Professional Documents
Culture Documents
INTERNATIONAL TRADE
Trade between countries take place because countries are unable to produce all of the goods
and services that they want or need and allow countries to sell off any excess goods they may
have.
International trade also provides the country with additional income in the form of revenue
from exports which are sold to other countries and also allows the establishing of “Allies” or
friendship between countries.
International Trade is also known as foreign trade and acts to improve the standard and quality
of life of the people.
Imports – goods and services purchased from another country. As a result of this exchange
money must leave your country to pay for such purchases.
Exports – goods and services produced locally and sold to other countries. This results in an
inflow of funds into the country.
Visible Trade – this refers to the imports/export of physical goods e.g. crawfish, pineapples,
salt, plastic goods.
Countries have to earn money to spend on things they need. Money is earned by the sale of
goods and services overseas (exports) which in turn will bring money into the country that can
now be used to make purchases from other countries, (imports).
If a country earns more than they spend, they build up a surplus, become wealthy and generally
have a higher standard of living. The opposite is also true.
1
Balance of Trade
The difference in the amount of goods leaving the country(export which brings in money)and
goods coming into the country (imports which takes money out of the country), is the country’s
Balance of Trade.
Exports ˃ Imports = Favorable/Surplus (Inflow of capital – Country earned more than it spent)
Balance of Payments
The difference in the total value of all the country’s exports (bring money into the country), and
the value of the goods imported (money leaving the country), in the form of goods (visible) and
services (invisible).
When Visible & Invisible Exports ˃ Visible & Invisible Imports = Favorable/Surplus
When Visible & Invisible Exports ˂ Visible & Invisible Imports = Unfavorable/Deficit/Adverse
Visible/Invisible Trade
Visible trade includes all items that can be seen and touched. Invisible trade include services
such as Banking, Insurance, Transportation (Shipping), Interest/Dividends, Travel & Tourist.
Also included are Transfer Payments which are not payment for goods & services but are gifts
or grants, e.g. i) gifts of money sent to/from families abroad, ii) grants made to aid other
countries, iii) grants to develop countries and international organizations.
2
Balance of Payments Account calculations:
i) Current Account
Visible Imports $500
Visible Exports $600
Balance of Trade + $100 surplus/favorable
Balancing Item
3
There are temporary measures that a country can take to correct an adverse Balance of
Payment problem as they are not satisfactory in the long run. These temporary measures may
include:
The best solution for this problem in the long run is to increase exports. Governments can help
to achieve this by offering incentives to firms involved in exporting goods. (Tax Relief, Special
Credit Facilities, Subsidies)
i) Exchange control – Central Bank can place a limit on the outflow of foreign
currency that can be purchased, meaning a decrease in imports.
ii) Import control - Tariffs and Quotas are 2 main methods used to
restrict imports.
We know that a country can borrow money from overseas, but there are limits on how they can
borrow from abroad or from their foreign currency reserve.
4
-The bank grants loans to countries which must be repaid over a period of 6 – 35 years. These
long-term loans are to assist member countries with economic development.
Absolute Advantage
States that when a country is able to produce a variety of products cheaper than other
countries, they will concentrate on those products with the lowest production cost.
Example: Assume that 2 countries (Country A and Country B) trade only 2 products: Computer
and Sugar, and they both have the same amount of resources. The amount of each item given
the set resources is shown below.
When we compare the cost of producing computers, Country B can produce it cheaper (more
efficiently) than country A, ($500 vs. $600), so Country B has an ABSOLUTE ADVANTAGE in the
production of computers and Country A an ABSOLUTE ADVANTAGE in producing sugar.
5
The country with the Absolute Advantage can produce and sell their product much cheaper on
the International market, so country A would specialize in the production and export of sugar
and country B in computers.
Which country will have the Absolute Advantage for the 2 products below?
Comparative Advantage
A comparative advantage occurs when a country do not have an Absolute Advantage in the
production of goods and services, so they will produce the good with the lowest opportunity
cost when compared to other countries with the same resources.
Assume:
Cost per unit
Rice Cloth
Country X $100 $50
Country Y $5 $20
Country Y have the absolute advantage in the production of rice and cloth.
Country X must now produce the product with the lowest opportunity cost, because they have
no Absolute Advantage. This will give them a Comparative Advantage in the production of that
product.
Rice Cloth
Country X $50/$100. Country X $100/$50. Country X
has to give up 0.5 cloth has to give up 2 rice
to obtain 1 Rice for 1 cloth
Country Y $20/$5. Country Y has $5/$20. Country Y
to give up 4 cloth to has to give up 0.25
obtain 1 Rice rice to obtain 1 cloth
6
Country X has only to give up 0.5 cloth to get 1 rice
Country Y has only to give up 4 cloth to get 1 rice
Country X has a lower opportunity cost in the production of rice, (only giving up 0.5 as opposed
to 4 cloth). Country X have a comparative advantage in the production of rice.
Country X has only to give up 2 rice to get 1 cloth
Country Y has only to give up 0.25 rice to get 1 cloth
Country Y has a lower opportunity cost in the production of cloth, (only giving up 0.25 rice as
opposed to 2). Country Y have a comparative advantage in the production of Cloth.
Assignment:
Using the information below, calculate the comparative cost and indicate which country should
produce which product.
Assume:
Cost per unit
Computer Sugar
Country A $600 $200
Country B $500 $100
Computer Sugar
Country A
Country B
7
Class work - Absolute/Comparative Advantage
a) Which country is more efficient at producing i) Pants ii) pocket calculators. (2)
b) How many pocket calculators have to be given up to produce one pair of pants in i)
Guyana, ii) Belize. (2)
c) Which country has the lowest opportunity cost in the production of pocket
calculators? (1)
d) If these 2 countries decide to specialize and trade with one another, in which good
should i) Guyana specialize ii) Belize specialize. (2)
8
6. Foreign Currency – Currency exchange between countries are constantly changing,
so the value of the currency when the trade took place may not be the
same as when the funds are collected 30 days later.
4. To prevent dumping
A country may restrict imports when they believe that other countries are dumping
their products into your country. These products may be of inferior quality or a
company trying to get rid of their excess goods. This will lower the cost and drive the
competition out of the market.
The following are methods used to control the amount of goods coming into and going out of a
country.
9
2) Tariffs – This is a tax placed on imported goods, so goods coming into the
country will be more expensive. This is usually implemented when the
government wants to encourage the purchase of local products.
3) Quotas – Government places a restriction on the quantity of a particular good
that is allowed to enter the country at any given period of time. This too was
implemented to discourage imports and encourage local trade. e.g. when local
crops are in season, there be a limit placed on the import of that products (sweet
pepper)
4) Exchange Control – Imports can only be purchased with foreign currency. The
government can limit imports by restricting the amount of foreign currency made
available to companies.
10
9. Briefly describe how an exporter can sell their goods abroad without
actually going overseas? (2)
10.What are three problems that can be experienced with fluctuating
exchange rates? (3)
11.What are; Tariffs, Quotas and Embargo? (6)
12.In what way would a subsidy offered to local businesses assist in
international trade? (3)
13.Identify 4 main reasons why countries would restrict trade. (4)
11