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 and economic links with countries they trade with.

FREE TRADE Because of the benefits already listed, countries and the world gains from allowing all countries to trade freely. However, in reality there are many examples of trade restrictions 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 the value of a commodity eg gold or oil Flexible Exchange Rates Where the value of a currency is allowed to float freely and is determined by trading on the international money market. Susceptible to the actions of speculators ie trading in ‘hot money’ Managed Exchange Rates This is where the value of a currency is allowed to float within an upper and lower limit and action is taken to keep its value within a specified range

DEALING WITH BALANCE OF PAYMENTS PROBLEMS Correcting 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 UK with 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 as targets for inflation, interest rates, exchange rates, budget deficit and convergence on the business cycle

OTHER INTERNATIONAL ORGANISATIONS

INTERNATIONAL DEVELOPMENT LESS 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