the global economy (4.1, 4.2, 4.3, 4.4, 4.5) (copy)

international trade

international trade

the exchange of capital, goods and services across nation states

involves the sale of exports and imports

exports

goods and services sold overseas to buyers

imports

foreign goods and services bought by domestic households and firms

factor endowment

quantity & quality of factors of production available in the country

such as natural resources and human capital

benefits of international trade

• increased competition

• lower prices

• greater choices

• acquisition of resources

• more foreign exchange earnings

• access to larger markets

• economies of scale

• more efficient resource allocation

• more efficient production

terms of trade

ratio of export prices to import prices

a measure that reflects changes in the average prices received for a basket of exports against those average prices paid for a basket of imports

ToT = (export price index / import price index) x 100

trade protection

a deliberate attempt by the government to safeguard domestic producers from foreign competition by use of barriers of trade

types of trade protection

1. tariffs

2. quotas

3. subsidy (export subsidy)

4. administrative barriers

tariffs

a special tax imposed on imported goods and services

• to discourage competition

• to raise revenue

• to discourage imports

• to protect domestic industries

non-tariff barriers to trade

• quotas

• voluntary export restrictions

• subsidies

• regulatory & technical standards

• government purchasing policies

quotas

quantitative restrictions on imports

subsidies

financial assistance to domestic firms to help them compete against foreign rivals by lowering the costs of production

• production subsidies

• export subsidies

production subsidies

help reduce the production costs for domestic firms

export subsidies

targeted at protecting specified export-oriented firms

administrative barriers

bureaucratic standards & regulations imposed on foreign firms in order to protect domestic firms/consumers

• embargoes

• exchange controls

embargoes

(administrative barrier)

bans on trade within a certain country

often due to political/economic disputes

exchange controls

(administrative barrier)

restrictions on the quantity of foreign exchange that can be brought or sold by domestic residents

advantages of trade protection

• protection of infant industries

• national security

• health & safety

• environmental standards

• anti-dumping

• unfair competition

• balance of payments protection

• generating government revenue

• protection of jobs

• economically least developed country diversification

infant industries

new or unestablished industries that have the potential to achieve a comparative advantage but are too underdeveloped to compete with foreign firms

dumping

the sale of good & services by foreign firms at a price lower than the cost of production

balance of payments

financial record of a country’s transactions with the rest of the world

includes the country’s trade of goods and services with other countries

Economically least developed countries

(ELDCs)

low income countries facing severe structural barriers to sustainable economic development

low levels of human capital

highly susceptible to economic & environmental shocks

disadvantages of trade protection

• misallocation of resources

• retaliation

• increased costs → higher prices

• less choice

• domestic firms lack incentive to become more efficient

• reduced export competitiveness

retaliation

actions taken by a country in response to trade restrictions being imposed on it from other countries

export competitiveness

the ability of domestic firms to export products successfully to foreign markets owing to their ability to compete in overseas markets

economic integration

the process of countries becoming more interdependent and economically unified

preferential trade agreements

a trade treaty between 2+ countries

giving special/favorable terms & conditions of trade to member countries

bilateral trade agreement

a contractual trade agreement between 2 countries, usually by mutual agreement to reduce/remove barriers of trade

regional trade agreement

a reciprocal trade agreement between 2+ countries typically belonging to the same geographical region

multilateral trade agreement

a legally binding preferential trade agreement between more than 2 countries/trade blocs, under WTO guidelines

trading blocs

a group of countries that agree to economic integration and freer international trade by reducing/removing trade barriers with one another

free trade area

trading bloc between member states that agree to trade freely with each other

can impose separate trade restrictions with non-member countries

customs union

member countries in a trading bloc , which engage in free trade with each other but impose a common external tariff when trading with non-member states

common market

(or single market)

the most integrated trading bloc

consisting of a customs union that allows free movement of factors of production between member countries

advantages of trading blocs

• access to larger markets and the potential for economies of scale

• greater employment opportunities

• stronger bargaining power in multilateral negotiations

• greater political stability and cooperation

disadvantages of trading blocs

• loss of sovereignty/economic independence

• changes to multilateral trading negotiations

monetary union

the monetary system in a common market that requires the convergence of monetary policy that is governed by a common central bank

requires the convergence of interest rates within the single market, so member states do not have the flexibility in exercising their own monetary policy

World Trade Organization

a global organization that exists to promote trade liberalization, oversee multilateral agreements, and resolve trade disputes between member states

objectives of WTO

1. non-discrimination: a WTO member country cannot discriminate between its trading partners

2. more open: the WTO is to encourage free international trade by being more open as an economy

3. predictable and transparent

4. more competitive

5. more beneficial for economically less developed countries

6. protect the environment

functions of WTO

1. trade negotiations

2. implementation & monitoring

3. dispute settlement

4. building trade capacity (special provisions granted to facilitate growth/development)

5. outreach (activities increase global awareness of WTO’s objectives & functions)

factors affecting the influence of the WTO

• difficulties on reaching an agreement on services/primary products

• unequal bargaining power of members

exchange rates

the value of one currency expressed in terms of another currency

floating exchange rate

the value of a currency is determined by the demand for and supply of the currency in the foreign exchange market

fixed exchange rate

central bank buys & sells foreign currencies to ensure the value of its currency stays at a single predetermined rate

depreciation

the loss of value of a country’s currency with respect to a foreign currency

appreciation

the increase of value of a country’s currency with respect to a foreign currency

changes in supply & demand for a currency

• foreign demand for exports

• domestic demand for imports

• inward/outward foreign direct investment

• inward/outward portfolio investment

• remittances

• speculation

• relative inflation rates

• relative interest rates

• relative growth rates

• central bank intervention

inward foreign direct investment

foreign multinational corporations expanding their operations in the domestic economy

outward foreign direct investment

domestic multinational corporations expanding their operations in overseas markets

inward portfolio investment

spending in the domestic economy by foreign investors

outward portfolio investement

spending by an economy’s investors in overseas markets

remittances

movement of money when nationals working abroad send money back to their home country

speculation

when a financial asset is purchased in the hope or anticipation that the resale value will be higher

consequences of change in exchange rate on economic indicators

• current account balance

• unemployment

• inflation

• economic growth

• living standards

foreign currency reserves

stocks of foreign currencies held by the central bank

devaluation

when the price of a currency operating in a fixed exchange rate system is officially and deliberately lowered

revaluation

when the price of a currency operating in a fixed exchange rate system is officially and deliberately increased

managed exchange rate

where the govt./central monetary authority intervenes periodically in the foreign exchange market to influence the exchange rate, when deemed necessary to maintain certainty & confidence in the economy

overvalued currency

when the value of a currency is above its equilibrium value in the long run

undervalued currency

when the value of a currency is below its equilibrium value in the long run

crawling peg system

method to manage a currency

involves the setting of two upper & lower bands, which the govt. strives to keep the currency value within by periodic intervention