Economics and international trade
Created | Updated Oct 2, 2003
Introduction
In this essay I will examine the reasons for international trade. I will also identify methods to improve balance of payments within a country.
The benefits of International Trade
Companies trading internationally concentrate activities where it is most beneficial. They can invest reserves where interest rates are high and stable and take advantage of movements in international exchange rates as conditions change. They can concentrate market activities where currencies are stable and economies are expanding and withdraw from politically and economically unstable countries. They can stabilize seasonal market fluctuations through trading internationally and sell excess production capacity.
Businesses take advantage of the differing laws in various countries by exploiting cheap labour in underdeveloped countries where employees do not demand high incomes. Some manufacturing industries use employees in developing countries with lower wages and poorer safety standards to reduce costs.
The Principle of Absolute Advantage
A country has “absolute advantage” over its trading partners if it produces more of a particular product or service with the same amount or fewer resources than another country (Sloman, 2001). Often a country has absolute advantage because the raw materials for production of a certain item can be found in that country.
A country may have an advantage of producing goods over that of another due to its different attributes. These may include climate, legal system, materials, labour skills, transportation links, and the availability of equipment and labour. International trade allows countries to specialise in producing goods. Increased specialisation can increase the level of productivity of a particular country.
The Principle of Comparative Advantage
A country that has a comparative advantage in the production of a product or service can produce it at a lower opportunity cost than of its trading partner (Sloman, 2001). Some countries have an absolute advantage in the production of many goods compared to the countries they trade with. The theory of comparative costs is that it is better for a country to specialise in the production of the product it is most efficient at producing. The reason why this system is more productive is it allows each country to put all its resources in to the production of one product rather than dividing the resources in to producing many.
Companies benefit from international trade by importing those goods that it is not so good at producing and exporting those, which it is good at producing. Countries can gain from mutual trade as they acquire goods that have been produced more efficiently than that which they could have produced themselves.
Balance of payments
The Balance of Payments is a statistical statement that summarizes, for a specific period (typically a year or quarter), the economic transactions of an economy with the rest of the world. (University of Manchester, 2002)
The balance of payments measures the finances which are flowing into the country, (usually through exports), and the money flowing out of the country (usually through imports). A government of a country obviously wants to minimise the money going out of the economy, and maximise the money coming into the economy, hence improving its balance of payments.
A method used to improve balance of payments is to place tariffs on the import of some products. This is usually a percentage placed on the price of a product. This is only effective when placed on goods where there are other substitutes produced within the country. Tariffs often prevent foreign competitor brands penetrating the market, as the public buy the cheaper product. This prevents money from leaving the country, and so improves the balance of payments.
Quotas are another method to prevent money from leaving the country. Quotas restrict the quantity of a product being imported. The government or a group of countries usually set a limit. This means that the consumers of a country have a limited choice and so therefore they are more likely to buy the product made in their own country. This will reduce the amount of money flowing out of the country into another.
Financial controls can be set to help control the amount of money flowing out of the country. This is the amount of money placed on foreign exchange. It is a financial quota placed on the importers and to any citizens travelling to another country. Controls are also set on any investment in other countries. They can also be placed on the purchase of foreign currencies. This places a restriction on the amount of money being allowed to leave the country.
Import licensing helps governments keep control of the businesses importing goods. It helps set quotas and so uses this to limit the volume of imported products entering a country.
An embargo is where a government prevents the import of a certain product. This is usually because the product is illegal. This obviously prevents wealth from leaving the country.
Subsidies can be given to home producers to make them more competitive against that of, often lower priced, imported good suppliers. The method can be used to create an artificially low price in another country in a method known as “dumping.” This will increase exports and so the amount of money coming into a country.
Countries can place certain regulations on the quality of imported goods like food. Setting standards can restrict the amount of counterfeit goods being sold in a country. They can make businesses provide detailed paperwork on the imported good and so increasing the costs of the imported goods. Many governments offer tax incentives to set up business in designated development areas. These benefits may be in the form of interest free loans, or tax exemptions in return for bringing jobs to underdeveloped areas
A country may use Procurement policies when trying to improve its balance of payments. This is effectively where a government will buy from home producers, rather than from any foreign producers, which would stop so much money leaving the country.
Conclusion
International trading is used by businesses to make cost savings due to large-scale productions; these savings can be passed onto consumers. Monetary savings can also be made though specialisation. When trading countries specialise in production and trade with the surplus, a substantial increase in the efficiency can be achieved. Quality of goods and services will, in the majority of cases, improve due to the increased specialisation.
For a country to improve its balance of payments it must attempt to restrict the imports of foreign produced goods and services and increase the amount of exports it makes. For country to restrict imports it can place tariffs, quotas, embargoes, regulations and import licensing on those businesses importing goods. In order to increase exports it can give subsidies to create an artificially low price for products and services. The governments could also introduce procurement policies, to ensure that it is contributing positively to their balance of payments.
For the citizens of a country to afford a good standard of living, international trade is needed to keep markets competitive and costs down. The problem with this is the increased competition may create a poor balance of payments within a country, as more is being imported than exported. For a country to maintain a high standard of living, an equilibrium of these two factors has to be maintained.
written by: Peter Jones
References
Books
Sloman, (2001) Essentials of Economics, Person education, Harlow.
Internet
University of Manchester (2002) Available from: http://www.mimas.ac.uk/macro_econ/imf/bopshome.html [accessed: 20th of December 2002]
In this essay I will examine the reasons for international trade. I will also identify methods to improve balance of payments within a country.
The benefits of International Trade
Companies trading internationally concentrate activities where it is most beneficial. They can invest reserves where interest rates are high and stable and take advantage of movements in international exchange rates as conditions change. They can concentrate market activities where currencies are stable and economies are expanding and withdraw from politically and economically unstable countries. They can stabilize seasonal market fluctuations through trading internationally and sell excess production capacity.
Businesses take advantage of the differing laws in various countries by exploiting cheap labour in underdeveloped countries where employees do not demand high incomes. Some manufacturing industries use employees in developing countries with lower wages and poorer safety standards to reduce costs.
The Principle of Absolute Advantage
A country has “absolute advantage” over its trading partners if it produces more of a particular product or service with the same amount or fewer resources than another country (Sloman, 2001). Often a country has absolute advantage because the raw materials for production of a certain item can be found in that country.
A country may have an advantage of producing goods over that of another due to its different attributes. These may include climate, legal system, materials, labour skills, transportation links, and the availability of equipment and labour. International trade allows countries to specialise in producing goods. Increased specialisation can increase the level of productivity of a particular country.
The Principle of Comparative Advantage
A country that has a comparative advantage in the production of a product or service can produce it at a lower opportunity cost than of its trading partner (Sloman, 2001). Some countries have an absolute advantage in the production of many goods compared to the countries they trade with. The theory of comparative costs is that it is better for a country to specialise in the production of the product it is most efficient at producing. The reason why this system is more productive is it allows each country to put all its resources in to the production of one product rather than dividing the resources in to producing many.
Companies benefit from international trade by importing those goods that it is not so good at producing and exporting those, which it is good at producing. Countries can gain from mutual trade as they acquire goods that have been produced more efficiently than that which they could have produced themselves.
Balance of payments
The Balance of Payments is a statistical statement that summarizes, for a specific period (typically a year or quarter), the economic transactions of an economy with the rest of the world. (University of Manchester, 2002)
The balance of payments measures the finances which are flowing into the country, (usually through exports), and the money flowing out of the country (usually through imports). A government of a country obviously wants to minimise the money going out of the economy, and maximise the money coming into the economy, hence improving its balance of payments.
A method used to improve balance of payments is to place tariffs on the import of some products. This is usually a percentage placed on the price of a product. This is only effective when placed on goods where there are other substitutes produced within the country. Tariffs often prevent foreign competitor brands penetrating the market, as the public buy the cheaper product. This prevents money from leaving the country, and so improves the balance of payments.
Quotas are another method to prevent money from leaving the country. Quotas restrict the quantity of a product being imported. The government or a group of countries usually set a limit. This means that the consumers of a country have a limited choice and so therefore they are more likely to buy the product made in their own country. This will reduce the amount of money flowing out of the country into another.
Financial controls can be set to help control the amount of money flowing out of the country. This is the amount of money placed on foreign exchange. It is a financial quota placed on the importers and to any citizens travelling to another country. Controls are also set on any investment in other countries. They can also be placed on the purchase of foreign currencies. This places a restriction on the amount of money being allowed to leave the country.
Import licensing helps governments keep control of the businesses importing goods. It helps set quotas and so uses this to limit the volume of imported products entering a country.
An embargo is where a government prevents the import of a certain product. This is usually because the product is illegal. This obviously prevents wealth from leaving the country.
Subsidies can be given to home producers to make them more competitive against that of, often lower priced, imported good suppliers. The method can be used to create an artificially low price in another country in a method known as “dumping.” This will increase exports and so the amount of money coming into a country.
Countries can place certain regulations on the quality of imported goods like food. Setting standards can restrict the amount of counterfeit goods being sold in a country. They can make businesses provide detailed paperwork on the imported good and so increasing the costs of the imported goods. Many governments offer tax incentives to set up business in designated development areas. These benefits may be in the form of interest free loans, or tax exemptions in return for bringing jobs to underdeveloped areas
A country may use Procurement policies when trying to improve its balance of payments. This is effectively where a government will buy from home producers, rather than from any foreign producers, which would stop so much money leaving the country.
Conclusion
International trading is used by businesses to make cost savings due to large-scale productions; these savings can be passed onto consumers. Monetary savings can also be made though specialisation. When trading countries specialise in production and trade with the surplus, a substantial increase in the efficiency can be achieved. Quality of goods and services will, in the majority of cases, improve due to the increased specialisation.
For a country to improve its balance of payments it must attempt to restrict the imports of foreign produced goods and services and increase the amount of exports it makes. For country to restrict imports it can place tariffs, quotas, embargoes, regulations and import licensing on those businesses importing goods. In order to increase exports it can give subsidies to create an artificially low price for products and services. The governments could also introduce procurement policies, to ensure that it is contributing positively to their balance of payments.
For the citizens of a country to afford a good standard of living, international trade is needed to keep markets competitive and costs down. The problem with this is the increased competition may create a poor balance of payments within a country, as more is being imported than exported. For a country to maintain a high standard of living, an equilibrium of these two factors has to be maintained.
written by: Peter Jones
References
Books
Sloman, (2001) Essentials of Economics, Person education, Harlow.
Internet
University of Manchester (2002) Available from: http://www.mimas.ac.uk/macro_econ/imf/bopshome.html [accessed: 20th of December 2002]
