International trade involves the exchange of goods and services across international boundaries.

International trade involves the exchange of goods and services across international boundaries

BENEFITS FROM INTERNATIONAL TRADE

As well as the costs and uncertainty involved in international trade there are benefits. Indeed, firms engage in international trade because they believe that the benefits outweigh the costs. Engaging in international trade gives firms access to larger markets enabling them to take greater advantage of economic of scale.

Consumer can also gain from international trade. They are able to purchaser goods not made in their own countries, have access to a greater variety of products and can benefit from increased competition in the form of lower-priced and better quality products

THE PATERN OF UK TRADE

Export and import figures are from 2000 UK trade in service

THE BASIS OF TRADE

International trade arises because the production of different kinds of goods requires different kinds of resources used in different proportions and the various types of economic resources are unevenly distributed throughout the world. The international mobility of resources is extremely limited. Land is obviously immobile in the geographical sense. Barriers of language and custom restrict the international movement of labour. Capital is more mobile geographically but it only crosses international boundaries when particularly favourable conditions exist (e.g. political stability, no threats of confiscation, no barriers to taking profit out of the country etc.).

Since it is very difficult to move resources between nations, the goods, which ‘embody’ the resources, must move. Nations, which have abundance of, land relative to labour will concentrate on ‘land-intensive’ commodities such as wheat and meat. They will exchange these goods for ‘labour-intensive’ products such as manufacturers made by countries, which have abundance of labour and capital relative to land. Unlike individuals, nation do not specialise completely in one process of in one product. They tend to concentrate on certain types of activity but even the greatest importers of food grow some of their own requirements and importers of ...

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BALANCE OF PAYMENTS

A country engaging in foreign trade will be making payments to foreign countries and receiving payments from them. Each nation keeps an account of its transaction with the rest of the world that it presents in the form of a balance sheet described as the balance of payments

DEFICIT AND SURPLUSES

The balance of payments account is presented as a balance sheet and like all balance sheets it must balance. The total outflow of money must equal the total inflow. This means because the balances of payments always balance the sum of credit and debit items must be zero.

The term ‘surplus’ and ‘deficit’ refer to the manner in which the account as been balanced. If outflows exceed inflows (i.e. there is deficit), the account will be balanced by withdrawals from the foreign currency reserves, by borrowing overseas, or by the sale of external assets. These items are counted as inflows (i.e. credit items). If inflow exceed outflows (i.e. there is a surplus), the account will be balanced by items which show how the surplus has been distributed, for example by additions to the foreign currency reserves, the repayment of overseas loans, or the purchases of external assets. These items are treated as outflows (i.e. debit items).

CAUSES OF DEFICITS ON THE BALANCE OF PAYMENTS

Most attention is usually paid to current account positions and particularly current account deficits. A deficit in current account may arise from high-income levels in the home country. This is because when incomes are high the people will buy more goods and services. Some of these will come from abroad, thereby increasing imports. An overvalued exchange rate will also lead to problems with exports being relatively high in price and imports being relatively cheap.

There are, however, more significant problems that can cause a deficit. The country may be producing products of a low quality, its costs of production may be higher and it may be producing products in low world demand.

REDUCING DEFICIT IN BALANCE OF PAYMENTS

For countries like the UK, which are heavily dependent on foreign trade (about 30% of UK output is exported directly or indirectly), the foreign balance is critical matter.

The policies a government will adopt to satisfy their balance of payments, in order to correct the disequilibrium will depend on the cause of the disequilibrium, the type of exchange rate system being operated, the level of economic activity in the domestic market, government priorities etc.

FIXED EXCHANGE RATE SYSTEM

When countries are operating fixed exchange rates, national economies are closely linked and economic changes in one country will transmit their effects fairly quickly to other countries, thus a country experiencing a higher rate of inflation than its competitors will find its balance of payments position deteriorating because imports are becoming more competitive on the home market and exports less competitive in world markets. With a fixed exchange rate the immediate effect of any deficit falls on the official reserves of gold and foreign currency.

IMPORT CONTROLS

Tariffs, quotas, exchange control and other methods can all be used to limit imports and direct demand to home-produced goods. Import controls also have the potential to increase domestic inflation. Tariffs directly raise the price of imports on the domestic market and quotas, by limiting the supply of imports, are likely to push up their price. Domestic firms, seeing rival goods from abroad rising in price, may raise their own prices knowing they will be able to remain competitive.

OTHER MEASURES TO REDUCE DEFICIT

A lack of price competitiveness and high marginal propensity to import are not the only possible causes of a deficit. Firms may be poor at marketing and in order to rectify this government may promote trade fairs and give awards to top exporters and encourage university and other courses in marketing. The quality of goods may be poor and here measures may be undertaken to improve education, training, researches and development. The country may also be producing products that are not in high world demand. In this case government may give financial assistance to improve industry up to standards.