International Trade and Exchange Rates

International Trade and Exchange Rates

Nature of International Trade

• Businesses operate in an international environment, engaging in selling products overseas and buying resources from abroad.
• International trade has grown significantly due to countries becoming more open and the increase in multinational corporations.
• Example: Toyota, a Japanese car manufacturer, is a major exporter with factories worldwide, employing around 340,000 people in over 50 locations.
• In 2017, Toyota's global car sales were 8.97 million, with a revenue of 1994372 million yen.

Toyota Sales (Units) by Region:

• 2003:
  • Japan: 1,271,000
  • Europe: 776,000
  • North America: 2,935,000
  • Others: 925,000
• 2017:
  • Japan: 2,274,000
  • Europe: 2,837,000
  • North America: 2,218,000
  • Others: 1,982,000

Importance of International Trade

• Creates opportunities for business growth.
• Increases competition.
• Provides more consumer choice.
• Allows countries to obtain goods not produced domestically or goods that are cheaper overseas.
• Helps improve consumer choice.
• Provides opportunities for countries to sell surplus commodities.

Visible and Invisible Trade

• Exports: Goods and services sold overseas.
• Imports: Goods and services bought from other countries.
• Visible Trade: Trade in physical goods.
• Invisible Trade: Trade in services.
• Visible Balance/Balance of Trade: Difference between total visible exports and imports, calculated as: Exports - Imports.
• A higher value of exports is generally preferred as it indicates more money flowing into the country.

Imports and Exports in Kenya (Case Study)

• Kenya relies heavily on primary goods for exports, mainly agricultural products and tea.
• Other exports include coffee, tobacco, iron and steel products, textiles, petroleum products, and cement.
• Key export customers: Netherlands, Pakistan, Tanzania, Uganda, UK, and USA.
• Kenya imports machinery, transportation equipment, motor vehicles, iron and steel, and plastics.
• Key international suppliers: China, Japan, Saudi Arabia, South Africa, UAE, and USA.

Exchange Rates

• Most countries have different currencies, affecting transactions between them.

Exchange Rate Calculations (Case Study: Ronnie Mackay)

• Scenario 1: US firm buys machines from Ronnie Mackay (£3,600,000) with exchange rate £1 = US$1.50. The price in dollars is calculated as: £3,600,000 \, \times \, US\$1.50 = US\$5,400,000
• Scenario 2: Ronnie Mackay buys components from Germany (€2.5 million) with exchange rate £1 = €1.10. The sterling price is calculated as: €2.5 \, million \, / \, €1.10 = £2,272,727
• Scenario 3: Spanish supplier sells materials to Ronnie Mackay (£200,000) with exchange rate £1 = €1.10. The amount in euros received is calculated as: £200,000 \, \times \, €1.10 = €220,000

Impact of Changes in Exchange Rates on Importers and Exporters

• Fall in Exchange Rate (Depreciation):
  • Impact on Exports: Exports become cheaper, which should lead to increased demand.
  • Impact on Imports: Imports become more expensive.
• Rise in Exchange Rate (Appreciation):
  • Impact on Exports: Exports become more expensive, which should lead to decreased demand.
  • Impact on Imports: Imports become cheaper.

Exchange Rate Effects Summary

International Competitiveness and Exchange Rates

• Changes in exchange rates can affect businesses, but not always positively.
• Example: If the value of the rupee falls, Indian exporters benefit from cheaper exports and increased demand, while Indian importers lose due to more expensive purchases.
• Sustained changes in exchange rates can significantly impact a country's international competitiveness.
• Positive Impact of Falling Exchange Rates:
  • Exporters sell goods more cheaply, benefiting the economy with higher employment, income, and tax revenues.
  • Example: The fall in the South African Rand since 2010 led to an increase in tourism.
• Negative Impact of Falling Exchange Rates:
  • Import prices rise, increasing costs for consumers and businesses.

Uncertainty Due to Varying Exchange Rates

• Constantly changing exchange rates create uncertainty for businesses.
• Difficult to predict demand for exports and costs for imports.
• Makes planning and budgeting more challenging.

Case Study: Alumburg (South Africa)

• South Africa benefited from international trade after its economy opened in 1994.
• Major exporter of minerals like gold, platinum, coal, and diamonds.
• Growing tourist industry.
• In 2015, South Africa exported US81,500 million worth of goods and services.
• Imports include machinery, foodstuffs, chemicals, petroleum products, and scientific instruments.
• Alumburg, an aluminium product producer near Johannesburg, uses extrusion.
• Extruded products are used in homes, cars, offices, planes, trucks, trains, boats, airports, factories, machines, and power stations.
• Trading for 40 years, Alumburg is growing sales overseas, especially in Europe.

Alumburg and Exchange Rates:

• If €1 = ZAR 10, an order worth ZAR 124 million would cost a European customer: ZAR \, 124 \, million \, / \, 10 = €12.4 \, million.
• If the exchange rate rises to €1 = ZAR 18, Alumburg's competitiveness and revenue in euros would be affected.

Plenary Questions

• Visible Trade Example: Manufactured aircraft components.
• Invisible Trade Example: Insurance.
• If US1.00 = €1.20, the cost in euros for a German business buying US6,700,000 of goods from the USA is: US\$6,700,000 \, \times \, €1.20 = €8,040,000.
• Improve International Competitiveness: A sustained fall in the exchange rate.