International Trade & Finance • In the modern world today, you can hardly find a country that does not sell its goods and services abroad and does not buy goods and services from foreign countries. • In simple words, all countries today have foreign transactions • The international flows of goods, services, manpower and finance constitute the international economy International economy • In the modern world today, you can hardly find a country that does not sell its goods and services abroad and does not buy goods and services from foreign countries. • In simple words, all countries today have foreign transactions • The international flows of goods, services, manpower and finance constitute the international economy International economy The international flows of goods, services, manpower and finance constitute the international economy. International economy ▪ ▪ ▪ ▪ ▪ ▪ The international economy is broadly constituted of International flow of goods and services International flow of capital including foreign investment and borrowing and lending of funds Financial assistance provided by international monetary organizations like the international monetary fund (IMF) and the world bank International flow of manpower Sale and purchase of foreign currency Control and regulation of international trade by international organizations like the General Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO) and Regional Trade Organizations (RTO). • Foreign trade in goods plays the important role in shaping the international economy • International trade, has grown so rapidly and extensively that it has led to international economic interdependence of most countries of the world. • The degree of global economic interdependence' is measured as the percentage of the total word trade (exports + imports) to world GDP. • International economics, as a subject of study, seeks to find answers to the following types of questions: • What is the basis of international trade? • What are the gains from foreign trade and how can these gains be measured? • How are the gains from foreign trade distributed between the trading partners? • What is meant by international division of labour and how is it determined? • How do protective trade policies affect the affect trade and trade benefits? • How is the foreign exchange rate determined? • What is meant by balance-of-payments disequilibrium and what are its consequences? • What factors lead to international economic conflicts? • Why do countries opt for international economic cooperation? International Trade - Definition • International Trade is usually referred to the exchange of goods, and services across international borders or territories. • In 2010, the value of international trade achieved 19 trillion (current US) dollars, i.e. about 30% of the world GDP. • One third of the produced goods and services are exchanged internationally around the world. International Trade – Definition • International trade is a set of actions that aim to exchange capital, goods, and services between foreign countries across their international borders. • International trade allows firms to compete in the global market and to employ competitive pricing for their products and services. • As more products become available to the market, consumers meet their needs and satisfy their wants, thus increasing customer satisfaction. What does international trade talk about? • Pattern of trade (Trade Model) The core subjects of trade theory are the pattern and volume of trade: which goods are traded by which countries, and how much of those goods are traded. These questions will be investigated by various international trade theories • Gains from trade Why should nations exchange their products and services? Who is gainer and who is loser, if there is any? Protectionism Should we protect our industries from international competition? Using what selection criteria? What may be economic consequences of trade protectionism or trade liberalization? Free Trade Agreements (FTAs) What does mean a FTA? How to measure its impact on trade between countries: members and non-members? What are trade potentials of a hypothetical FTA (to be admitted)? What are required criteria to benefit from a special FTA? What are policies to be considered? International policy coordination To where does the world go in international trade relations? What are related international organizations, and what role they play? Trade and development What are the impact of trade on industrial specialization? Industrialization? Economic growth? Poverty? Income discrimination? Could be international trade considered as a development engine for less developed countries (special cases)? Trade and labour economics What are trade effects on employment, wages, and wage inequality? Trade and political economy How trade affect the income distribution within a country? How trade may affect the political regimes? Are trade pro-democracy or anti-democracy? What is its importance?! • According to "Global Policy Forum", till 2030, 60% of the world economy be exchanged internationally. • Many current evidences are in line with this prediction. • For example, either country in the world is now member of, at least, one international trade agreement. In such circumstances, domestic economy will be affected more and more by the world economy. • That is, the level of income, employment, wages, growth, and development in a country is not only a result of its domestic policies, but also determined by its position in the world economy. • Consequently, a good knowledge of International Economics becomes vital for any economist. Some times, a good economic policy regarding his international relations is more beneficial than any policy arranging domestic economic issues of that country. The Reasons for Trade • There are different explanations or reasons why trade takes place between countries. • There are five basic reasons why trade may take. • The purpose of each model is to establish a basis for trade and then to use that model to identify the expected effects of trade on prices, profits, incomes, and individual welfare. 1. 2. 3. 4. 5. The Reasons for Trade Differences in Technology Differences in Resource Endowments Differences in Demand Existence of Economies of Scale in Production Existence of Government Policies Differences in Technology • Advantageous trade can occur between countries if the countries differ in their technological abilities to produce goods and services. • Technology refers to the techniques used to turn resources (labor, capital, land) into outputs (goods and services). • The basis for trade in the Ricardian model of comparative advantage is differences in technology. Differences in Resource Endowments • Advantageous trade can occur between countries if the countries differ in their endowments of resources. • Resource endowments refer to the skills and abilities of a country’s workforce, the natural resources available within its borders (minerals, farmland, etc.), and the sophistication of its capital stock (machinery, infrastructure, communications systems). • The basis for trade in the Heckscher-Ohlin model is differences in resource endowments. Differences in Demand • Advantageous trade can occur between countries if demands or preferences differ between countries. • Individuals in different countries may have different preferences or demands for various products. For example, the Chinese are likely to demand more rice than Americans, even if consumers face the same price. Canadians may demand more beer, the Dutch more wooden shoes, and the Japanese more fish than Americans would, even if they all faced the same prices. • There is no formal trade model with demand differences, [although the monopolistic competition model] which include a demand for variety that can be based on differences in tastes between consumers. Existence of Economies of Scale in Production • The existence of economies of scale in production is sufficient to generate advantageous trade between two countries. • Economies of scale refer to a production process in which production costs fall as the scale of production rises. This feature of production is also known as “increasing returns to scale.” Existence of Government Policies • Government tax and subsidy programs alter the prices charged for goods and services. • These changes can be sufficient to generate advantages in production of certain products. In these circumstances, advantageous trade may arise solely due to differences in government policies across countries. • "Domestic Policies and International Trade“. • "Production Subsidies as a Reason for Trade“ • "Consumption Taxes as a Reason for Trade" provide several examples in which domestic tax or subsidy policies can induce international trade.
