International Trade

Exports & imports Exports = goods & services sold to another country. Imports = goods bought from another country

Visible & invisible Trade Visible trade = tangible goods - ones you can touch. Invisible trade = intangible things – services (finance etc). Classify the following items into visible or invisible SoftwareI-padHSBC banking OilInsurance American Airlines Toyota Landcruiser WheatHersheysPepsi

Balance of Trade value of visible exports – value of visible imports Balance of Trade surplus Exports larger than imports Balance of Trade deficit Imports larger than exports

Balance of Payments All transactions that a country has with other countries current account + capital account + financial account

Current Account Trade - visible Services - invisible Income – adds wages from residents working abroad, subtracts foreign workers wages. –adds profits & dividends sent back by firms abroad, subtracts these leaving the country Transfers –Aid sent & received between governments, taxes/payments to/from E.U. etc

Capital Account Ownership/sales of fixed assets –(foreign buyers of a house – money entering the country – added to capital account) Financial Account Profits on capital, shares & loans – dividends, interest payments.

Correcting B.O.P. deficit Balance of trade deficit Deflation – ↓ AD through ↑ taxes & ↓ public spending. This should ↓ imports as there is less money to spend – but it may also affect domestic industry → ↑ possible unemployment. Protectionism – ↑ measures that stop/reduce imports (tariffs, quotas, subsidies, embargos). Devaluation – ↓ value of pound →↑ cost of imports & ↓ cost of exports. Financial Account deficit Interest rates – ↑ interest rates → ↑ hot money as people can earn more on savings.