Unit 6 - International Trade

Question 1

State

Types of international trade

Answer 1

**Home local trade **- within borders
Regional trade - trade amongst neighbouring countries
Bilateral trade - between two countries
Multi-lateral/International trade - amongst three or more countries

Question 2

Give Reasons for trade

Answer 2

• we may lack resources
• lack certain technologies, therefore to lower cost of production
• Economies of scale, reduce cost per unit
• Surpluses and Deficits
• Foreign exchange earnings
• Employment, that leads to economic growth and development
• International peace and Harmony
• Choice and variety
• Competition (prices and efficiency )
• Resource endowment

Question 3

Define

Absolute advantage

Answer 3

If a country can produce more of a good or service given the same amount of resources

Question 4

Define

Comparative advantage

Answer 4

When one country has absolute uncertainty in production of both goods and services
Therefore a country should produce the good for which they have less opportunity cost

Question 5

What assumptions are made for the theories of absolute and comparative advantage?

Answer 5

• only two products traded buy only two countries
• Production and opportunity cost are constant (linear PPC)
• no transport costs
• Perfect factor mobility
• no barriers to trade
• Equal Exchange rates
• Absolute balance of power between nations and no obligations

Question 6

What other theories exist for determining trade?

Answer 6

1. Competitive advantage - focuses on actual cost of production, produce where you have a lower cost.
2. Factor endowment - Focuses on quality and quantity of factors of production
3. Governmental policy - government may decide not to specialise to avoid over dependence or exhaustion of resources by diversifying production.

Question 7

Why would a government employ protectionist policies on trade?

Answer 7

To prevent free trade and protect domestic economies from foreign competition and dependence on trade

Question 8

What are the motives for tariffs?

Answer 8

To raise revenue and increase supply of the products on the domestic market (discourage consumption of imports)

Question 9

Explain how export subsidies protect domestic economies?

Answer 9

Subsidies are given to exporters and domestic firms competing with imports, to make their goods more price competitive and a higher output

Question 10

How do exchange controls protect?

Answer 10

Limits the amount of foreign exchange that can be purchased and limits access to to foreign currencies meaning importers can not import as much, so consumers turn to domestic products

Question 11

Define

Embargoes

Answer 11

Complete ban on imports of a particular good or trade with another country entirely

Question 12

Define quotas and how they affect imports?

Answer 12

Restrictions on the maximum quantity of imports that can be purchased
Leads to higher prices op goods for consumers and forces them to demand less domestically produced goods.

Question 13

How do administrative restrictions protect ?

Answer 13

Bureaucratic procedures make it very difficult for importers to bring their goods into economies and may set artificially high prices for imports to discourage consumption.

Question 14

How do VERs protect ?

Answer 14

Voluntary export restraints are agreements that governments pressure countries to sign to limit imports and used often to avoid retaliation as the export countries sign them “willingly”

Question 15

Keeping exchange below its real value. How does it protect?

Answer 15

Manipulation of the exchange rate gives producers a competitive advantage over importers

Question 16

Describe the employment argument for protectionalism ?

Answer 16

When we buy imports we create jobs in forest markets one reduce those in our domestic economies so protectionalist aim to reduce unemployment.

Question 17

Infant industry argument for protectionism?

Answer 17

Trade barriers placed to protect infant industries as they grow to be able to compete with already large and established economies
Risks - industries may not survive without the protection or may fail before hend and there is no way to be sire which ones will succeed

Question 18

BOP argument for protectionism.?

Answer 18

Governments may apply barriers to improve their account positions if imports fall with held exports constant bop is in a better position.

Question 19

Labour exploitation argument

Answer 19

Moral reasons eg. Child labour or underpaid workers (absolute advantage for labour), it he import very cheap goods made with child labour domestic firms suffer because of higher cost of production

Question 20

Dumping argument

Answer 20

Selling goods below their cost of production or selling substance to foreign markeQts an from growing d preventing new firms in there markets from growing navel destroying established competition

Question 21

Revenue arguments

Answer 21

Tariffs give more tax to our governments

Question 22

Strategic industry argument _

Answer 22

Country chooses to produce goods itself to protect the country in cases crises as to avoid dependence on countries with which there is tension.

Question 23

Arguments for free trade

Answer 23

Prevent countries from specializing in the product in which they have comparative advantage

2. Reduce international competition and so increase prices and lower the quality of the products.
3. Reduce the choice of products available to consumers.
4. Lower the size of firms’ markets and so reduce their ability to take advantage of economies of scale.
   5
   Reduce firms’ choice of raw materials and capital goods which may increase costs of production
5. Result in trade war, with tariffs pushing up prices.

Question 24

What is TOT

Answer 24

Rate at which the goods of one country
exchange for the
goods of another country.
Ratio of export prices to import prices

Question 25

#Define Depreciation

Answer 25

fall or decrease in the international value of a currency caused by market forces. Such a fall will cause a reduction in export prices in terms of foreign currencies and a rise in import prices in terms of the domestic currency:

Question 26

Reasons to buy a currency

Answer 26

purchase goods and services from the country • invest in the country • enable foreign travel to be tourists in the country • speculate on making a profit if the value of the currency should rise in the future.

Question 27

#Define Appreciation

Answer 27

increase in the international price of a currency caused by market forces.

Question 28

Factors affecting exchange rate?

Answer 28

1. Interest Rates 2. Inflation 3. Expectations 4. Current Account 5. Competitiveness of goods 6. Economic Growth 7. Buying a Currency

Question 29

How do interest rates affect exchange rates?

Answer 29

if interest rates are high then its more attractive to save in your country so there is an inflow of hot money as people chase higher return on investment, therefore higher demand for your currency, therefore appreciation. low interest rates, depretiation | hot money is bad for locals

Question 30

How does Inflation affect exchange rate?

Answer 30

if there is high inflation, less people are likley to buy your goods as they are trying to avoid imported inflation, so less demand for your currency therefore , **depretiation** low inflation, cheaper goods , more demand for you currency, **appretiation**

Question 31

How do expectations/speculation affect exchange rates?

Answer 31

Investors feel that a currency is about to appreciate, they run and buy it actually causing an **appretiation ** if they feel a currency is about to depretiate, they sell actually causing **depretiation**

Question 32

How does the current account affect exchage rates?

Answer 32

Surplus causes **appretiation**, more credit items means more credits than debits Deficit leads to **depretiation** , more debit than credits

Question 33

Impact of depretiation on the domestic economy

Answer 33

goods become cheaper for foreigners and imports become expensive for locals, demand for domestic goods increases both internationally and domestically, real GDP and output increase, demand pull inflation and more employment | appretiation is the opposite

Question 34

Impact of depretiation on domestic price level

Answer 34

as economy approaches full employment, factors of production become scarce and expensive, especiallyimported one ,cost of production becomes larger therefore cost push inflation

Question 35

#Define Balance of Payments

Answer 35

A statement of income and expenditure on the international account

Question 36

Why is BOP important for a country?

Answer 36

- It reveals financial and economic status of a country - Determines whether a currency is depreciating or appreciating - Helps government in making fiscal and trade policies - allows us to analyse and understand economic dealings of a country with others

Question 37

#State Components of BOP

Answer 37

Current account Capital account Financial Balancing Item / Net errors and Omissions

Question 38

# State Contents of the current account

Answer 38

**Visible**/BOT/ Trade in goods **Invisible**/Trade in services **Income Account**/Primary income **Current Transfer**/Secondary Income

Question 39

Explain what is in the Visible Balance

Answer 39

This is the revenue earned from tangible from tangible exports minus the expenditure on imports of tangible goods

Question 40

Explain the Invisible Balance

Answer 40

This is the revenue gained from intangible exports minus the expenditure on intangible exports Examples - embassies abroad, shipping, banking insurance, aviation An embassy of Kenya abroad is and invisible import A Kenyan ship being used by Americans is an invisible import

Question 41

Explain what is in the income account?

Answer 41

This includes income from profits, wages, interest, dividends from international firms tho locals and vice versa

Question 42

Explain what is in the Current Transfer

Answer 42

This is a record of funds received without the exchange of services eg. Foreign aid, workers remittance

Question 43

How does a growing/declining domestic economy affect the BOP

Answer 43

As output increases, more money is spent to import raw materials, and more locals buy domestic goods, therefore less exports, causing a deficit. However this deficit is short term and self correcting, as the imported goods are used to manufacture goods that are both sold locally and exported, so export revenue will rise to match imports Declining economy will mean we cannot afford imports leading to a surplus that is however not beneficial

Question 44

How does economic activity in trading partners affect BOP?

Answer 44

If the trading country has low economic activity, then import expenditure will fall and therefore M>X leading to what is referred to as **cyclical deficit**, and is usually temporary and self correcting as fluctuations in economic activity are normal. High economic activity, higher import expenditure, more exports from the local country, X>M, leading to a surplus

Question 45

How do structural problems affect the BOP?

Answer 45

Overvalued currencies, High inflation rates and low labour and factory productivity, poor quality education and low level investments, reduce international competitiveness which leads to a deficit as there is less to export and no money to import, leading to a **deficit that is not self correcting **, which usually requires borrowing of finance to dealing with extra spending on imports to fill domestic banks

Question 46

How does the propensity to import affect the BOP?

Answer 46

If locals believe that imported goods are better and their developing local economies are not as good. This increased propensity to import leads to a **deficit** that causes major problems as it often leads to a weak currency, unemployment and lower economic growth

Question 47

How does confidence in an economy affect BOP?

Answer 47

Political instability may lead to a loss of belief in the local economy leading to less capital inflow and huge outflows as there is less participation in the local economy leading to a **Deficit** High confidence leads to a **surplus** as more people buy local goods then reduce imports

Question 48

How does consumer spending affect the BOP?

Answer 48

If consumer spending increases ,due to an expansion of the macroeconomy, aggregate demand increases past what can be met by current supply. Imports are increased to fill this gap, and if consumers discover imports are cheaper and better quality this leads to a large **deficit**