UNIT – I

BASIC ECONOMIC CONCEPTS

What Is Economics?

Economics is a social science concerned with the production, distribution, and consumption of
goods and services. It studies how individuals, businesses, governments, and nations make
choices on allocating resources to satisfy their wants and needs, trying to determine how these
groups should organize and coordinate efforts to achieve maximum output.

It is the study of how people allocate scarce resources for production, distribution, and
consumption, both individually and collectively.

Economics is especially concerned with efficiency in production and exchange and uses models
and assumptions to understand how to create incentives and policies that will maximize
efficiency.

Economists formulate and publish numerous economic indicators, such as gross domestic
product (GDP) and the Consumer Price Index (CPI).

Capitalism, socialism, and communism are types of economic systems.

Economics can generally be broken down into

 Microeconomics
 Macroeconomics

Microeconomics is the study of decisions made by people and businesses regarding the
allocation of resources, and prices at which they trade goods and services. It considers taxes,
regulations and government legislation.

Microeconomics focuses on supply and demand and other forces that determine price levels in
the economy. It takes a bottom-up approach to analyzing the economy. In other words,
microeconomics tries to understand human choices, decisions and the allocation of resources.

Having said that, microeconomics does not try to answer or explain what forces should take
place in a market. Rather, it tries to explain what happens when there are changes in certain
conditions.

For example, microeconomics examines how a company could maximize its production and
capacity so that it could lower prices and better compete. A lot of microeconomic information
can be gleaned from company financial statements.

Microeconomics involves several key principles, including (but not limited to):
  Demand, Supply and Equilibrium: Prices are determined by the law of supply and
demand. In a perfectly competitive market, suppliers offer the same price demanded by
consumers. This creates economic equilibrium.
 Production Theory: This principle is the study of how goods and services are created or
manufactured.
 Costs of Production: According to this theory, the price of goods or services is
determined by the cost of the resources used during production.
 Labor Economics: This principle looks at workers and employers, and tries to
understand patterns of wages, employment and income.

Macroeconomics, on the other hand, studies the behavior of a country and how its policies
impact the economy as a whole. It analyzes entire industries and economies, rather than
individuals or specific companies, which is why it's a top-down approach. It tries to answer
questions such as, "What should the rate of inflation be?" or "What stimulates economic
growth?"

Macroeconomics analyzes how an increase or decrease in net exports impacts a nation's capital
account, or how gross domestic product (GDP) is impacted by the unemployment rate.

Macroeconomics focuses on aggregates and econometric correlations, which is why

governments and their agencies rely on macroeconomics to formulate economic and fiscal
policy. Investors who buy interest-rate sensitive securities should keep a close eye on monetary
and fiscal policy. Outside a few meaningful and measurable impacts, macroeconomics doesn't
offer much for specific investments.

MARITIME ECONOMICS

Maritime economics concentrates on the economic decisions of shipping and shipping related
companies. It covers also all other maritime related activities and sectors, on which decisions are
dependent to various degrees.

Maritime economics is a tool, which can be used to enable decision makers to understand the
relationship between economic variables within a shipping company and outside it between the
shipping company and other relevant organizations. So the limited resources can be best utilized
for achieving the corporate goal.

Maritime is a word with a broad sense, which covers many aspects related to the sea often
beyond purely transportation. However, maritime economics, which is referred to and discussed
hereafter, is exclusively limited to transportation and the directly related activities. A more
accurate name should be: Maritime Transport Economics.

Maritime transport is a complex system, which can be subdivided into several groups of
activities around and in support of the core activity; the movement of cargo by sea. These
supporting activities are vital to the shipping industry although they often independently
operated. These activities are basically either related to ships or cargo. Maritime economics is
interested in those activities are basically either related to ships or cargo. Maritime economics is
interested in those activities as well.

The following Graph shows the relationship between the sea transport and the related maritime
activities and between shipping companies and the various organizations.

Trade

Trade is a basic economic concept involving the buying and selling of goods and services, with
compensation paid by a buyer to a seller, or the exchange of goods or services between parties.
Trade can take place within an economy between producers and consumers.

Trading globally between nations allows consumers and countries to be exposed to goods and
services not available in their own countries. Almost every kind of product can be found on the
international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies, and water.
Services are also traded: tourism, banking, consulting, and transportation. A product that is sold
to the global market is an export, and a product that is bought from the global market is an
import. Imports and exports are accounted for in a country's current account in the balance of
payments.

INTERNATIONAL TRADE

International trade allows countries to expand their markets for both goods and services that
otherwise may not have been available domestically. As a result of international trade, the
market contains greater competition, and therefore more competitive prices, which brings a
cheaper product home to the consumer.

International trade not only results in increased efficiency but also allows countries to participate
in a global economy, encouraging the opportunity of foreign direct investment (FDI), which is
the amount of money that individuals invest into foreign companies and other assets. In theory,
economies can, therefore, grow more efficiently and can more easily become competitive
economic participants. For the receiving government, FDI is a means by which foreign currency
and expertise can enter the country. These raise employment levels, and, theoretically, lead to a
growth in the gross domestic product. For the investor, FDI offers company expansion and
growth, which means higher revenues.

TRADE DEFICIT

Trade deficit occurs when a country's imports exceed its exports during a given time period.

A trade deficit is a situation where a country spends more on aggregate imports from abroad
than it earns from its aggregate exports. A trade deficit represents an outflow of domestic
currency to foreign markets. This may also be referred to as a negative balance of trade (BOT).

Factors affecting the International trade:

International trade can significantly affect a country’s economy, it is important to identify and
monitor the factors that influence it.

1) Impact of Inflation:

If a country’s inflation rate increases relative to the countries with which it trades, its current
account will be expected to decrease, other things being equal. Consumers and corporations in
that country will most likely purchases more goods overseas (due to high local inflations), while
the country’s exports to other countries will decline.

2) Impact of National Income:

If a country’s income level (national income) increases by a higher percentage than those of
other countries, its current account is expected to decrease, other things being equal. As the real
income level (adjusted for inflation) rises, so does consumption of goods. A percentage of that
increase in consumption will most likely reflect an increased demand for foreign goods.

3) Impact of Government Policies:

A country’s government can have a major effect on its balance of trade due to its policies on
subsidizing exporters, restrictions on imports, or lack of enforcement on piracy.

4) Subsidies for Exporters:

Some governments offer subsidies to their domestic firms, so that those firms can produce
products at a lower cost than their global competitors. Thus, the demand for the exports produced
by those firms is higher as a result of subsidies.

Many firms in China commonly receive free loans or free land from the government. These firms
incur a lower cost of operations and are able to price their products lower as a result, which
enables them to capture a larger share of the global market.

5) Restrictions on Imports:

If a country’s government imposes a tax on imported goods (often referred to as a tariff), the
prices of foreign goods to consumers are effectively increased. Tariffs imposed by the U.S.
government are on average lower than those imposed by other governments. Some industries,
however, are more highly protected by tariffs than others. American apparel products and farm
products have historically received more protection against foreign competition through high
tariffs on related imports.

In addition to tariffs, a government can reduce its country’s imports by enforcing a quota, or a
maximum limit that can be imported. Quotas have been commonly applied to a variety of goods
imported by the United States and other countries.

6) Lack of Restrictions on Piracy:

In some cases, a government can affect international trade flows by its lack of restrictions on
piracy. In China, piracy is very common; individuals (called pirates) manufacture CDs and
DVDs that look almost exactly like the original product produced in the United States and other
countries. They sell the CDs and DVDs on the street at a price that is lower than the original
product. They even sell the CDs and DVDs to retail stores. It has been estimated that U.S.
producers of film, music, and software lose $2 billion in sales per year due to piracy in China.

As a result of piracy, China’s demand for imports is lower. Piracy is one reason why the United
States has a large balance-of-trade deficit with China. However, even if piracy were eliminated,
the U.S. trade deficit with China would still be large.

7) Impact of Exchange Rates:

Each country’s currency is valued in terms of other currencies through the use of exchange rates,
so that currencies can be exchanged to facilitate international transactions.

Demand

Demand for particular products or services are an essential component of international trade. For
example, the demand for oil affects the price and thus, the trade balance of oil-exporting and oil-
importing countries alike. If a small oil importer faces a falling oil price, its overall imports
might fall. The oil exporter, on the other hand, might see its exports fall. Depending on the
relative importance of a particular good for a country, such demand shifts can have an impact on
the overall balance of trade.

FACTORS OF PRODUCTION

In economics, factors of production, resources, or inputs are what is used in the production
process to produce output—that is, finished goods and services. The utilized amounts of the
various inputs determine the quantity of output according to the relationship called the
production function.

Scarcity arises from the shortage of resources. Economists call resources Factors of production’.
Resources must be understood to mean not just raw materials, but also services, infrastructure,
Capital, work force and anything else needed to produce goods. All factors of production are
combined in an economy to produce a range of goods and services to satisfy demand.

The factors of production are generally divided into:

• land;

• labor;

• Capital;

• enterprise.

The factors are also frequently labeled "producer goods or services" to distinguish them from the
goods or services purchased by consumers, which are frequently labeled "consumer goods".

Land

The term land includes all natural resources which have been termed gifts of nature. In this
context, natural resources include mineral deposits such as oil, coal or iron ore, agricultural land,
forests and building sites. Hence it comprises both the space required for production and specific
raw materials. These resources are in limited quantities at any given time. Land, therefore, can be
defined precisely as the limited source of raw materials and the area in which production can be
organized.
Labour

This is the fundamental factor of production, being the human physical effort, skill and
intellectual power that people apply to the production of goods and services. Labour, therefore,
may be defined as the peoples physical and mental contribution to production.

The quantity and quality of labour will vary from nation to nation. It will depend on such things
as the age profile of the population. The availability of educational opportunities and the
political, social and cultural structure of particular societies. In a similar way to land, labour will
be limited in both quality and quantity at any given time.

Capital

Capital, or Capital assets, is the stock of all material goods or material resources used in
production. It is a characteristic of Capital goods that they are not usually wanted for their own
sake, rather for the contribution they make to production. It is the stock of machinery,
equipment, buildings, roads, coal mines, oil wells, ships and so on. Capital is created using
resources to increase the value or productivity of land and labour resources Capital can also refer
to financial Capital, the investment necessary for production to occur.

Enterprise

As production processes have become more and more complex, the need for better organization
is more and more apparent. Enterprise combines the previous three factors into one working
production process. Without it, production might not be possible. The entrepreneur provides the
structure for production and brings together the needed raw materials, labour, and Capital.

The total stock of the factors of production, or resources, determines what an economy can
produce. Each country has varying totals of resources. This must be seen against the fact that
very few productive processes require a strictly fixed proportion of each factor. The proportion
of factors of production used in a particular process usually depends upon which factors are most
abundant, such as the cheapest.

FACTORS OF UTILITY AND PRICE

Utility and price, in economics, it is defined as, the determination of the prices of goods and
services. Utility is a term in economics that refers to the total satisfaction received from
consuming a good or service. Economic theories based on rational choice usually assume that
consumers will strive to maximize their utility.

Utility, in economics, refers to the usefulness or satisfy a consumer can get from a service or
good.

The economic utility of a good or service is important to understand, because it directly

influences the demand, and therefore price, of that good or service. In practice, a consumer's
utility is impossible to measure and quantify. However, some economists believe that they can
indirectly estimate what is the utility for an economic good or service by employing various
models.

In microeconomics, utility represents a way to relate the amount of goods consumed to the
amount of happiness or satisfaction a consumer gets. Marginal utility (tells how much
marginal value or satisfaction a consumer gets from consuming an additional unit of good).
The concept of marginal utility is used by economists to determine how much of an item
consumers are willing to purchase.

Positive marginal utility occurs when the consumption of an additional item increases the total
utility. On the other hand, negative marginal utility occurs when the consumption of one more
unit decreases the overall utility.

Microeconomic theory states that consumer choice is made on margins, meaning consumers
constantly compare marginal utility from consuming additional goods to the cost they have to
incur to acquire such goods. A consumer buys goods as long as the marginal utility for each
additional unit exceeds its price. A consumer stops consuming additional goods as soon as the
price exceeds the marginal utility.

Factors of opportunity cost

Opportunity cost is a key concept in economics, and has been described as expressing "the basic
relationship between scarcity and choice".

Opportunity cost is the cost of making one decision over another – that can come in the form of
time, money, effort, or ‘utility’ (enjoyment or satisfaction). We make these decisions every day
in our lives without even thinking. A benefit, profit, or value of something that must be given up
to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to
alternative uses, every action, choice, or decision has an associated opportunity cost.

When we make a purchasing decision, we subconsciously consider several factors before making
a decision. However, because we make so many decisions every day, our brain stores previous
decisions we made and uses them to help speed up the decision process. Our brains
simultaneously consider factors such as time, effort, and money. This then allows us to come to a
decision which best optimizes how much we value each of these factors.

Opportunity cost requires trade-offs between two or more options. One is chosen and the others
are foregone. In economics, it is assumed that this chosen option is the most valued and most
optimal. So when a consumer purchases a Starbucks, its value is greater than the $5 paid for it.
The value that the consumer receives is known as the consumer surplus, which is simply the
additional value they receive from consuming the product below their willingness to pay. .

Economists often refer to the opportunity cost as the next best alternative that is foregone.
Just think of a time when you went into a store and they did not have the item you want in stock.
You may very well choose a close substitute instead. This is the next-best product but is one that
you usually forego. This is generally considered as the opportunity cost but is commonly
considered using four variables.

The notion of opportunity cost plays a crucial part in attempts to ensure that scarce resources are
used efficiently. It not restricted to monetary or financial costs: the real cost of output forgone,
lost time, pleasure or any other benefit that provides utility should also be considered an
opportunity cost.

The opportunity cost of a product or service is the revenue that could be earned by its alternative
use.

PRICE MECHANISM

Price mechanism refers to the system where the forces of demand and supply determine the
prices of commodities and the changes therein. It is the buyers and sellers who actually
determine the price of a commodity. It acts as the outcome of the free play of market forces of
demand and supply. However, sometimes the government controls the price mechanism to make
commodities affordable for the poor people too.

Price mechanism is the manner in which the profits of goods or services affect the supply and
demand of goods and services, principally by the price elasticity of demand. A price mechanism
affects both buyer and seller who negotiate prices. A price mechanism, part of a market system,
comprises various ways to match up buyers and sellers.

The price mechanism is an economic model where price plays a key role in directing the
activities of Manufacturer, consumers, and resource suppliers. An example of a price mechanism
uses announced bid and ask prices. Generally speaking, when two parties wish to engage in
trade, the purchaser will announce a price he is willing to pay (the bid price) and the seller will
announce a price he is willing to accept (the ask price).

The primary advantage of such a method is that conditions are laid out in advance and
transactions can proceed with no further permission or authorization from any participant. When
any bid and ask pair are compatible, a transaction occurs, in most cases automatically.

Under a price mechanism, if demand increases, prices will rise, causing a movement along the
supply curve.

For example: the oil crisis of the 1970s drove oil prices dramatically upwards, which in turn
caused several countries to begin producing oil domestically.
A price mechanism affects every economic situation in the long term. Price Mechanism plays a
vital role in determining prices in a capitalist economy. An example of the effects of a price
mechanism, in the long run, involves fuel for cars. If fuel becomes more expensive, then the
demand for fuel would not decrease fast but eventually, companies will start to produce
alternatives such as biodiesel fuel and electrical cars.

A price mechanism is a system by which the allocation of resources and distribution of goods
and services are made on the basis of relative market price. There are two important elements of
price mechanism –

1. PRICES - prices are essence of price mechanism. price mechanism works through prices in a
free enterprise economy, where all goods and services carry price tags with them. a whole set of
prices prevail in such an economy. goods and services are available at a price because it involves
cost in producing these goods and services. consumers have to pay some prices if they want to
buy some goods like food, clothes, etc. producers are willing to sell goods and services only if
they get the appropriate price.

2. MARKET - forces of demand and supply operate within the framework of market. market
constitute an integral part of the price mechanism

Demand (D) is a schedule that shows the various amounts of product consumers are willing
and able to buy at each specific price in a series of possible prices during a specified time period.

The concept of demand in economics is not just need, desire, or want. It is all these things
backed up by a willingness and ability to pay the price. This is known as effective demand, but is
generally referred to simply as demand. It expresses the quantity of a commodity which
consumers are prepared to buy over a range of prices. The two factors of primary interest are the
price and quantity demanded.

Quantity demanded (Qd) is the amount of a good or service that individuals are willing and
able to buy at a particular price at a particular time.

DEMAND FACTOR

The demand changes as a result of changes in price, other factors determining it being held
constant.

These other factors determine the position or level of demand curve of a commodity.

1. Tastes and Preferences of the Consumers

2. Income of the People
3. Changes in Prices of the Related Goods
4. Advertisement
5. The Number of Consumers in the Market
 6. Consumers’ Expectations with Regard to Future Prices

Supply
This refers to the quantity of a product that will be offered on the market at a given price during a
particular time period. The law of supply states that more of a commodity will be supplied at a
higher price than at a lower one. It is important to note here that the supply schedule derived in
this section is based upon the assumption that the market is a perfectly competitive one. While
accepting that the cruise industry does not fit this model perfectly, it is still a useful model to
develop because it is one of the few shipping markets that impinges directly upon the final
consumer

What Is the Law of Supply and Demand?

The law of supply and demand is a theory that explains the interaction between the sellers of a
resource and the buyers for that resource. The theory defines what affect the relationship
between the availability of a particular product and the desire (or demand) for that product has on
its price. Generally, low supply and high demand increase price and vice versa.

 The law of demand says that at higher prices, buyers will demand less of an economic
good.
 The law of supply says that at higher prices, sellers will supply more of an economic
good.
 These two laws interact to determine the actual market prices and volume of goods that
are traded on a market.
 Several independent factors can affect the shape of market supply and demand,
influencing both the prices and quantities that we observe in markets.

COMPETITIVE MODEL

There are two participants in the market i.e. Producers and Consumers. There are a large number
of buyers and sellers in a competitive market and thus they compete among themselves.
Producers compete with each other by providing the desired products to the consumers at the
lowest possible price and the consumers compete with one another by paying the price for the
products they are willing to buy, while others may not be able to afford the product. This is
known as the basic competitive model.
The basic competitive model is the model which assumes that the firms are interested in profit
maximization, consumers are rational or self-interested and the markets are perfectly
competitive.

The consumers are assumed to be rational as they make choices in their own self-interest i.e. they
make a choice such that their satisfaction is maximized.

The firms are also assumed to be rational as they operate with the motive of profit maximization.
Perfectly competitive markets are those where a single producer have no power to set the price of
a product as there are many sellers selling homogeneous products and the market mechanism
(interaction between demand and supply) determines the price and quantity of the product.

There are 4 basic market competitive models: pure competition, monopolistic competition,
oligopoly, and pure monopoly. Because market competition among the last 3 categories is
limited, these market models are often referred to as imperfect competition.

Purely competitive market

In a purely competitive market, there are large numbers of firms producing a standardized
product. Market prices are determined by consumer demand; no supplier has any influence over
the market price, and thus, the suppliers are often referred to as price takers. The primary reason
why there are many firms is because there is a low barrier of entry into the business. The best
examples of a purely competitive market are agricultural products, such as corn, wheat, and
soybeans.

Monopolistic competition

Monopolistic competition is much like pure competition in that there are many suppliers and
the barriers to entry are low. However, the suppliers try to achieve some price advantages by
differentiating their products from other similar products. Most consumer goods, such as health
and beauty aids, fall into this category. Suppliers try to differentiate their product as being better,
so that they can justify higher prices or to increase market share.

Oligopoly

An oligopoly is a market dominated by a few suppliers. Although supply and demand influences
all markets, prices and output by an oligopoly are also based on strategic decisions: the expected
response of other members of the oligopoly to changes in price and output by any 1 member.
Auto manufacturers are a good example of an oligopoly, because the fixed costs of automobile
manufacturing are very high, thus limiting the number of firms that can enter into the market

Pure monopoly
A pure monopoly has pricing power within the market. There is only one supplier who has
significant market power and determines the price of its product. A pure monopoly faces little
competition because of high barriers to entry, such as high initial costs, or because the company
has acquired significant market influence through network effects, such as Facebook, for
instance.

One of the best examples of a pure monopoly is the production of operating systems by
Microsoft. Because many computer users have standardized on software products compatible
with Microsoft's Windows operating system, most of the market is effectively locked in, because
the cost of using a different operating system, both in terms of acquiring new software that will
be compatible with the new operating system and because the learning curve for new software is
steep, people are willing to pay Microsoft's high prices for Windows.

THE DEMAND FOR SHIPPING

Demand for shipping, like that for all forms of freight and passenger transport, results from the
final consumers' demand for goods. It is not a direct demand but a derived demand. Shipping is a
factor that is not in demand for its own sake but is derived from the demand for the goods that
are being transported. This discussion does not include any consideration of the cruise trade. This
demand is closely related to the growth in world income, particularly of that of the developed
world, which is the major influence on the level of seaborne trade. The average distance of hauls,
costs of transportation, and other factors, particularly international crises, have an important
impact on the levels of derived demand for shipping. In this chapter empirical evidence of trends
in the level of seaborne trade, and factors influencing it, will be related to a theoretical analysis
of demand.

What Is Derived Demand?

Derived demand is an economic term describing the demand for a good/service resulting from
the demand for an intermediate or related good/service. It is a demand for some physical or
intangible thing where a market exists for both related goods and services in question. The
derived demand can have a significant impact on the derived good's market price.

The demand for shipping is a derived demand as the product being consumed is not the
transport itself (except in passenger transport), but the goods that are being transported.

The shipping demand of the car industry is a very good example. Cars are produced all over the
world in a wide variety of makes and models. Not every country produces each make or model
and so cars need to be transported to satisfy customer demands.

Therefore, when demand for cars increases, demand for transport increases. For example if more
American families decide to order cars produced in Japan, Japanese cars will need to be
transported from Japan to the United States. To transport these cars more ships will have to be
chartered. Therefore, the transport by ship is a derived demand from the purchase of the car

Derived demand is a sort of demand for a service or goods that depends on the demands for the
outputs - so in the case of shipping demand, it depends on demand in the world for the goods
being shipped (e.g. as demand for grain trade increases, so demand for shipping grows with it).

Shipping is a derived demand, which means that shipping as an industry depending on people
who are willing to trade by sea using ships. The efficiency of it stimulates sea trade and even
though there are numerous factors that have their effect on shipping, ultimately it reacts to
demand and therefore grows in proportion with world trade.

FACTORS AFFECTING DEMAND FOR SHIPPING

AN ECONOMIC ANALYSIS OF THE DEMAND FOR SHIPPING

The demand for shipping is dependent upon the amount of international trade generated between
countries. Seaborne trade accounts for the bulk of international movements. About 75% of the
world trade volume is carried by sea. The level of demand is dependent on several factors, the
most important of which are:

• the level of world economic activity;

• the volume of seaborne trade generated and its major commodities;

• the distance over which the cargo is hauled;

• external factors and events.

These factors will be examined individually in the light of their importance in an economic
analysis of shipping demand.

World Economy

The most important single influence on ship demand is the world economy. Since the world
economy generates most of the demand for sea transport (import of raw materials for
manufacturing industry, trade in manufactured products), the growth of sea trade follows closely
the growth of world economy (growth of trade).

This is a major factor in the level of demand for seaborne trade. In the long run, it is dependent
upon elements such as the level of world population and changes in standards of living. In the
short run, a diversity of elements can be, and are, important. One study of the relative
contributions of economic growth, trade liberalization and transport cost reduction found that
70% of the observed increase in world trade was solely due to simple economic growth in the
relevant economies.
The best guides to changes and trends in the economy of the world or that of individual countries
are gross domestic product (GDP) and gross national product (GNP).

GDP is a measure of the total flow of goods and services produced by the economy, normally
calculated on an annual basis. It is obtained by adding together the value of output, that is, the
final consumption, investment goods, government consumption and investment and exports less
imports, at current market prices. It measures the level of economic activity within the national
frontiers of a country. It is gross because no allowance is made for the depreciation of Capital
goods and labour used in the production of those services. This explains why it is often referred
to as gross domestic value added.

GNP is the annual total of the goods and services produced in a country’s economy, valued at
current market prices. It includes incomes accrued from investments abroad less incomes earned
by foreigners in the domestic economy. It is gross domestic product plus net foreign investment
earnings earned on overseas assets owned by that country’s residents. It is national because it is a
measure of all resources controlled by its citizens, irrespective of the physical location of those
resources

Seaborne Commodity Trades

Maritime transport dominates international trade. It has been estimated that approximately 75%
of world trade by weight moves by sea, but, when measured in terms of value, the share falls to
approximately 60%.

The total volume of trade has more than doubled in the 20 years between 1995 and 2015, from
5,191 million tons to 10,956 million tones. Against the background of this increase were changes
in particular commodities’ contribution to the total. Crude oil declined from 28% to 11% of the
total. The five major dry bulk commodities (iron ore, coal, grain, bauxite/alumina, and
phosphate) increased their share from 21 % to 29%. The most noticeable change is that of
containers, which doubled its share from 1% to 16%, while other dry, mainly general cargo,
declined from 14% to 10%.

For industrial raw materials, processing before shipment can have a direct effect on the volume
of cargo shipped by sea and the type of ship required.

Average Haul

The demand for sea transport depends upon the distance over which the cargo is shipped. A ton
of oil transported from the Middle East to W.Europe via the Cape generates two or three times as
much demand for sea transport as the same tonnage of oil shipped from Libya to Marseilles.
Consequently the average haul in the oil trade depends upon the balance of output from the
groups of suppliers (Middle East, Alaska, North Sea, Mexico).

Sea transport demand is measured in terms of 'ton miles', which can be defined as the tonnage of
cargo shipped, multiplied by the average transportation distance.
Transport Costs

Many of the developments in sea trade depend on the economics of the shipping operation. Raw
materials will only be transported from distant sources if the cost of the shipping operation can
be reduced to an acceptable level or some major benefit is obtained in quality of product This
makes transport costs a significant factor for industry.

Improved efficiency, bigger ships and more effective organization of shipping operations have
brought about a steady reduction in transport costs and higher quality of service m and
contributed to the growth of international trade.

Political Events

Political developments may bring about a sudden and unexpected change in demand. The term
'political event' is used to refer to occurrences as a localized war, a revolution, government
policies, or the political nationalization of foreign assets.

Events of this type do not necessarily have a major impact on the ship demand in their own right
but their indirect consequences are significant.

International Effect:
a) Suez Canal opening and closure.
b) World War I & II.
c) Tap Line oil pipeline closure between Saudi Arabia and the Mediterranean.
d) OPEC production cut backs.

Localized effect:
a) Cuban crisis - sugar exports diverted to the USSR and China.

Competition

The demand for a specific shipping service can be influenced by competition from within the
shipping industry or from other transport modes. Demand will be determined by evaluation and
comparison of the following factors:

a) Level of quality of services.

b) Frequency of services.
c) Speed.
d) Freight costs.
e) Economies of scale.
f) Efficiency/ reliability.

In a free competition market, customers assess the above factors and decide which service best
suits their interests.
BASIC MEASURES OF ECONOMIC ACTIVITY (GNP AND GDP)

Both GDP and GNP are two of the most commonly used measures of a country's economy, both
of which represent the total market value of all goods and services produced over a defined
period.

Gross domestic product and Gross national product are both metrics used to measure a
country's economic output.

GDP measures the value of goods and services produced within a country's borders, while GNP
measures the value of goods and services produced by a country's citizens domestically and
abroad.

GDP is an important figure because it shows whether an economy is growing or contracting.

GDP is the most commonly used by global economies. The United States abandoned the use of
GNP in1991, adopting GDP as its measure to compare itself with other economies.

Gross Domestic Product

Gross domestic product is the most basic indicator used to measure the overall health and size of
a country's economy. It is the overall market value of the goods and services produced
domestically by a country. GDP is an important figure because it gives an idea of whether the
economy is growing or contracting.

Calculating GDP includes adding together private consumption or consumer spending,

government spending, capital spending by businesses, and net exports—(exports –imports).
Here's a brief overview of each component:

Consumption: The value of the consumption of goods and services acquired and consumed by
the country’s households. This accounts for the largest part of GDP

Government Spending: All consumption, investment, and payments made by the government
for current use

Capital Spending by Businesses: Spending on purchases of fixed assets and unsold stock by
private businesses

Net Exports: Represents the country’s balance of trade (BOT), where a positive number bumps
up the GDP as country exports more than it imports, and vice versa
Gross National Product

Gross national product is another metric used to measure a country's economic output. Where
GDP looks at the value of goods and services produced within a country's borders,

GNP is the market value of goods and services produced by all citizens of a country—both
domestically and abroad.

While GDP is an indicator of the local/national economy, GNP represents how its nationals are
contributing to the country's economy. It factors in citizenship but overlooks location. For that
reason, it's important to note that GNP does not include the output of foreign residents.

GNP can be calculated by adding consumption, government spending, capital spending by

businesses, and net exports (exports minus imports) and net income by domestic residents and
businesses from overseas investments. This figure is then subtracted from the net income earned
by foreign residents and businesses from domestic investment.

DERIVED DEMAND FOR SHIPPING

Earlier it was argued that normal effective demand was an expression of the quantity that
consumers are prepared to buy over a range of products, supported by the ability to pay. This
discussion examined the case of an imaginary cruise market where the consumers’ objective was
to have an enjoyable holiday, including in it a sea voyage back to the original point of
embarkation. Sea cruises are the exception and not to be confused with the pure transport activity
of the rest of the shipping industry. Demand for shipping is an indirect demand. Shipping IS seen
as an element in the process of production; demanded not for its own sake but for the
contribution it makes to the production of final consumer goods and services.

We illustrate the concept of derived demand with examples:

The demand from the final consumers for petrol to fill their car or motor cycle in Singapore. This
is related to the earlier derived demand for tankers to convey the oil from the producer in Kuwait
to the refinery and then to the distribution point.

The demand for a cup of coffee at the end of a meal in a restaurant in Glasgow is part of a
derived demand for tonnage to transport coffee from Brazil to the United Kingdom.

This is the essential difference from the cruise passenger market, whose final demand was a
satisfactory holiday on a cruise ship. To restate the definition, the derived demand for a factor
like shipping is dependent on the ultimate demand for the final consumer product. The derived
demand for dry cargo tonnage in conveying wheat comes directly from the final consumers'
demand for bread. Students will have perceived that the theoretical economic concept of derived
demand underlies much of the previous discussion of the importance of the relationship between
increased economic activity and the level of international seaborne trade.
Elasticity of Demand

Price elasticity of demand refers to the responsiveness of quantity demanded to a change of

price.

For maritime economics, elasticity of demand indicates the responsiveness of the demand for the
different shipping services to a change of the various freight prices. An increase of freight rates
will lead to a proportionate decrease in demand and vice versa.

The actual responsiveness of demand to changes in freight rates depends upon:

1. The availability of alternate transport modes (e.g. trains, air lines). The more elastic the
demand for services offered by one form of transport, the easier it is to substitute these services
by those of another form of transport.

2. The quality of services provided. The demand tends to be inelastic to changes in price, if the
quality of services provided is of high standard.

3. The time over which the adjustment occurs. Elasticity of demand tends to be greater the longer
the time over which adjustment occurs.

4. The actual income or any change to the income of people determining demand. The
smaller/larger the freight is in relation to the income, the more inelastic/elastic respectively will
demand be.

Understand demand measurement — distance, ton/miles and tonnes/kilometres.

Sea transport demand is measured in terms of 'ton miles', which can be defined as the tonnage of
cargo shipped, multiplied by the average transportation distance. Many of the developments in
sea trade depend on the economics of the shipping operation.

What is a tonne mile?

A statistical unit of freight transportation equivalent to a ton of freight moved one mile
compare car-mile

tonne-kilometer (tkm) — the unit of measurement used to measure the quantity and traffic of
transportation used in transportation statistics, planning, and their related fields.. It consists of
two parameters: tonne amount and distance in kilometers. So 2 tons of cargo transported for 2
kilometres is a 4 tonne-kilometres.

Tonnage is a measure of the cargo-carrying capacity of a ship. The term derives from the
taxation paid on tons or casks of wine. In modern maritime usage, "tonnage" specifically refers
to a calculation of the volume or cargo volume of a ship.
Tonnage measurements are governed by an IMO Convention (International Convention on
Tonnage Measurement of Ships, 1969 (London-Rules)), which applies to all ships built after July
1982.

Gross tonnage (GT) is a function of the volume of all of a ship's enclosed spaces (from keel to
funnel) measured to the outside of the hull framing. The numerical value for a ship's GT is
always smaller than the numerical values of gross register tonnage (GRT). Gross tonnage is
therefore a kind of capacity-derived index that is used to rank a ship for purposes of determining
manning, safety, and other statutory requirements and is expressed simply as GT, which is a unit
less entity, even though it derives from the volumetric capacity in cubic meters.

Net tonnage (NT) is based on a calculation of the volume of all cargo spaces of the ship. It
indicates a vessel's earning space and is a function of the moulded volume of all cargo spaces of
the ship.

A commonly defined measurement system is important, since a ship's registration fee, harbour
dues, safety and manning rules and the like may be based on its gross tonnage (GT) or net
tonnage (NT).

Gross register tonnage (GRT) represents the total internal volume of a vessel, where one
register ton is equal to a volume of 100 cubic feet (2.83 m3); a volume that, if filled with fresh
water, would weigh around 2.83 tonnes. The definition and calculation of the internal volume is
complex; for instance, a ship's hold may be assessed for bulk grain (accounting for all the air
space in the hold) or for bales (omitting the spaces into which bulk, but not baled cargo, would
spill). Gross register tonnage was replaced by gross tonnage in 1982 under the Tonnage
Measurement convention of 1969, with all ships measured in GRT either scrapped or re-
measured in GT by 1994.

Net register tonnage (NRT) is the volume of cargo the vessel can carry—that is, the gross
register tonnage less the volume of spaces that do not hold cargo (e.g., engine compartment,
helm station, and crew spaces, again with differences depending on which port or country does
the calculations). It represents the volume of the ship available for transporting freight or
passengers. It was replaced by net tonnage in 1994, under the Tonnage Measurement convention
of 1969.