CHAPTER ONE
INTERNATIONAL TRADE AND
THE BALANCE OF PAYMENTS
Trade is simply a buying and selling of
goods and services from one to
other.
International trade is a trade between
residents of two countries.
‫موقع المحاضرات‬
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Import is the purchase of goods and services
from foreign countries leading to
outflow of foreign currency.
Export is the sale of goods and services to
foreign countries leading to inflow
of foreign currencies.
Why do countries trade?
Without trade, A country must be self-sufficient.
It must produce everything its
citizens want to consume.
With trade, Countries can specialize in the
production of goods that they can
produce, and satisfy other needs by
trading.
There are two classic international
trade theories explained why the
countries trade,
Adam Smith's theory of absolute advantage
Ricardo's theory of comparative advantage
Which
explained
the causes and gains
international trade.
from
Absolute advantage theory
Theory of absolute
demonstrates that:
advantage
international trade will be beneficial
when
One nation has an absolute advantage
in one good and the other nation has an
absolute advantage in the other goods
One country is said to have:
an absolute advantage when it can
produce more of the good than another
country,
resources.
by
the
same
quantity
of
Assumptions:
(a) There are two countries in the
world
(b) Labor is only one factor of
production
(c) The cost of a good depends on the
amount of labor
(d) No transportation cost exists.
Example
Nations
Egypt
Japan
Cars
10 units
20 units
Clothes
20 Yards
15 Yards
It can be seen that:
The Egypt has an absolute
advantage in clothes production,
as its workers' productivity in cloth
is higher than that of the Japan.
Similarly, Japan has an absolute
advantage in cars production.
Principle of Absolute Advantage
Each
nation
benefits
by
specializing in the production of
goods that it produces at a lower
cost than the other nation,
while
importing the goods that it
produces at a higher cost.
Comparative advantage theories
What If
Egypt has absolute advantage
in both goods
While
Japan has disadvantage in both
goods????
Example
Nations
Egypt
Japan
Cars
30 units
10 units
3 times
Clothes
30 Yards
5 Yards
6 times
1
2
Egypt is six times as efficient in clothes
production but only thrice as efficient
in cars production
Egypt has a greater absolute advantage in
clothes than in cars,
while
Japan has a smaller absolute disadvantage
in cars than clothes
Each nation specializes in and
exports that good in which it has
a comparative advantage
Egypt in clothes, Japan in cars.
Trade enables both countries to have gain
from trade.
Define the advantage and specialization in the
next case:
Case 1
Egypt
Japan
onion
100 units
75 units
watches
200 units
150 units
Egypt has................ In producing and
exporting………………….While Japan has…………………in
producing and exporting……………………
Balance of Payments
balance of payments is defined as
the record of transactions between
residents and non-residents over a
specified period.
Three main components :
•The current account,
•The capital account
•The official statements b
•The Current Account (CA);
The current account is subdivided into 4 sections
• The merchandise trade account (Exports or
imports of goods.),
• The services account ( tourists’ expenditures,
and shipping fees)
• investment income account (International
interest and dividend payments and the earnings
of domestically owned firms operating abroad).
• the transfer payments account (unilateral
current transfers (like gifts and foreign aids).
•The Capital Account:
The Capital Account includes the
purchase and sale of financial and
non-financial assets.
•The Official Account:
Includes the net change in foreign
exchange reserves and official
government borrowing.
FOREIGN EXCHNGE MARKETS
AND EXCHANGE RATE
The foreign exchange market is the
market in which individuals, firms, and
banks buy and sell foreign currencies
or foreign exchange.
The foreign exchange market for any
currency is composed of all the
locations (such as London, Paris,
Zurich, Frankfurt, Singapore) where
currencies are bought and sold for
other currencies.
Exchange Rate
The exchange rate between the
dollar and the Egyptian pound is
equal to the number of pounds
needed to purchase one dollar.
For example, if 1$=6LE this
means that six pound are required
to purchase one dollar.
EQUILIBRIUM FOREIGN EXCHANGE RATES
The exchange rate is determined, just
like the price of any commodity, by
the intersection of the market
demand and supply curves for dollar
R
D
Imports
S
Exports
Surplus
7
6
5
E
Deficit
D
100
200
300
Q
Ex