The next topic being covered is Invisible Trade. Invisible trade is the trading of services between countries. The factors that make up invisible trade are; Travel, which is all about tourism, holidays and people bringing in money; Shipping, which is travelling between countries via sea; Civil Aviation, which is flying in an aircraft between countries transporting goods; Other Services, which is about royalty, e.g. money from making books, films, singing, and TV programmes. E.g. Take That having a huge concert and bringing in lots of money from people buying tickets even people abroad coming to watch; Government, which is embassies in foreign countries, these help people from the UK who need help when abroad. Government is the biggest loss on invisibles in the UK; Private Transfers, which are gifts being transferred between countries and money being transferred between countries; Interests, Profits, and Dividend are like firms in different countries but the money t he firm makes goes back to its native country e.g. McDonalds profits go back to America. These are all the things that make up invisible trade. Invisible trade and visible trade are important elements of trade as they make up the current account and all together these make up the Balance of Payments.
The next element of international trade that I am going to discuss is the Trade Gap. Firstly the trade gap is the money gap in between the imports and exports. For example if imports were £200,000,000 and exports were £100,000,000 then there would be a gap of £100,000,000 as you would have spent £200,000,000 on imports and only gained £100,000,000 on exports.
£200million Imports
GAP BALANCE
£100million Exports
If you wanted to close this gap then you could spend less on imports which would cause the imports gap to reduce and come down like this, based on spending £100million less. This would cause the trade gap to be balanced. Other ways that you could bring the gap to be balanced would be to offer better quality products so that more people would want them causing more exports. They would go up like this. Other ways of closing this gap would be UK companies advertising abroad, the government could subsidise UK exporters and also you could have car shows to bring foreign people over to buy our cars. Other ways of bringing the import gap down would be to have a tariff – import duty, and import quota which would limit the amount you can import, and embargo but other countries may retaliate, and also and exchange control, which is limiting the amount of foreign currency used. There is however a certain type of import control that isn’t allowed or has to be agreed upon. This is called GATT which stands for General Agreement on Tariffs and Trade. This means that countries have to agree to reasons for allowing import duties.
The next type of element that I am going to do is exchange rates. First of all an exchange rate is the amount of foreign currency you can get for your money. If you were to go on holiday to Italy you would want your great British pounds to be changed into the euro. Now if you were to go on the 25th of November 2006 then for every pound you gave in you would have gotten 1 euro 41 cents. And if you were to go to America you would have gotten $1 89cents for every pound. There is however a fluctuating exchange rate which means that the pound to foreign currency is rising and falling. The correct economical term for this is appreciating when the pound rises and depreciating when the pound is falling. If I were to use an example then it would look like the diagram below.
High High Demand For £’s
£1 = $2
Low Low Demand for £’s
If the pound to the dollar is high then there is a high demand for pounds but if the pound to the dollar is low then there is a low demand for pounds. As shown in the diagram above. There is a high demand for pounds when people are buying our exports as they need our currency to pay us. But there is a low demand when imports are more as we are buying more and exports are less so people don’t need our currency as much.
I am now moving on to the topic of why countries trade. Trading countries trade the thing that they don’t specialise in but the country they trade with are better at producing the product traded. If that wasn’t clear then I will explain it in yet another diagram!
So in this diagram Country A would specialise in quality trainers and Country B would specialise in ordinary trainers. The benefits of countries specialising in their best product would be that there would be much more trainers produced and each country would be better off. So now you can see why countries trade, because if they do then everyone is better off and more produce is produced.
In this section of my essay I am going to be talking about a man named Adam Smith. Adam Smith was the man who came up with what we commonly refer to as capitalism. It was his systematic treatment of how the exchange of goods, or a market, would create incentives to act in the general interest that later became known as political economy and even later economics. Adam Smith asserts that when individual’s trade they value what they are purchasing more than what they are trading in for a commodity. If this were not the case, then they would not trade but retain ownership of the more valuable commodity. Although he is often described as the "father of capitalism" (and the "father of "), Adam Smith himself never used the term "capitalism". He described his own preferred economic system as "the system of natural ." However, Smith defined "capital" as stock, and "profit" as the just expectation of retaining the revenue from improvements made to that stock. Smith also viewed capital improvement as being the proper central aim of the economic and political system.
In this final part of my essay I am discussing the European Union. Britain is part of the E.U (European Union) which is an organization consisting of 25 independent, democratic member states which will be 27 as of the 1st January 2007. Britain can trade for free with all the members of the EU but if you are outside of the European Union then you have to pay to trade. Think of it as paying to get over a wall into a cool group. All of the members in the EU pay annually into an EU fund based on GDP (Gross Domestic Product), which is the Wealth of the Nation. The common currency in the European Union is the Euro and 12 out of the 25 use it, 13 out of 27 as of the 1st January 2007. There are benefits for trading within the EU; benefits such as if someone from for example Poland wanted to come and work in the UK then you wouldn’t’ have to pay them the maximum wage so you can imagine if there are more and more people working in the UK then we don’t lose as much money as we would if we were paying people who are from the UK.
In my essay I have covered the points that are included in the topic of International Trade. I think I have fully expressed each point to my best ability and I hope I have made it clear.
