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INTERNATIONAL TRADE

INTERNATIONAL TRADE. STUDY UNIT 5. LEARNING OUTCOMES. Explain why international trade occurs Discuss reasons for international trade Discuss the advantages and disadvantages of international trade. Explain the compilation of the balance of payments (BoP)

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INTERNATIONAL TRADE

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  1. INTERNATIONAL TRADE STUDY UNIT 5

  2. LEARNING OUTCOMES • Explain why international trade occurs • Discuss reasons for international trade • Discuss the advantages and disadvantages of international trade. • Explain the compilation of the balance of payments (BoP) • Explain the determination of exchange rates • Predict how changes in the exchange rate may affect the BoP and the economy. • Predict the impact of an import tariff.

  3. INTRODUCTION • Involvement of country in international trade is measures by the openness of the economy. • The openness is measured by: • Exports as a percentage of GDP • Imports as a percentage of GDE • Average of the above ratios. • Exports in SA represent 30% of GDP • Imports represent 28% of GDE

  4. REASONS FOR INTERNATIONAL TRADE • Theory of absolute cost and advantage • One country specialise in production of a product • Domestic exchange ratio • International exchange ratio • Terms of trade is established between 2 domestic exchange ratios

  5. ABSOLUTE COST AND ADVANTAGE

  6. REASONS FOR INTERNATIONAL TRADE • Theory of relative cost and advantages • One country has relative advantage in both products • International trade still take place if exchange ratios are different • Differences in demand patterns • Ladies shoes • Fortified wines in Europe • Income between countries different, therefore demand patterns different • Economies of scale

  7. THEORY OF RELATIVE COST AND ADVANTAGES

  8. ADVANTAGES OF INTERNATIONAL TRADE • Economies of scale • New products are made available • Existing products more effectively produced • Increase competitiveness • Improvement in political relationships • Specialisation

  9. DISADVANTAGES OF INTERNATIONAL TRADE • Local industries may be hampered • Unequal footing due to availability of natural resources and the development thereof • Dumping • Currency depreciation exports increase • Labour costs • Capital and labour may become idle • Natural resources may become exhausted • Overspecialisation • Economy may collapse • Revenue may decrease • Pollution

  10. BALANCE OF PAYMENTS • DEFINITION OF BoP • Sub accounts of BoP (See p22): • Current account • Financial account • Capital transfer account • Unrecorded Transactions • Current account • Trade account • Shows whether SA live within it means.

  11. BALANCE OF PAYMENTS FORMAT

  12. BALANCE OF PAYMENTS FORMAT

  13. BALANCE OF PAYMENTS • Current account • Deficit financed by loans or by foreign reserve position • Financial account • Direct investment • Portfolio investment • Other investment • Unrecorded Transactions • Balancing item of balance of payments debit and credit transactions

  14. BALANCE OF PAYMENTS • Gold and other foreign reserves • Increase vs. decrease • Reflect overall position of BoP • Reserves serve as a source of finance when outflows exceed inflows • Use to prevent large fluctuations in the exchange rate • Indication of changes in monetary policy • Liabilities related to reserves • Loans by government and banks it increase reserve position • SDR • Valuation adjustments • Changes in gold and exchange rate values changes daily

  15. BALANCE OF PAYMENTS • Role of the BoP • BoP transactions affect • Exchange rate • Domestic production • Serves as a statistical tool for determining a country’s economic position • Financial account can be used to determine which type of monetary policy to be used • Provides information for decisions on trade, e.g. tariffs

  16. EXCHANGE RATES • Definition of an exchange rate • Direct quotation • $1 = R7,75 • Indirect quotation: • R1 = $0,1290 • Demand for Dollars arises: • SA importers for goods they import • SA citizens buying shares on foreign bourses • Foreigners selling their shares on JSE (SA). • SA tourists which purchase dollar travellers cheques • Speculators which anticipate the rand to depreciate

  17. EXCHANGE RATES • Supply for Dollars arises: • SA exporters of goods to USA • SA citizens selling shares on foreign bourses • Foreigners buying shares on JSE (SA). • Foreign tourists which exchange dollar travellers cheques for rands • Speculators which anticipate the rand to appreciate

  18. EXCHANGE RATES • If currency depreciates: • SA exports become cheaper • SA Import more expensive • BoP improves • Money supply increases as a result of an increase in gross gold and foreign reserves.

  19. TRADE POLICY • Import tariff: • Tax to be paid on imported goods • Government revenue increases • Protect domestic firms • Import quota: • Quantity restriction on amount to be imported • Type of tariffs: • Revenue tariff vs. Protective tariff • Specific tariff vs. Ad valorem

  20. Impact of an import tariff

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