The International Market
The importance of international trade
The reason countries trade
additional income from sale of goods/services
selling overseas bring in money to by from other countries
quality of live of all countries involved can be improved
foreign trade = buying and selling of goods /services between different counties in the world
Import = bought from other country – outflow of funds
Export = sold to other country – inflow of funds
Visible trade = import and export of goods
Invisible trade = import and export of services (tourism, transport, insurance…)
principle of comparative costs:
Difference between climate or natural resources countries have to trade in order to obtain goods which they cannot produce themselves
specialisation and differentiation in commodities for which they have a comparative advantage (low production costs)
import commodities from countries where production is comparative cheaper
Balance of trade (trade gap)
= records the value of countries’ imports and exports
favourable – when exports exceed imports ( surplus has been created)
adverse (unfavourable) – when imports exceed exports ( deficit has been created)
Balance of payment
visibles = goods
invisibles = services
= a statement of the difference in total value of all payments made to other countries and the total payment received from them
includes visibles and invisibles
shows weather the country is making a profit or a loss in its dealings with other countries
favourable – net inflow of capital (country has earned more than it spent)
adverse – net outflow (country has spent more than it has earned)
current account = records trade in goods and services
capital account = records flows for investment and saving purposes
Correcting a balance of trade deficit
temporary measures:
• borrowing from International Monetary Fund (IMF)
• obtaining loans from abroad
• drawing on gold and currency reserves
• selling off foreign assets
!!!increase in exports!!!
government: offering incentives to firms (tax relief, special credit facilities, subsidies)
Devaluation
= lowering the value of currency in relation to other currencies
makes imported goods more expensive and exports cheaper
Deflation
if people’s income or its spending power is reduced they will buy fewer products (imports)
wage rise controls, restricting credit and hire purchase, increasing interest rates, increasing taxes
Exchange control
= Central bank places a limit on the amounts of foreign currency hat can be bought
supply of domestic currency on the market is reduced raising in the price of the currency
Import control
= use of tariffs and quotas
tariff = a duty or tax on imports to increase their costs and discourage purchase
quota = numerical limit on the numbers of a commodity which can be imported
Trade is the most common form of transferring ownership of a product. The concepts are very simple, I give you something (a good or service) and you give me something (a good or service) in return, everyone is happy. However, trade is not limited to two individuals. There are trades that happen outside national borders and we refer to that as international trading. Before a country does international trading, they do research to understand the opportunity costs and marginal costs of their production versus another countries production. Doing this we can increase profit, decrease costs and improve overall trade efficiency. Currently, there are negotiations going on between 11 countries about making a trade agreement called the Trans-Pacific
The trend toward a more globalized market has become increasingly developed in the latter half of the 20th century. Emphasis on world trade has become a dominant figure in almost every Nation’s economy. Between 1970 and 2000 world trade has experienced an increase of almost 370 percent. Concurrently, world GDP increased by 150 percent. Trade is beneficial to Nations because it allows the creation of avenues that aid in efficient allocation of resources (Canas & Coronado). Countries can gain from trade when they specialize according to their comparative advantage. This is, when they create conditions where goods and services can be produced at a lower opportunity cost than in any other country. Along the same logic, countries can also make large profits by taking advantage of another countries comparative advantage.
Trade, of course, is only part of a larger network of relationships between our two countries. This network evolves in response to many complex influences, and exporters need to consider how our two countries' ever-expanding, ever-changing relationships will affect their activities. To take just a few examples:
Long has it been taken for granted that all countries must have their own domestic currency with reasons ranging from trading issues to fiscal revenues and other financial variables. When taking a look at the argument for the trading issues it can be said that modification flexibility of the exchange rate allows domestic governing authorities to alter relative prices by depreciating the domestic currency in such a fashion that encourages exports and at the same time discouraging imports. There are several arguments on the financial side, which all relate to central banks money printing abilities and their power to adjust the value of their currency, thus making them to detach the domestic financial markets from the conditions established in the international ones, and to perform as a lender of last resort when a crisis threatens the domestic financial system. Seigniorage, which involves the domestic government being able to tax the domestic currency, is definitely an argument on the fiscal side. If the need for more money in the form of bills and coins arise, the government can produce them as “no interest” coins and bills and are allowed to do with it what they see fit. Most, if not all, of these advantageous characteristics are threatened when a country decides to dollarize.
as a result prices begin to fall. Because of the surplus of goods and falling
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). International trading has its comparative advantages. Gains arise when a nation specializes in production and exchanges output with a trading partner, Meaning each nation should produce goods they are the best at making. When that happens the transaction leads to lower cost of production and maximizes the combined output of all nation involved. For example California shouldn’t try to produce and sell coconuts, it would be too expensive because they don’t have the right climate, where else in Indonesia it would be cheaper because it has the right climate for
The use of foreign exchange arises because different nations have different monetary units, and the currency of one country cannot be used for making payments in another country. Because of trade, travel, and other transactions between individuals and business enterprises of different countries, it becomes necessary to convert money into the currency of other countries in order to pay for goods or services in those countries. The transfer of money values from one country to another and the determination of the price at which the currency of one country will be surrendered for that of another constitute the main problems of foreign exchange. Foreign exchange is a commodity, and its price fluctuates in accordance with supply and demand. Exchange rates are published daily in the principal newspapers of the world. By international agreement fixed exchange rates with a narrow margin of fluctuation existed until 1973, when floating rates were adopted that fluctuate as supply and demand dictate.
This is a monetary policy which involves the government’s intervention to curb disorderly trends in the foreign currencies level. In case the quantity of a local currency goes down, the central bank uses the foreign currencies to buy its currency from the foreign economies. This ensures that the economy has ample home currency and thus enough money in circulation.
The central bank is expected to flood the market with more cash than usual, partly to stop the yen from rising too much. Japanese firms and investors raced to repatriate their assets, selling dollars and other foreign currencies, to provide for the cost of rebuilding their domestic economies, which will raise the value of the yen. It is feared will make exports more expensive and broke, it hopes to export
Free trade is the purchase and sell of goods and services between countries without any restriction like tariffs, duties or quotas. In 1948 began the liberalization process of lowering tariffs and non-tariff
supply increases when it is sold by the exporters and the RMB demand rises. To keep a
The global economy needs free trade. Countries need free trade. Trade with other countries occurs at some level in every country globally. There may be some indigenous tribes within some countries that can lay the claim that they are self-sufficient, however, there is not a single country that can say the same. Proponents of an open trading system contend that international trade results in higher levels of consumption and investment, lower prices of commodities, and a wider range of product choices for consumers (Carbaugh, 2009, p26). Free trade is necessary. How do countries decide what to import and what to export?
When imported products have reduced or no tariffs, they will be cheaper for consumers to buy.
basically lower the spending power of a currency and reduces the quantity of goods you
Export-Import: Assuming that a nation is sending out more than its imports from different nations, then this might mean progressed interest for that coin, influencing valuation for that money against