1. The Dynamic Environment of International Trade
Chapter 2

2. Balance of Payments
The system of accounts that records a nation’s international financial transactions is called its balance of payments.
Receipts from other countries (plus side):
Export sales
Money spent by foreign tourists
Foreign investments into your own country
Foreign government payments
Payments to other countries (negative side):
Imports
Spending by your local citizens in overseas
New overseas investments
Cost of economic and military aid
All countries have money which flows into and out of them. The BoP is the system of accounts which keeps track of them. Must always balance!

3. Balance of Payments Three types of accounts
Current account
Capital account
Reserves account
If a country’s expenditures > income, its citizens must reduce standard of living, or its money will lose value against other countries’.
Deficit= Loss of value for the dollar
Current- Record of all merchandise exports, imports, and services plus transfers of funds
Capital- Record of direct investment, portfolio investment, s-t capital movements
Reserves- Imports and exports of gold, increases or decreases in foreign exchange, increases or decreases in liabilities to foreign exchange

4. Balance of Payments (cont..)
Current Account: A record of all merchandise exports, imports, and services plus unilateral transfer of funds.
Capital Account: A record of direct investment, portfolio investment, and short- term capital movements to and from countries.
Reserve Account: A record of exports and imports of gold, increase or decrease in foreign exchange, and increase or decrease in liabilities to foreign central banks.

5. Protectionism
Acts to “protect” a country’s markets from foreign competitors
Why?
Infant industry
National defense
Industrialization of underdeveloped countries

6. Protectionism Tariff Quota
A tax on imported goods
Quota
A unit or dollar limit placed on a good
Sometimes paired with tariffs
Voluntary Export Restraint: Restriction on the volume of exports.
Boycott: An absolute restriction against the purchase and importation of certain good/service from other countries.
Embargo: Refusal to sell to a specific country.
VER- A country agrees to only export a certain number of a product. Done in order to prevent quotas or tariffs. Japan and US with cars
Boycott- Government refuses to buy from a certain country.
Embargo- A country refuses to sell to a certain a country.

7. Protectionism Monetary Barriers Standards Antidumping Penalties
Blocked currency
Differential exchange rate
Government approval to secure foreign exchange
Standards
Antidumping Penalties
Refuse to allow importers to exchange their currency into sellers’ currency
DER- Get different exchange rates on different products. For example, give a better rate for desirable products,
GAtSFE- Requires permission to exchange domestic currency for foreign currency
Set standards so high that they cannot be met- thus, restrict trade (knotholes in lumber going to Japan)
Dumping- Selling for less than its costs in order to gain marketshare. Also helps to get rid of excess products.

8. Easing Trade Restrictions
Market access
Allows US to retaliate against protectionism
Export expansion
Easier to gain an export license
Government responsible for exporter needs
Import relief
Offers assistance to companies impacted by imports

9. Easing Trade Restrictions
General Agreement on Tariffs and Trade
U.S. and 22 other countries
Reduces tariffs
Set up an organization to monitor trade
Resulted in deep cuts of tariffs

10. Easing Trade Restrictions
World Trade Organization
Began in 1995
Governs trade
Settles disputes and issues penalties against countries practicing protectionism

11. Easing Trade Restrictions
International Monetary Fund
Stabilize exchange rates
Lends money to member countries
Special drawing rights
Average base of value to counter fluctuations in world gold values
Helps to tie down values

12. Easing Trade Restrictions
World Bank Group
Lend money and provide assistance to developing countries
Mediate between investors and foreign governments