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
| Price of Exports | Demand for Exports | Price of Imports | Demand for Imports |
---|
Exchange Rate Falls | Falls | Rises | Rises | Falls |
Exchange Rate Rises | Rises | Falls | Falls | Rises |
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.