Ch. 18 - International Trade

International Trade

The buying and selling of goods and services between different countries

Reasons for trading?

1. To obtain essential raw materials i.e. oil

2. Unsuitable climate/soil types e.g. Ireland can’t grow bananas, coffee etc.

3. Greater Choice

4. Creates Employment

5. Benefit from skills/traditions of other workforces

Closed Economy

An economy which does not engage in international trade

Open Economy

An economy which does engage in international trade

Visible Exports

Physical, tangible goods manufactured domestically and sold to other countries, resulting in money flowing into the exporting nation

Examples: Beef, dairy, pharmaceuticals

Invisible Exports

A service sold to a foreign country, representing money flowing into the home country without the movement of physical goods.

Examples: tourism, banking, education

Visible Imports

Physical, tangible goods manufactured abroad and brought into a country, resulting in an outflow of money from the importing nation

Invisible Import

Services purchased by residents, businesses, or governments from foreign countries, representing money flowing out of the domestic economy

Benefits of Exports to the Economy

1. Creates Employment

2. Access to Larger Markets

3. Injection into Circular Flow of Income

4. Attracts Investment

Benefits of Imports into the Economy

1. Greater Choice

2. Lower Prices

3. Access to Raw Materials (not available in domestic economy)

Balance of Trade

The difference between the value of visible exports and visible imports

BoT = Visible Exports - Visible Imports

Balance of Payments (BoP)

A record of a country’s monetary transactions with the rest of the world for a period of time

Current Account (BoP)

The sum of a country's balance of trade in goods and services, net income from abroad, and net current transfers

Capital Account (BoP)

Records inflows and outflows of a non-recurring nature i.e. capital transfers. Examples: land, buildings

Financial Account (BoP)

Records transactions involving financial assets and liabilities such as stocks, bonds, loans and bank deposits

Consequences of a Surplus BoP

1. Inflation

2. .

3. Currency Appreciation

Consequences of a Deficit BoP

1. Deflation

2. .

3. Currency Depreciation

Impact of MNCs on the BoP Current Account

1. MNCs export finished goods (visible exports) and services (invisible exports) - Boosts BoP

2. MNCs may import raw materials and capital goods - Decreases BoP

3. MNCs may employ staff from the home country of the MNC. Some of these workers may send part of their income back - Decreases BoP

4. MNCs may repatriate profits - Decreases BoP

The Law of Absolute Advantage

States that each country should specialise in the production of the goods and services that it can produce more efficiently than other countries and trade for the remainder of its requirements

The Law of Comparative Advantage (LoCA)

States that each country should specialise in the production of the goods and services in which it is relatively most efficient (has the greatest comparative advantage) and trade for the remainder of its requirements

Limitations of the LoCA

1. Transport Costs - The LoCA does not account for transport costs, which is unrealistic, especially in the case of an island nation like Ireland

2. Desire for Self Sufficiency - Some countries may not want to specialise and trade but prefer to be as self-sufficient as possible

3. Free Trade is assumed - The LoCA assumes that free trade takes place. This is true for countries that have trading blocs e.g. the EU or the NAFTA, but oftentimes trade is limited

Ireland’s Sources of Comparative Advantage

1. Climate - Mild, temperate climate. Fertile soils, ideal rainfall.

2. Low Corporation Tax

3. Skilled Labour Force

4. Use of English Language

5. Infrastructure

6. Member of EU

Free Trade

Member countries can trade freely without tariffs or barriers to trade being imposed. Examples: EU, NAFTA,

Trade Protection (Protectionism)

This is a policy designed to restrict imports or promote domestic production by placing tariffs or quotas on foreign goods. Example: Donald Trump’s tariffs

Methods of Trade Protection

1. Tariffs: Tax on imports. Tariffs make imports more expensive and consumers may choose g&s in the domestic economy.

2. Quotas: A physical limit placed by the government on the amount of a certain good allowed to enter the country

3. Trade Embargo: A complete ban on importing a good from a country

Advantages of Trade Protection

1. Protects Domestic Economy

2. Increases Government Revenue

3. Reduces Pollution

4. Less Reliance on Foreign Markets

5. Reduction in Leakages from Circular Flow of Income

Disadvantages of Trade Protection

1. Lower Incentive to innovate (less competition)

2. Reduces choice for consumers

3. Reduces economic growth

4. Economic Isolation

Fair Trade

The Fair Trade movement is a social movement aimed at promoting fair labour practices for fair wages

Advantages of Fair Trade

1. Promotes Fair Labour Practices - Workers are paid a fair wage, have safe working conditions and are not subjected to exploitation or abuse

2. Promotes Environmental Sustainability - Products are produced using sustainable practices

3. Promotes Economic Development - Fair prices are charged for goods in LDCs and local communities are supported, promoting economic development

World Trade Organisation (WTO)

The primary global institution responsible for setting and enforcing international trade rules. They promote free trade by reducing trade barriers.

International Monetary Fund (IMF)

An international organisation that works to promote global financial stability and facilitate international trade. It can provide loans to countries experiencing economic difficulties i.e. Ireland’s bailout in 2010

Main goal = Reduce poverty and promote sustainable development

Exchange Rate

The exchange rate is the value of one currency relative to another

Factors affecting exchange rates

1. Interest Rates - Higher interest rates tend to attract foreign investment which can increase demand for a currency and raise its value

2. Inflation Rate - Countries with higher inflation rates may see their currency depreciate as people feel they will have more purchasing power in other countries

3. Political Instability - This can lead to uncertainty and causes investors to withdraw their money from the country - the currency depreciates

4. Currency Speculation - When investors buy or sell a currency to make a profit from changes in its exchange rate, rather than buy goods or services

Consequences of Appreciation of the Euro

1. Imports become cheaper - EU consumers can buy goods for cheaper from foreign countries

2. Exports become more expensive - Foreign buyers now pay more for EU goods

3. Foreign Investment - If investors expect the euro to keep appreciating, they may buy euros now to profit later, increasing demand

vice-versa for depreciation