Documente Academic
Documente Profesional
Documente Cultură
The international
context
w w w . s t ud y i n t e r a c t i v e . o r g
15 8
CHAPTER 14
T H E I N TE R N A T I O N A L C O N T E X T
CHAPTER CONTENTS
LEARNING OUTCOMES ------------------------------------------------- 160
BALANCE OF PAYMENTS ----------------------------------------------- 161
CURRENT ACCOUNT DEFICIT / SURPLUS
162
15 9
CHAPTER 14
T H E I N TE R N A T I O N A L C O N T E X T
LEARNING OUTCOMES
a) Explain the concept of the balance of payments and its implications for
government policy.
b) Identify the main elements of national policy with respect to trade.
c) Explain the impacts of exchange rate policies on business.
d) Explain the role
development.
of
major
institutions
promoting
global
trade
and
16 0
CHAPTER 14
T H E I N TE R N A T I O N A L C O N T E X T
BALANCE OF PAYMENTS
The balance of payments records financial transactions between one country and
the rest of world.
Current account;
ii)
Capital account;
iii)
Financial account.
The current account which measures trade in goods and services, net investment
incomes and transfers, whereas the capital and financial accounts record flows
of financial capital arising from saving, investment and currency speculation.
-92,877
+54,479
+26,940
-13,610
-25,068
+3,393
+18,121
+3,554
Key points
The sum of the balance of payments accounts must always be zero.
Net errors / omissions arise as a result of statistical errors.
If there is a current account surplus
-
16 1
CHAPTER 14
T H E I N TE R N A T I O N A L C O N T E X T
imports
Consequences:
In order to fund a balance of payments deficit, there will need to be a rise in
external debt, which is clearly not sustainable.
16 2
CHAPTER 14
T H E I N TE R N A T I O N A L C O N T E X T
Currency devaluation
Whilst a deficit will lead to an increase in supply of the domestic currency on foreign
exchange markets, and thus reduce the value of the currency, devaluation becomes
an option when a government has artificially retained a high rate.
Balance
on
current
acct
Time
Deficit
The problem with devaluation being that low price elasticities of demand for imports
and exports immediately following an exchange rate change may lead to an
increase in the deficit. The delayed impact, often due to contracts in place, means
that the volume of imports does not immediately fall away!
16 3
CHAPTER 14
T H E I N TE R N A T I O N A L C O N T E X T
Protectionist measures
Import tariffs;
ii)
Import quotas;
iii)
iv)
Domestic deflation
ii)
Increasing taxation;
iii)
16 4
CHAPTER 14
T H E I N TE R N A T I O N A L C O N T E X T
Using indices for the average prices of imports and exports, the movement in the
terms of trade between 2010 and 2011 would be computed as:
EXERCISE 1
2010 value.
Index numbers for import and export prices for the two years are given below.
Exports
Imports
2010
150
2011
144
216
16 5
CHAPTER 14
T H E I N TE R N A T I O N A L C O N T E X T
Absolute advantage -
Axioms
Table 1
Bread
Bananas
Country A
Country B
400
320
Or
Or
400
160
If each country was self-sufficient, and did not trade then their respective output
would be as follows
Table 2
Country A
Country B
Total
Bread
200
160
360
Bananas
200
80
280
16 6
CHAPTER 14
T H E I N TE R N A T I O N A L C O N T E X T
Comparative advantage
The theoretical basis for free trade is comparative advantage theory. Global
resources can be more effectively utilised when countries specialise in producing
those goods and services in which they have a comparative advantage.
Comparative advantage means that that the opportunity cost of producing the good
is less in a country than elsewhere.
Country A
Country B
1 bread = 1 banana
1 banana = 1 bread
1 banana = 2 bread
The above ratios show that Country B has a comparative advantage in bread ! As to
produce an extra unit of bread it only has to give up half a banana, compared to
Country A that would need to give up 1 whole banana to produce 1 extra bread!
Thus the two countries specialise in the commodity for which they have a
comparative advantage!
Table 4
Bread
Bananas
Country A
Country B
Total
320
320
400
400
Overall economic output is therefore 720, which is greater than under selfsufficiency.
16 7
CHAPTER 14
T H E I N TE R N A T I O N A L C O N T E X T
EXERCISE 2
Assume that two small countries, X and Y, produce two commodities P and Q and
that there are no transport costs. One unit of resource in Country X produces 4
units of P or 8 units of Q. One unit of resource in Country Y produces 1 unit of P or
3 units of Q. Which of the following statements are true?
16 8
CHAPTER 14
T H E I N TE R N A T I O N A L C O N T E X T
World Bank The World Bank is an international financial institution that provides loans to
developing countries for capital programs.
The World Bank's official goal is the reduction of poverty. All decisions must be
guided by a commitment to promote foreign investment, international trade, and
facilitate capital investment.
16 9
CHAPTER 14
T H E I N TE R N A T I O N A L C O N T E X T
GLOBALISATION
Globalisation may be defined as the widespread extension of trade between
countries and a high degree of interdependence of production between countries.
Impact of globalisation
17 0