UNIT 48
Changing
Patterns Of
Exports And
Imports
Trade involves exchange of goods and services
INTERNATIONAL TRADE/EXTERNAL TRADE
• Exchange of goods and services
between countries.
• Involves risk and effort
• Benefits : Allows firms to reach
wider market, take greater
advantage of economies of
scale, source their products from
wider areas and earn higher
profits
• Drawbacks : products travel
greater distances, difficulty in
communication due to different
languages, differences in
culture, differences in marketing
strategies, trade restrictions,
heavy tariffs, higher competition,
differences in foreign currencies.
INTERNAL TRADE
• Trade within a country.
• Involves risk & effort
• Drawback : Reach a relatively
smaller market, less advantages
of economies of scale, source
products from relatively narrow
regions, relatively lower profits.
• Benefits : contrasting to the
drawbacks of international trade.
The Pattern of International Trade
Factors which influence the choice of trading partners of a
country :
• Buy from countries which produce good quality products
at low prices
• Sell to countries which have a high and stable demand for
the products it is exporting
• Most countries trade with countries close to them in :




tastes
development
geography
historical links
Most of current world trade takes place between developed
countries. Most of this trade is in services and high quality
finished manufactured products.
Changes In Exports And Imports
Factors that influence the value of a country’s exports and imports:
1. Country’s inflation rate : high inflation rate will lead to
more households & firms buying imports however,
difficulty in exporting (opposite effect if inflation reduces)
2. Country’s exchange rate : fall in a country’s exchange
rate will lower export prices and raise import prices
hence increasing value of exports and decreasing amount
spent on imports
3. Productivity : more productive country’s workers leads to
lower labour cost per unit & cheaper the products
therefore more households & firms buy more of domestic
products thereby rising exports and reducing imports
4. Quality : poor the quality, lesser the exports
5. Marketing : Effectiveness of domestic firms in
marketing their product influences the exports as do
the imports based on the marketing skills undertaken
by foreign countries.
6. Domestic GDP : If incomes rise at home more
imports will be bought which could also encourage
domestic demand. Could lead to a drop in exports due
to switch from domestic markets to foreign markets.
7. Foreign GDP : If incomes abroad rise, foreigners will
buy more products thus increasing exports.
8. Trade restrictions : Ease in trade restrictions will
make it easier for firms to export
Causes Of Current Account
Deficit
1. Incomes at home and abroad : A deficit
from a fall in incomes abroad and/or high
incomes at home can be referred to as a
cyclical deficit.
2. High exchange rate : It will cause export
prices to rise and reduce import prices
3. Structural problems :problems with
products manufactured by firms in a
country, costs incurred to produce them,
prices at which they are sold and
marketing strategies adopted.
Consequences Of A Current
Account Deficit
1. May mean that a country is consuming more
goods and services than it is producing
sometimes referred to as a country living
beyond its means.
2. Can also mean a reduction in inflationary
pressure as there will be a fall in aggregate
demand.
3. Output and employment is lower than possible.
4. Significance of a current account deficit depends upon the size,
duration and cause.
• A small deficit to last for a small period of time is unlikely to
cause any problem.
• A deficit caused by import of raw materials & capital goods,
changes in income (domestic and abroad) or high exchange rate
is self-correcting over time.
• Recessions abroad may not last & with a rise in income, exports
can increase.
• Can put downward pressure on exchange rates (lower value)
which could lead to higher exports as they become cheaper.
• Deficit arising due to a lack of international competiveness is
more serious as it is not self-correcting.(poor quality
produced, products do not match world demand, costs of
production are high). Govt. may need to intervene by
introducing policies (supply-side) to improve the trade.
Causes Of A Current Account
Surplus
1. Low exchange rate
2. High quality of domestically produced products
3. High incomes abroad
4. Low costs of production
Consequences Of A Current
Account Surplus
1.
2.
3.
4.
5.
Increase economy’s AD
Rise in GDP
Higher employment
More money will enter
Country is consuming fewer products than it
is producing
6. If economy is operating a floating exchange
rate, an increase in surplus will lead to
appreciation in the exchange rate as demand
for economy’s currency will exceed supply.