chapter 14 - international trade & finance Flashcards
why do nations trade?
distribution of natural, human, and capital resources among nations is uneven; nations differ in their endowments of economic resources.
- Efficient production of various goods requires different technologies, and not all nations have the same level of technological expertise
- Products are differentiated as to quality and other attributes, and some people may perfer certain goods imported from abroad rather than similar goods produced domestically.
abundant labour - labour-intensive goods
vast amt of land - land intensive good
industrially advanced economy - capital intensive good
absolute advantage
if it can produce the product more efficiently. This means that it can produce more of the product from any given amount of resource inputs than can any other country.
comparative advantage
if it can produce the product at a lower opportunity cost
terms of trade
exchange ratio
What are some of the advantages of free trade
- It allows all countries to specialize in producing commodities in which they have lower opportunity cost.
- It allows for more efficient allocation of resources.
- It enables people to enjoy more goods compared to a situation where there was protectionism.
- It promotes competition and deters monopoly. The increased competition from foreign firms forces domestic firms to adopt the most cost efficient techniques.
- The imposition of trade barriers often leads to trade wars. Consequently, world trade contracts and every economy suffer. This would not happen with free trade.
tariffs
tax imposed by a nation on its imports
gainers:
1. Domestic producers: They will be able to sell more as their prices are lower than that of the imports.
2. Government that imposed the tariff has gained in terms of revenue collected.
b) Losers
1. Domestic consumers: They have to pay the higher price for the imports.
2. Foreign suppliers: They are unable to sell as must now as their goods are all taxed and therefore more expensive.
quota
a) It raises the price of imports.
b) Quota, by restricting the amount that the foreign producer can sell in the country, leaves less competition for the domestic producer, and consequently results in higher prices for the domestic good.
case for protectionism
i) Infant industry argument
to allow new domestic industries to establish themselves
i) To prevent ‘dumping’
If a foreign producer is dumping its excess goods into a country at a price that is below its cost of production, this action may lead to significant disruption to its domestic industries.
iv) National security
There is a greater need for trade barriers should the industry to be protected is considered vital for national security.
v) Diversification for stability
Countries should avoid dependence on one or two commo¬dities in which it has a comparative advantage as highly specialized economies
Factors causing the currency’s demand &/or supply curves to change
i) Increase in the demand for Singapore’s exports at each price
demand curve for S$ will shift rightwards, increase in the price of S$. S$ has appreciated
ii) Reduction in the demand for US goods by Singapore
Singapore demands less US$ (as demands for US goods falls) so they supply less S$ to exchange. SS of S$ falls. S$ appreciates
iii) A change in taste in favour of US goods by Singaporeans
Singapore would have to sell their S$ in the foreign exchange market to buy US$ to pay for U.S. imports. The supply curve of S$ shifts rightwards, leading to a decrease in the price of S$. The S$ has depreciated against the US$.
i) Relative income changes
Suppose income of Singaporeans increase
Singapore buys more goods from US
Singapore sells their S$ to buy US$ to pay US
decrease price of S$
S$ depreciated against US$
v) Relative price changes
Suppose the prices of Singapore goods increase.
US will buy less Singapore goods. Demand for S$ falls shifting the demand curve for S$ to the left. The S$ depreciates against the US$.
On the other hand, Singaporeans will buy more goods from US because of higher price level in Singapore. The supply of S$ will increase resulting in a rightward shift of the supply curve of S$.*The S$ depreciates further
i) Relative interest rate changes
Suppose Singapore interest rate increase.
US buy Singapore bonds
demand curve for S$ shifts right
S$ appreciates against the US$
On the other hand, Singapore citizens are less likely to be interested in US bonds
Reason: higher interest rate in Singapore
supply of S$ decreases
supply curve of S$ shifts left
S$ appreciates further
fixed exchange rate system
requires the government, through the central bank, to intervene in the foreign exchange market to buy or sell, usually US$, in exchange for the domestic currency.
flexible/floating exchange rate system
a) Clean float
When currencies are allowed to float in the free market without government intervention, it is called a free or clean float.
b) Dirty float
The exchange rate determination is not left solely to market forces. There are times when the government intervene in the foreign exchange market for the purpose of changing the exchange rate in the direction that it wants.`
balance on current account
Item (10) Balance on Current Account =
(3) Balance on Goods
+ (6) Balance on Services
+ (8) Net Investment Income
+ (9) Net Transfers
balance on capital account
measures debt forgiveness
balance on financial account
summarises international asset tran¬sactions having to do with international purchases and sales of real (e.g., real estates) or financial (e.g., stocks, bonds) assets.
