INTERNATIONAL TRADE

LEARNING OUTCOME 8

THE BENEFITS OF TRADE• Absolute Advantage

• Comparative Advantage

• Economies of Large Scale

When a country can produce goods that another country cannot or can produce more with the same resources.

When a country gives up less of something else to produce a given quantity ie the production has a lower opportunity cost than another country.

Firms make savings through specialisation and large scale production - so do countries

• Strengthened Links

Countries tend to build up stronger political, cultural andeconomic links with countries they trade with.

FREE TRADE

Because of the benefits already listed, countries and theworld gains from allowing all countries to trade freely.

However, in reality there are many examples of traderestrictions which prevent free trade from operating.

Some trade restrictions or methods of protection are:

• Embargo- a complete ban on trade with another country• Quotas - a limit on the amount imported• Tariff- a duty or tax on imports to raise their sale price

• Currency Restrictions - also known as exchange control where a country’s currency is made hard to obtain• Prior-to-Import Deposits - importer must deposit a percentage of the purchase price into a special account. Can limit imports by increasing the percentage required.

THE BALANCE OF PAYMENTS

The record of a countries trade is known as the:-

Balance of Payments which is divided into 2 main sections:-The Current Account:-

shows the trade in visibles (goods), invisibles (services)and investments (eg property)

The Capital Account:-

shows the movement of money in and out of a country

for investment in productive capacity (direct investment)

for investment in shares (portfolio investment)

and the speculators’ trade on the money market (hot money)

EXCHANGE RATES

An exchange rate is determined by the amount of buying and selling of the currencies involved on any day

Like any other commodity, money is bought and sold in a market – the international money market

An exchange rate is the price of one currency in terms of another eg 1.6 dollars to the pound

The more of a currency that is sold, the more its value will drop against others

The more of a currency that is bought up the more its value will rise against others

EXCHANGE RATE SYSTEMS

Fixed Exchange Rates

This is where the value of a currency is tied to thevalue of a commodity eg gold or oil

Flexible Exchange Rates

Where the value of a currency is allowed tofloat freely and is determined by trading on the international money market. Susceptible to theactions of speculators ie trading in ‘hot money’

Managed Exchange Rates

This is where the value of a currency is allowed tofloat within an upper and lower limit and action istaken to keep its value within a specified range

DEALING WITH BALANCE OF PAYMENTS PROBLEMSCorrecting a Deficit

• policies to reduce demand generally will also reduce the demand for imports• reducing UK inflation will make our exports more competitive abroad• encourage sterling depreciation ie sell sterling to make our exports more competitive abroad

Correcting a Surplus – UK does not tend to have this problem

• sterling appreciation ie buy up sterling to make our exports more expensive• implement restrictive exchange controls

TRADING ORGANISATIONS

The European Union

Currently has 25 members countries including the UKwith others waiting to join

Main Aims:

• the creation of an internal and unrestricted market within which goods and people can move freely• economic, social and cultural co-operation• ultimately the creation of a single European currency

Will the UK join the Euro?

Said to be 5 conditions required for joining, such astargets for inflation, interest rates, exchange rates, budget deficit and convergence on the business cycle

OTHER INTERNATIONAL ORGANISATIONS

INTERNATIONAL DEVELOPMENTLESS DEVELOPED COUNTRIES (LDCs)

• high population/birth rate/mortality rates• low national income per head• low growth• poor education system• lack of capital investment

NEWLY INDUSTRIALISED COUNTRIES (NICs)

• large increase in growth rates• strong export markets• high national income per head• good education system• strong manufacturing sector• capital intensive industries