Question

Discuss how international factor movements can be seen as a substitute for international trade. How might they be seen as complements? How might trade barriers (or the lack of trade barriers) be related to this question.

Answer 1

International factor movement like FDI can act great substitute in place of international trade. India for special has trade deficit of 17 billion dollars in August 2018 and FDI has been around 22billion dollar in first half of 2018 itself.

This brings commodity prices to factor price equalization as international factord like FDI are substitute for trade of commodities which reduce overall demand of commodities and hence equalises prices with stability .

However for countries like CHina and its economic policies and ease of doing business the FDI is seen as complement to trade surplus where both have risen dramatically over years which has helped China to have forex reserves above 1 trillion dollars.

Trade barriers are biggest bottlenecks which increases trade deficit because of inter country relations and sanction and tarrriffs. These constraints make up for trade deficit and is one of reasons many economies open up FDI routes in various sectors such that international capital is invested for long term which offsets any trade deficit .