India's trade with its South Asian neighbours: Conflict or Confidence Building?

Abstract

In the above example, India is more productive in both, chemicals as well as ceramics. However, while Bangladesh is thrice as productive domestically in respect to ceramics as compared to chemicals, India is only twice as productive in the same product relative to chemicals. It will be worthwhile for Bangladesh to specialise in the production of ceramics in which it has a comparative advantage and for India to specialise in the production of chemicals. Both countries stand to gain through trade provided that for each unit of chemical Bangladesh imports from India it has to part with less than three units of ceramics to India, while India, too, gains if for each unit of chemical it sells Bangladesh it can get more than two units of ceramics. Thus, when trade takes place, it benefits both parties when the ratio of exchange for each unit of chemicals varies between >2 and <3 units of ceramics. The exact rate of exchange would depend on relative bargaining power of the traders. A value nearer to 3 will indicate larger bargaining power for the Indian exporter, and a value nearer to 2 would indicate greater bargaining power for the Bangladeshi exporter. In general, if the relative gains are higher the lower the elasticity of demand for the product and the greater the value addition to the product. Thus, manufactured products generally fetch better exchange as compared to primary products.

Citation

Nath Mukherji, I. (2008), "India's trade with its South Asian neighbours: Conflict or Confidence Building?", Chatterji, M. and Jain, B.M. (Ed.) Conflict and Peace in South Asia (Contributions to Conflict Management, Peace Economics and Development, Vol. 5), Emerald Group Publishing Limited, Leeds, pp. 285-298. https://doi.org/10.1016/S1572-8323(08)05018-2