imports and exports etc Flashcards
Define internation trade, comparative advantage and absolute advantage
International trade= exchange of goods and services across international borders
Absolute advantage= when a country can produce a good or service for less money than resources than another country
Comparative advantage= when a country can produce goods and services at a lower opportunity cost than another country
How do you work out comparative advantage?
Opportunity cost ratios- find out the cost to BOTH countries. How many of one good has to be lost to make one more of the other good. Both countries will have comparative advantage for the production of one of the two goods, even if one country has a absolute advantage over the production of both goods
What is the theory of comparative advantage?
States that a country should specialise in the production for which it has the lower opportunity cost
Why should two countries that produce two goods specialise in the one that they have a comparative advantage in??
It will increase total world output/trade
What is the terms of trade and how is it measured?
measures the price of exports divided by the price of imports. It is expressed as a % so in the base year it will be 100
- Index of export prices / index of imports x100
How do you calculate terms of trade if the index of exports has risen 10% and the index of imports has risen 5%??
110 / 105 x100
in 104.8.
This means the terms of trade have improved (exports risen more than imports) If they rise above 100 they are improving, if they fall below 100 they are worsening
What is the balance of payments??
The balance of payments is a record of the transactions of trade of a country with the rest of the world
made up of current account and financial account.
What factors make up the current account??
- Imports of goods and services
- exports of goods and services
- primary income flows
- secondary income flows
What are BOP CA surpluses and deficits?
CA surplus is where the value of our exports are greater than the value of our imports
CA Deficit is what we usually run in the UK, and the value of our imports are higher than the value of our exports
What are primary income flows??
Primary income flows are monetary flows coming in and out of the country, such as wages and investment
Wages- if UK companies pay UK workers abroad then this is a debit on the CA, if foreign companies pay their workers in the UK, this is a credit. currently we pay more money to our workers working abroad than foreign companies pay their workers working here
Investment- income received on FDI (foreign direct investment) such as profits earned by BP working in India (credit for the UK CA) however Nissan’s factory in Sunderland sending its profits back to Japan is a debit on the CA as the money is flowing out.
What is secondary income??
‘Money for nothing’- the UK sending money abroad to fund relief programmes/ pay for EU membership
Can be remittances- foreign workers sending their money earned in the UK back home to their families, which is a big debit on the UK CA.
What factors can affect the BOP CA??
Economic growth- lots of consumer spending will increase our imports relative to our exports, worsening the deficit and leading to demand pull inflation- making our exports even more expensive and worsening the deficit further.
Exchange rate- a weaker pound will make imports more expensive and exports cheaper, improving our BOP CA deficit. It requires demand for imports and exports to be quite price elastic, if demand for imports is inelastic, then only a small number of people will stop buying them at higher prices, which won’t help the deficit
International competitiveness- if a country becomes less competitive, demand for their exports falls relative to their imports. It isn’t able to compete as effectively as china who produce goods for cheaper.
Evaluation of whether you’ll get a deficit or surplus
Marginal propensity- like in the UK, people in richer countries have a high marginal propensity to import, so when wages rise we see a large rise in import spending
Depends on the type of growth- export led growth such as in Germany can result in a CA surplus, but investment led growth like in the UK may rely on importing goods to expand infrastructure/ capital etc.
Why is a BOP CA deficit considered harmful??
- If you run a CA deficit, you are running a financial account surplus, so foreigners have an increasing claim on your economy/ assets which they can withdraw at any time. Your CA deficit could be funded by foreign multinationals, which also reduces long term income.
- A CA deficit suggest you’re relying on consumer spending and are becoming uncompetitive, leading to lower export sector growth.
- A CA deficit may cause loss of confidence among foreign investors, who might remove their investments, decreasing the demand for your currency and making it fall, which could decline living standards as imports become more expensive
Why can CA surpluses be bad too?
A CA surplus suggests you are exporting lots but not importing much. this may lead to a fall in consumer spending and therefore domestic demand is falling, leading to domestic unemployment.
Also might be cyclical, suggest you’re in a recession and people have less money to spend on imports, improving the CA deficit is there is one
