Explore issues using economic concepts and statistical data - International trade

Authors Avatar

Economics Notes 2004

Economics 2.1: Explore issues using economic concepts and statistical data.

TRADE

Regional Trade – Trade within countries, eg Dairy Products from Waikato

International Trade – Trade between countries, eg Gold from South Africa

Onshore services – a service provided for foreigners in New Zealand by a New Zealand owned business. (Such as tourism in New Zealand)

Offshore services – when a New Zealand firm provides a service outside our country. (Such as insurance)

Free trade is when the purchase and sale of goods and services across international borders can occur without intervention by either government.

Protectionism – Trade barriers used to prevent domestic producers from international competition.

Types of Protectionism

Ones that decrease Imports                         Ones that increase Exports

Tariffs          Quotas             Bans                      Subsidies      Marketing            Tax

                                                                                      Boards          Incentives

Regulations        Embargoes                          

Tariffs:         Is a tax on imports that increase the price of the imported products and it less competitive that locally produced items.

Quotas:        Set a limit on how much an imported commodity will be allowed into the country.

Bans:        Products which are not allowed to be imported into a country, eg drugs, material from endangered species, flick knives etc.

Regulations:        Normally relate to health, safety, cultural and environmental factors.

Embargo:        Is where a country refuses to trade with another country, eg many countries did not trade with Iraq after the gulf war of 1991.

Trade is important to New Zealand because it is a small country and cannot provide the resources to satisfy all our needs and wants, therefore we must import vital goods in order to survive. To generate income to import we export certain commodities.

Magnitudes and Patterns of Trade

  • Exchange Rates and TWI (the price of the money needed to trade)
  • The Terms of Trade (indexes showing what we can be bought with what we earn)
  • The Balance of Payment – the Current Account, the Capital Account and the Financial Account.

Exchange Rates:        The price of the New Zealand dollar (NZD) is determined by the demand and supply of the New Zealand dollar. The price of the New Zealand dollar is expressed in terms of foreign currencies, eg 1NZD = 0.7047USD = 0.3734GBP = 74.33JPY = 0.5220EUR

TWI - Trade                 A weighted index of New Zealand main trading partner’s

Weighted Index:        exchange rates including the currencies of Australia, Japan, USA, UK and the Euro. This shows the trend in the New Zealand dollar.

Terms of Trade        An index showing the relationship between export earnings

Index:         and import payments. Above 1000 means the country is earning enough to buy the imports needed, less than 1000 means the country has to borrow overseas to buy imports.

        

Terms of Trade =                                x 1000

The Balance of Payment

                                                                                                                                                                                                                                                                                

Balance of Current Account = Balance of Trade + Balance of Invisibles

Balance of Trade = Export Receipts - Import Payments

Balance of Invisibles = Invisible Receipts – Invisible Payments


New Zealand's Balance Of Payments

The Balance of Payments records New Zealand's transactions with the rest of the world. Essentially it measures all flows of money in and out of New Zealand. The Balance of Payments is made up of three sections.

1. The Current Account - import payments and export receipts for the current 12 month period. It measures the:

  • Balance on Goods - exports and imports of goods.
  • Balance on Services - exports and imports of services.
  • Balance on Income - investment income earned and paid.
  • Balance on Transfers - resources supplied to, or received from, overseas without payment required.

2. The Capital Account - measuring capital inflow and capital outflow. It shows just capital account inflows and outflows, which are transfers of ownership of fixed assets or the transfer of funds linked to them, without any corresponding transaction. They are transfers, not sales (e.g., this account includes the capital transfers of migrants).

3. The Financial Account - measuring direct, portfolio and other investments to account for the amount of New Zealand's Reserve Assets. It contains:

Direct Investment. Investment is categorised as direct investment if the owner has 10% or more of the voting shares.

  • Portfolio Investment. When the owner has less than 10% voting shares, bonds or notes.
  • Trade debits and credits plus overseas loans made or received.
  • Reserve Assets. These represent everything that New Zealand has with the IMF

GROWTH

Economic growth is an expansion of the economy’s ability to produce goods and services.

GDP (Gross Domestic Product) measures national income, monetary value of the production of final goods and services, in a year.

Different Measures of Economic Growth

Changes in Real GDP (real national income) – measures the money value of all goods and services produced in an economy in a year, then taking out any change in the value of money attributable to inflation. Any increase in real GDP indicates economic growth.

Improved productive capacity – when the economic capacity line on the AS/AD diagram moves to the right or the PPC frontier moves outwards.

Net Social Welfare – the level of transfer payments, expressed as a percentage of national income. The unemployment benefit is the major variable welfare benefit. If this falls, unemployment is falling, and there is a short term economic growth.

Nominal and Real

Nominal GDP is found by multiplying the quantity of goods and services produced by the current price of goods and services. (To exclude the influence of inflation we calculate Real GDP)

Real GDP is found by multiplying the quantity of goods and services produced by the price of that good or service in the base year, thus ignoring the changes in the price level.

Real GDP per Captia is a measure of standard of living. It is calculated using the formula:

Real GDP per Captia =

Limitations to Real GDP per Captia

  • Non-market economic activity. The production of some goods and services does not pass through markets and therefore is not recorded in GDP.

  • Informal Transaction. Many goods and services that are sold are not recorded because they take place in the informal or ‘black’ economy such as sale new produce at a flee market.

  • Income distribution. Comparing income levels between two countries using average (per captia) data may also be misleading if income is unevenly distributed in one but not the other country.

  • Accidents and disasters. A fatal car crash, ceteris paribus, will cause GDP per Captia to increase. This is because emergency services are used to deal with the accident and after the event there are fewer people. That is GDP increases, the population decreases: so GDP per Captia increases.

Despite these problems, Real GDP per Captia remains a common measure for international comparisons.

Join now!

INFLATION

Inflation is an increase in the general level of prices over time. It is measured as a percentage change in Consumer Price Index (CPI). It will reduce the purchasing power of the money.

GENERAL PRICE RISES occur when the average level of prices increases, e.g. CPI on the rise

PRICE RISES IN PARTICULAR MARKETS occur when the price of one good/service or one industry sector increase, e.g. Building costs increase 9%

Inflation – is an increase in the general level of prices over time.

Disinflation – is a decrease in the rate of inflation. Prices are still increasing ...

This is a preview of the whole essay