(19) International Trade and Capital Flows Flashcards
International Trade: Imports
What is an ‘Import’
An import is a good or service brought into one country from another. The word “import” is derived from the word “port,” since goods are often shipped via boat to foreign countries. Along with exports, imports form the backbone of international trade; the higher the value of imports entering a country, compared to the value of exports, the more negative that country’s balance of trade becomes.
BREAKING DOWN ‘Import’
Countries are most likely to import goods that domestic industries cannot produce as efficiently or cheaply but may also import raw materials or commodities that are not available within its borders. For example, many countries have to import oil because they cannot produce it domestically or cannot produce enough of it to meet demand. Free trade agreements and tariff schedules often dictate what goods and materials are less expensive to import. With globalization and the increasing prevalence of free trade agreements between the United States and other countries and trading blocks, U.S. imports have increased from $473 billion in 1989 to $2.24 trillion in 2015.
International Trade: Exports
What is an ‘Export’
An export is a function of international trade whereby goods produced in one country are shipped to another country for future sale or trade. The sale of such goods adds to the producing nation’s gross output. If used for trade, exports are exchanged for other products or services in other countries.
BREAKING DOWN ‘Export’
Exports are one of the oldest forms of economic transfer and occur on a large scale between nations that have fewer restrictions on trade, such as tariffs or subsidies. Most of the largest companies operating in advanced economies derive a substantial portion of their annual revenues from exports to other countries. The ability to export goods helps an economy to grow, by selling more overall goods and services. One of the core functions of diplomacy and foreign policy within governments is to foster economic trade in ways that benefit both parties involved.
Exports are a crucial component of a country’s economy. Not only do exports facilitate international trade, they also stimulate domestic economic activity by creating employment, production and revenues. As of 2014, the world’s largest exporting countries in terms of dollars are China, the United States, Germany, Japan and the Netherlands. China has exports of approximately $2.3 trillion, primarily exporting electronic equipment and machinery. The United States exports approximately $1.6 trillion, primarily exporting capital goods. Germany has exports of approximately $1.5 trillion, primarily exporting motor vehicles. Japan has exports of approximately $684 billion, primarily exporting motor vehicles. Finally, the Netherlands has exports of approximately $672 billion, primarily exporting machinery and chemicals.
International Trade: Autarky or closed economy
What is ‘Autarky’
Autarky is a nation or entity that is self-sufficient. A political/economic term, Autarky comes from the Greek autarkeia - autos, meaning “self” and arkein, meaning “to be strong enough or sufficient”. Autarky is achieved when an entity, such as a political state, is self-sufficient and exists without external aid.
BREAKING DOWN ‘Autarky’
Autarky is a state of independence. For example, a country that is functional without partaking in any international trade. From an economic view, autarky involving the elimination of foreign trade has proved unsuccessful, and is more of an Utopian ideal.
International Trade: Free trade
What does ‘Free Trade’ mean
Free trade is the economic policy of not discriminating against imports from and exports to foreign jurisdictions. Buyers and sellers from separate economies may voluntarily trade without the domestic government applying tariffs, quotas, subsidies or prohibitions on their goods and services. Free trade is the opposite of trade protectionism or economic isolationism.
BREAKING DOWN ‘Free Trade’
Politically, a free trade policy may just be the absence of any other trade policies; the government need not positively do anything to promote free trade. This is one reason it is sometimes referred to as “laissez-faire trade” or “trade liberalization.” Governments with free trade agreements (FTAs) do not necessarily abandon all control of taxation of imports and exports. In modern international trade, very few so-called FTAs actually fit the textbook definition of free trade.
International Trade: Trade protection
What is ‘Protectionism’
Protectionism refers to government actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition.
BREAKING DOWN ‘Protectionism’
The merits of protectionism are the subject of fierce debate. Critics argue that over the long term, protectionism often hurts the people it is intended to protect by slowing economic growth and pushing up prices, making free trade a better alternative. Proponents of protectionism argue that the policies provide competitive advantages and create jobs. Protectionist policies can be implemented in four main ways: tariffs, import quotas, product standards and government subsidies.
International Trade: World price
The price of a good or service in world markets for those to whom trade is not restricted.
International Trade: Domestic price
The price of a good or service in the domestic country, which may be equal to the world price if free trade is permitted or different from the world price when the domestic country restricts trade.
International Trade: Net exports
What are ‘Net Exports’
Net exports refer to the value of a country’s total exports minus the value of its total imports. It is used to calculate a country’s aggregate expenditures, or GDP, in an open economy. In other words, net exports equals the amount by which foreign spending on a home country’s goods and services exceeds the home country’s spending on foreign goods and services.
BREAKING DOWN ‘Net Exports’
For example, if foreigners buy $200 billion worth of U.S. exports and Americans buy $150 billion worth of foreign imports in a given year, net exports is a positive $50 billion. Factors affecting net exports include prosperity abroad, tariffs and exchange rates.
Another term for net exports is balance of trade; positive net exports means a trade surplus and negative net exports means a trade deficit. Exports consist of all the goods and other market services a country provides to the rest of the world, including merchandise, freight, transportation, tourism, communication and financial services.
International Trade: Trade surplus
What is a ‘Trade Surplus’
A trade surplus is an economic measure of a positive balance of trade, where a country’s exports exceed its imports. A trade surplus represents a net inflow of domestic currency from foreign markets and is the opposite of a trade deficit, which represents a net outflow. Balancing international trade is an important economic factor for a country; when a nation has a trade surplus, its exports exceed its imports during a specified period of time.
BREAKING DOWN ‘Trade Surplus’
In the United States, trade balances are reported monthly by the Bureau of Economic Analysis. A country’s trade balance is a leading factor influencing the value of its currency in the global markets. With a trade surplus, a country has control of the majority of its own currency through trade. In many cases, a trade surplus helps to strengthen a country’s currency; however, this is dependent on the proportion of goods and services of a country in comparison to other countries as well as other market factors. Countries can also highly control their currency through foreign investment efforts.
When just focusing on trade effects, a trade surplus means there is high demand for a country’s goods in the global market, which pushes the price higher and leads to a direct strengthening of the domestic currency. Countries with a trade surplus often continue to increase their exports over their imports as goods and services become more highly relied upon internationally.
International Trade: Trade deficit
What is a ‘Trade Deficit’
Trade deficit is an economic measure of international trade in which a country’s imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets.
Trade Deficit = Total Value of Imports – Total Value of Exports
Also called a negative balance of trade.
BREAKING DOWN ‘Trade Deficit’
Nations of the world trade with each other and keep track of their trades in their balance of payment (BOP) ledgers. One of the primary accounts in the balance of payments is the current account which keeps track of the goods and services leaving (exports) and entering (imports) a country. The current account shows direct transfers such as foreign aid, asset income such as foreign direct investment (FDI), net income i.e. income received by residents minus income paid to foreigners, and the trade balance (BOT).
The trade balance is the largest section of the current account and measures the income that a country receives from its exports and the payment it makes for its imports. A country that exports more than it imports will have a trade surplus since the inflow of currency is greater than the outflow of currency. Most countries will like to bring more money in by exporting more goods and services than they import. However, it is not uncommon to see trade deficits in a country’s current account. A trade deficit occurs when a country has imports that exceed exports. Because the trade balance is the largest section of the current account, a trade deficit (or surplus) usually translates to a current account deficit (or surplus).
A trade deficit usually occurs when a country does not produce enough goods for its residents. Another way to look at a deficit is that a country’s consumers are wealthy enough to purchase more goods than the country produces. When production falls short, importing goods from other nations increases. Economic theory dictates that a trade deficit is not necessarily a bad situation because it often corrects itself over time. An increase in imported goods from other countries decreases the price of consumer goods in the nation as foreign competition increases. The lower prices help to reduce the threat of inflation in the local economy. An increase in imports also increases the variety and options of goods and services available to residents of a country. It is expected that a fast-growing economy would pull in more imports as it expands to allow its residents to consume more than the country can produce. So, in some cases, a trade deficit could signal a growing economy.
In the long run, however, a trade deficit may lead to fewer jobs created. If the country is importing more goods from foreign companies which compete with its domestic companies, the domestic companies may eventually be driven out of business due to the lower prices that ensue. Manufacturing companies are usually hit the hardest when a country imports more than it exports as loss of jobs and incomes for its employees can be traced to the increase in competition from imports. The loss of jobs could lead to even fewer goods being produced in the economy which, in turn, could lead to even more imports and a wider deficit.
However, a deficit has been reported and growing in the United States for the past few decades, which has some economists worried. This means that large amounts of the U.S. dollar are being held by foreign nations, which may decide to sell at any time. A large increase in dollar sales can drive the value of the currency down, making it costlier to purchase imports. In 2016, US exports were $2.2 trillion and imports were $2.7 trillion. The trade deficit was, therefore, about $500 billion – meaning that the US imported $500 billion more than it exported.
International Trade: Terms of trade
What does ‘Terms of Trade - TOT’ mean
Terms of trade, or TOT, is a term that represents the prices of the exports of a country, relative to the prices of its imports; the ratio is calculated by dividing the price of the exports by the imports, with the result then being multiplied by 100. When a country’s TOT is less than 100%, more capital is going out than coming in. When the TOT is greater than 100%, the country is accumulating more money from exports than it is spending.
BREAKING DOWN ‘Terms of Trade - TOT’
Terms of trade, when used to help determine how healthy a country’s economy is, can lead analysts to draw the wrong conclusions. It is essential for analysts to know why exports increase, in relation to imports, specifically because terms of trade are impacted by the changes that occur in the prices of exports and imports.
Terms of trade measurements are often recorded in an index so that economic monitoring can be performed.
International Trade: Foreign direct investment
What is a ‘Foreign Direct Investment - FDI’
Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company. Foreign direct investments are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies. The key feature of foreign direct investment is that it is an investment made that establishes either effective control of, or at least substantial influence over, the decision making of a foreign business.
BREAKING DOWN ‘Foreign Direct Investment - FDI’
Foreign direct investments are commonly made in open economies, as opposed to tightly regulated economies, that offer a skilled workforce and above average growth prospects for the investor. Foreign direct investment frequently involves more than just a capital investment. It may include provision of management or technology as well.
International Trade: Multinational corporation
What is a ‘Multinational Corporation - MNC’
A multinational corporation (MNC) has facilities and other assets in at least one country other than its home country. Such companies have offices and/or factories in different countries and usually have a centralized head office where they coordinate global management. Very large multinationals have budgets that exceed those of many small countries.
BREAKING DOWN ‘Multinational Corporation - MNC’
Multinational corporations are sometimes referred to as transnational corporations.
Nearly all major multinationals are either American, Japanese or Western European, such as Nike, Coca-Cola, Wal-Mart, AOL, Toshiba, Honda and BMW. Advocates of multinationals say they create high-paying jobs and technologically advanced goods in countries that otherwise would not have access to such opportunities or goods. On the other hand, critics say multinationals have undue political influence over governments, exploit developing nations and create job losses in their own home countries.
LOS 19. a: Compare gross domestic product and gross national product.
Gross domestic product is the total value of goods and services produced within a country’s borders.
Gross national product measures the total value of goods and services produced by the labor and capital supplied by a country’s citizens, regardless of where the production takes place.
LOS 19. b: Describe benefits and costs of international trade.
Free trade among countries increases overall economic welfare. Countries can benefit from trade because one country can specialize in the production of an export good and benefit from economies of scale. Economic welfare can also be increased by greater product variety, more competition, and a more efficient allocation of resources.
Costs of free trade are primarily losses to those in domestic industries that lose business to foreign competition, especially less efficient producers who leave an industry. While other domestic industries will benefit from freer trade policies, unemployment may increase over the period in which workers are retrained for jobs in the expanding industries. Some argue the greater income inequality may result, but overall the gains from liberalization of trade policies are thought to exceed the costs, so that the winners could conceivably compensate the losers and still be better off.
