of export, trading contracts and agreements).

Tariff regulation    

 Custom duties are a list of the customs duties with which the goods are assessed at their import and export. The customs duties represent some kind of the tax raised at crossing by the goods of customs border the one who these goods import or take out. The customs duties raise goods cost as the exporter (importer) it is compelled to compensate the expenses on payment of the duty at the expense of increase in the price at the goods. High import duties make foreign goods noncompetitive in home market and used for protection of national manufacturers of the similar goods.    

Duties: ad value - raised in percentage of goods cost; specific - raised in the form of a certain sum of money from weight, volume or goods piece; mixed, a simultaneous application ad value and specific duties.

According to this law the Custom duties of Ukraine are systematized according to the Ukrainian classification of the goods of foreign trade activities - the list of rates of the import customs duties raised from the goods which are imported on customs territory of Ukraine.

The Ukrainian classification of the goods of foreign trade activities (national variant of the qualifier of the Commodity nomenclature of foreign trade activities) which is based on Harmonized system of the description and coding of the goods of 2007 is put in a basis of the commodity classification scheme of Custom duties of Ukraine (the commodity nomenclature).

The duty which is subject to payment, pays off customs body under the rates of the tariff operating at date of giving of the customs declaration.

The custom duties rates of  Ukraine are divided as follows:

• Preferential rates, including clearings of duty payment, are applied to the goods occurring from the countries, entering together with Ukraine in the customs unions or forming special zones or to which the special mode according to the international contracts is given, and also an origin from a number of developing countries;
• Preferential rates are applied to the goods occurring from the countries, using on Ukraine by a most favored nation treatment;
• Full rates are applied to other goods. [8]

Non-tariff regulation

Quantitative restrictions, other non-tariff methods, trading-political methods of stimulation of export, trading contracts and other non-tariff methods of regulation of foreign trade activities. Quantitative restrictions include quota and licensing.

Quotas are limiting volumes of the certain goods which are authorised for importing to (export) on territory of the country during certain term. Quotas are individual, limiting import (export) in one concrete country; group, establishing volume of import (export) in certain group of the countries, and also global when import (export) is limited without instructions of the countries on which this restriction extends.

Licences are permissions to import (export) of the goods during any time, given out by competent bodies (Ministry of Economy).

Licences are general which represent permissions to import (export) operations with the certain goods during all period of validity of a mode of licensing. Besides, licences are individual, resolving to one subject of enterprise activity realisation of one import (export) operation on the licensed goods. Licences establish volumes of the imported (taken out) goods in quantitative expression when it is authorised to import to (take out) certain quantity of the goods, or cost expression when under the licence it is possible to import to (take out) the goods for the certain sum.

Quotas and licenses limit independence of businessmen concerning a choice of the market and trade volume, however, these kinds of the external economic regulation have gained now the greatest distribution. [3]

 

 

 

 

Conclusions to Chapter I

 

According to the results of theoretical studies determined that foreign trade is the relationships between the trade community sailing of goods, capital, labor and services.

Foreign trade includes all metabolic activity in both goods and other products of human labor. Moreover, foreign trade covers items that are not created by people, and sometimes not at all accessible to people (eg, land on the moon). That whole foreign trade can be defined as a system of exchange relations issues (sales) that arise and exist between the trade community and based on the international division of labor.

The current mechanism of foreign relations in Ukraine, reflecting the social, economic, socio-political and other interests (which create incentives for change, or vice versa, saving previous state) is inefficient both in terms of compliance with the challenges of globalization and economic development in general. This means that Ukraine today is not hurt does not show obvious need for quality economic development. Social, technological attractiveness living standards of the leading countries not transformed the economic demand for institutions and mechanisms for the development of these standards. Ukraine seeks declaratory development, but maintaining the existing traditions and practices.

 

 

 

 

 

 

 

 

CHAPTER 2. The position of Ukraine in modern foreign trade

2.1. Factors of Ukraines foreign trade development

First of all, unlike the fall of 2008, Ukraine is still excluded from the economic crisis that struck the European Union and other Western countries and is already beginning to have a negative impact on China and other East Asian countries. 
According to the Cabinet of Ministers, Ukraine's GDP growth in 2011 will be 5%. IMF and European Bank for Reconstruction and Development in October predicted 4.5%, but it is quite good results compared to most of our neighbors, such as the European Union (1.6%) and Russia (4,1-4,4%).

Fig.1. Import and export of Ukraine in 2012

The increase in industrial production in Ukraine is forecasted at 7.5%, with the best performance, according to Goskomstat made in areas that produce products with high added value: machinery, petroleum and chemical industries. Ukrainian exports in the first ten months of 2011 increased by more than a third as compared with the same period a year ago, and in Europe and the CIS - more than 40%. 
Government and the National Bank of Ukraine has managed to maintain the stability of the national currency. Exchange rate against the dollar remained constant throughout the year. Thus, the foreign exchange market did not arise nor excitement, no serious panic. Inflation is estimated to Cabinet fell to its lowest level during the existence of independent Ukraine and should be in 2011, about 5% (although the value deflator GDP in January-November amounted to 13.5%, so not everything is so simple). 
External debt can keep under control. For the first three quarters of its gross was $ 123.1 billion, less than 78% of GDP. Much, of course, but by world standards, not worst. 
In 2012 Cabinet promises budget deficit not exceeding 2.5% of GDP (in 2011 it was 3.5%), increased the minimum wage by 14% and pensions by 11%. Despite the rise in imported natural gas, the government has repeatedly stated that the cost to the public, as well as utility rates in the near future will not rise.[9]

Thus, the current position, according to official communiques and figures pretty good. However, any process should be considered in the dynamics, but here the situation is not so good.

Another refrain entire year took issue talks about lower prices for Russian gas. Thus, the Ukrainian side has repeatedly made statements that coveted deal "is about to be concluded." As a result, in 2012 Ukraine begins with the prices of imported gas in excess of $ 400 per 1 thousand cubic meters most worryingly, expect lower gas prices due to "natural" causes, however. Despite the crisis in Europe, the price of oil on the world market is held at around $ 100 per barrel (if you want to get the price of gas for Ukraine after 9 months, multiply that number by about four) and lowered obviously will not. Firstly, the high cost of oil is determined by growing demand from China and other emerging market countries. Secondly, it is necessary and Western oil and gas corporations, forced to develop less accessible deposits of high cost of production. For the Ukrainian economy expensive natural gas - is a serious problem. Firstly, a further increase in trade deficit is larger for the first eleven months of 2011 totaled nearly $ 12.8 billion in long term chronically scarce trade - is a sure way to increase the foreign debt and the devaluation of the hryvnia.

Second, a sharp increase utility bills for households. While the government supports "Naftogaz of Ukraine" afloat by constant infusion of funds and foreign loans, but sooner or later the government will have to either raise gas prices for industry to openly exorbitant $ 520-550 per 1 thousand cubic meters to keep subsidizing public and utility companies or raise rates for the last 3-5 times.

Thirdly, a decline in the competitiveness of Ukrainian industry. Expensive gas significantly increases the cost of Ukrainian metals, chemicals, cement, sugar and many other commodities. This will reduce the already small share of profits of Ukrainian enterprises, which is to modernize and create new jobs. However, high gas prices - this is not the only problem that full-length to face the Ukrainian economy in 2012. 
The growing trade deficit Ukraine caused not only a rise in gas. In our country have forgotten how or never really could not do many things that are needed for everyday life.

For Ukraine's success in international markets required a significant adjustment of foreign policy in the following strategic areas: