Trade:
Trade is the exchange of goods and services between two or more countries which specialise in production of certain goods hence the countries exchange in demand of their own currency unless a powerful currency is traded in order to benefit from those products.
International Specialization: Some countries have better quality raw materials than other countries which enables external economies of scale for them hence production of those goods is higher with better quality hence there is international demand for such goods which enables those countries to specialise on such products due to high international demand and external income in the economy.
Is international specialisation beneficial?
International specialisation in a country does provide external income by selling the surplus of products produced which have high international demand yet it makes it focused on only limited goods to produce since specialisation has an opportunity cost hence the economy needs to be equally dependant on other countries for other type of goods which may lead to over-dependancy hence may narrow down job opportunities and lead to emigration.
Who may benefit with international specialization?
Countries with secondary or tertiary sector production may benefit more than countries with primary sector production since the value of products in primary sector is much less than finished goods hence countries with primary sector production may suffer trade deficits due to low value exports and high value imports.
Trade deficit = Import is more than Export
Trade surplus = Import is less Export
Trade Balance = Export almost same as Import (Imports are not equal to exports)
Current Account Of Trade:
Current account of trade is the account at which international transactions are done and the amount from exports is received and amount is exchanged to another currency to pay for imports. Amount received can be in another powerful international currency which can be used in domestic expenditure (eg: USD$)
Deficit in current account is when more money is spent on exchange of currency to pay for imports than money received from export
Surplus in current account is when more money is received from exports than spent on imports
How does the government manage the current account
The government always appreciates a surplus in current account since the overall debt on the economy is less hence there is less burden on the government. The government may tax the entrance of imports to add an extra source of revenue and also subsidises domestic firms to reduce prices of goods so demand of import doesnt exceed the demand for domestic products so there wont be any large deficit in countries current account.
The government also subsidises and aids the exporting firms which have low costs of production so that they can take part in international competition and gain extra revenue from surplus of products produced.
How do consumers affect exports and imports?
As expansionary policies are introduced, consumers often raise their living standards by consuming luxury goods and high quality goods and hence may import them from country with best quality exports hence the private benefit of consumer rises causing productivity to rise yet it may also weaken the county’s power of currency since they are demanding other country’s currency which strengthens the power of that currency hence value of exports decrease causing a deficit in current account of trade leading to decrease in GDP.
MNCs and exports
The government appreciates MNCs since they increase the country’s employment rate and productive potential by employing more FOP yet they send their profits to the origin country causing corporate tax revenue to fall yet demand for their currency to rise since profits are transferred in the country’s currency and FDI (foriegn direct investment) is done in the country’s currency as well. Foreign Exchange Rate: Foreign exchange rate is the value of the currency expressed in terms of another currency which shows what the currency can buy in another country.
Fixed Exchange Rate:
Is fixed by the government in order to prevent any fluctutations due to changes in demand/supply or power of currency. Revaluation – The value of currency increases in terms of another currency Devaluation – The value of currency decreases compared to another currency
Floating Exchange Rate: Is determined by the market forces of demand and supply of the currency which leads to changes in value and purchasing power. Appreciation – The value of currency increases
Depreciation – The value of currency decreases
How does power of currency change in international markets?
The value of money decreases domestically due to inflation causing the value of currency to decrease in global markets when compared to a stable currency. This causes that 1 unit of the currency will mean less when compared to stable currency. Also, an increase in demand of the country’s exports may cause more demand of the currency hence the value of national currency of the demanding country may decrease since value of other currency is rising which leads to increase in value of exports and cheaper imports.
The currency can only appreciate or depreciate when demand of the currency changes yet fixed exchange rate can only by changed by changing supply of money or selling foreign reserves of other countries to raise supply of other currencies and stabilise the relative value since value of reserves was rising.
Benefits and necessities of revalution/appreciation or devaluation/depreciation
Revalution is when the government decreases the supply of the currency hence there is international shortage and price rises causing value of currency to rise and foreign exchange rate strengthens leading to increase in value of exports and cheaper imports hence budget deficit decreases hence pressure on government decreases. The government also may want to protect it’s domestic industries and increase it’s transfer of currencies by MNC’s exporting profits in same currency since value of the currency is higher.
Devaluation is when government raises the supply of cash in expansionary policies hence value of money falls yet forex rate falls hence price of imports rises and price of exports fall yet it encourages international competition leading to even higher demand of exports which can lead to higher revenue or the government may want to devaluate the currency in order to increase free trade and encourage better international relations to initiate trade. The government may also recover the exchange rate by implying contractionary policies which leads to stabilisation of currency and may put some protectionist impositions to protect domestic industries.
Purchasing Power Parity: The cost of living in other countries is not determined by exchange rates since prices in countries differ due to external economies of scale hence purchasing power parity (PPP) is used to calculate differences in cost of living, inflation etc.
Suppose a good is $10 in the US and €25 in London so the PPP is 25/10 = 2.5 Eventhough the exchange rate maybe $1= €0.9 causing product to be €9 when calculated by exchange rate eventhough London is 2.5x higher in cost of living.
Protectionism:
The idea of protectionism comes from countries who are not willing to be involved in free trade and are dependant on own domestic industries for production eventhough it may be bad in quality. The main idea is to have less debts and domestic expenditure is easier with also protection of own firms which may be kicked off due to low quality goods.
How does a country become protectionist?
A country may become protectionist after it has a high trade deficit due to high imports due to better quality of goods with falling national GDP since domestic production falls as demand falls leading to taxation of imports making it more expensive to import with costly paperwork and subsidising domestic industries from that money to raise cost of production and expenditure of firms. The country may put embargos (ban) on demerit goods so social costs decrease and quotas on some products so a limited amount of them can enter the country.
Ways of Being Protectionist:
– Tariffs ( Taxes on imports to raise prices )
– Quotas ( Only a fixed amount can enter the country )
– Embargo ( Complete ban on some products )
– Custom Duty (Taxes on products being bought from another country)
– Heavy and Costly paperwork (Paperwork load on imports rises)
What are the benefits of being protectionist?
Being protectionist enables the country to have a balance or stabilise the current account by imposing taxes on on imports and increase volume of imports by subsidising which leads to an increase in GDP although it may lead to retaliation from other countries and lead to decrease in demand of imports which causes demand of the currency to fall and the value of exports to fall leading to bad international relations which may lead to absolute economic failure in harsh economic conditions since there may be no foreign help and no FDI.
Sunrise industries – are industries which are small yet are being in competition with international monopolies which leads to market failure by price fixing hence enfant industries are eliminated from competition. They are subsidised by the government to decrease cost of production.
Sunset industries – are industries which run out of competition due to international monopolies and the demand of their products is negligible because of changes in consumer preferences and tastes.
