International Trade Booklet A PDF

**International Trade** **Open Economy:** An economy that engages in international trade i.e. importing and exporting goods and services. Ireland is a small open economy **Closed Economy:** An economy that does not engage in international trade e.g. most nations do not trade with North Korea. **E...

**International Trade** **Open Economy:** An economy that engages in international trade i.e. importing and exporting goods and services. Ireland is a small open economy **Closed Economy:** An economy that does not engage in international trade e.g. most nations do not trade with North Korea. **Exports and Imports** **Don't do it in a table format Do it in a list format**  **Benefits of International Trade for Ireland (a small open economy)** **[For Firms ]** **1. Companies Benefit from Economies of Large-Scale Production** **With trade, specialization will take place. Companies will increase production and may benefit from economies of scale. These savings may be passed onto consumers through lower prices.** **2. Access to Raw Materials** **Businesses have access to essential raw materials that are not available on the domestic market e.g. oil, coal, petrol. Many firms could not produce or manufacture goods without these materials.** **3. Domestic Market too Small for Large Companies** **If a company is competitive then it can sell that output, which it can't sell domestically, on the international market (e.g. Ryanair). As we know Irish domestic market is small. (Ireland 5 million -- E.U. 500 million).** **[For Consumers ]** **1. Greater Choice of commodities** **Through international trade, consumers are given a wider choice of products. Goods not available in a domestic market can be imported from abroad. For example, Ireland imported over 83 million litres of wine in 2017.** **2. More Competitive Prices** **Trade results in greater competition on the market which should lead to more competitive prices for consumers. This also helps reduce the rate of inflation.** **[For the Economy ]** **1. Injection of Capital into the Economy** **As Irish goods and services are bought abroad, money is paid to Irish companies which is then spent on consumption, direct and indirect taxation or can be saved which further capitalises our banks. This can boost the economic growth of the country.** **2. Employment / Investment Opportunities** **Efficient production means that employment in these industries is more secure. Employment will be created in those industries which are expanding due to the benefits of trade. A healthy trading economy generates confidence in the economy and investment is thus encouraged. (250,000 workers are directly employed by foreign MNC'S.)** **Costs of International Trade for Ireland (a small open economy)** **1. Affects Domestic Industries** **International trade may adversely affect the consumption pattern of a country due to the import of cheaply manufactured goods/services. This could lead to job losses in local SMEs and a slowdown on economic growth.** **2. Uneven Economic Development** **Due to the operation of comparative costs, international trade leads to specialisation and one-sided economic development which is not helpful to the prosperity of the country.** **3. Ireland's Dependency on Foreign Markets** **A slowdown in the economy of our main trading partners (e.g. the U.S) would have a** **negative knock-on effect on our exports, employment, profits and tax intake.** **- Our reduced over reliance on British trade in recent decades meant Ireland wasn't as exposed to Brexit as it might have once been.** **The Covid-19 pandemic also highlighted the Irish reliance on foreign market.** **- Supply chain issues from other countries reduced the availability of many goods.** **- Travel restrictions led to a reduction in tourism which negatively affected the tourism sector.** **4. Environmental Impact** **International trade is facilitated through ships and air-travel which help ship goods from one location to another. For example, Ireland imports cocoa beans from Mexico. The ships used to transport these resources use fossil fuels which leads to an increase in Co2 emissions. Naturally, this is not environmentally sustainable.** ### **Implications of International Trade** **[Advantages of International Trade]** 1. 2. 3. 4. 5. **[Disadvantages of International Trade]** 1. 2. 3. 4. **Balance of Payments** The **balance of payments** is a financial summary of a country's transactions with the rest of the world over a specific period, encompassing both the current account and the capital and financial account. The current account is the sum of the trade balance (exports less imports) net income from abroad. It records visible and invisible trade over a period of time. It is the difference between total exports and imports. It includes net income flows such as interest and dividends earned by foreign citizens from Irish assets and dividends and interest earned by Irish citizens from foreign assets. The Capital Account records inflows and outflows of a non-recurring nature e.g. amounts receivable from the EU regional development fund. It includes certain EU transfers and lending money to foreign governments. The Financial Account covers transactions in financial assets and financial liabilities. It consists of four main categories: 1\. direct investment 2\. portfolio investment 3\. other investment 4\. reserve assets.  **[Calculating the Balance of Trade/ Payments Current Account Balance ]** **[Balance of Payments Surplus]** A **balance of payments (BOP) surplus** occurs when a country's total income from exports and other financial transactions exceeds its total expenditure on imports and other outflows. This surplus can have several implications for the economy: **1. Economic Growth** A BOP surplus often signals a strong export sector, which can contribute to overall economic growth. Increased foreign revenue supports domestic industries and can lead to job creation and higher income levels. **2. Downturn in Economy and Drop in Demand for Imports** A surplus might also arise during an economic downturn when domestic demand for imports decreases. This reduction in import demand, coupled with stable or rising export levels, can contribute to a surplus. **3. Heavy Dependence on Exports** Countries with persistent BOP surpluses may be heavily reliant on exports as a primary source of income. This dependence can make the economy vulnerable to global market fluctuations, trade disputes, or changes in foreign demand. **4. Demand-Pull Inflation** A surplus, especially one driven by a surge in export demand, can lead to **demand-pull inflation**. This occurs when increased foreign revenue boosts domestic spending, potentially driving up prices if the supply of goods and services cannot keep pace with the higher demand. **5. Protectionist Measures** A sustained BOP surplus might also indicate that a country has implemented protectionist measures to limit imports, such as tariffs, quotas, or other trade barriers. These measures can artificially inflate the surplus by reducing the volume of imports, potentially leading to trade tensions with other nations. **[Balance of Payments Deficit]** A **balance of payments (BOP) deficit** occurs when a country\'s total expenditure on imports, services, and other outflows exceeds its total income from exports and other inflows. This deficit can have several implications for the economy: **1. Rise in Incomes in Domestic Economy** A BOP deficit might coincide with rising domestic incomes, as increased consumer and business spending can lead to higher demand for imported goods and services. When incomes rise, people typically spend more, including on foreign products, which can contribute to a deficit. **2. Leakage from the Circular Flow of Income** A deficit can represent a **leakage** from the domestic circular flow of income, where money spent on imports leaves the local economy rather than being reinvested within it. This can reduce the multiplier effect of spending on domestic businesses and potentially lead to lower economic growth. **3. National Debt** A persistent BOP deficit might necessitate borrowing from foreign sources to cover the deficit. This can lead to an increase in national debt if the country continuously borrows to finance its deficit. Long-term reliance on external debt can create financial strain and increase vulnerability to global economic fluctuations and interest rate changes. **4. Unemployment** If a BOP deficit is driven by increased import demand, it might reflect a lack of domestic production capacity to meet consumer needs. If domestic industries cannot compete with foreign goods, it could lead to job losses and higher unemployment in sectors that face competition from imports. **[Impact of Multinational Corporations on the Balance of Payments]** The presence and operations of **multinational corporations (MNCs)** can have significant impacts on a country's **balance of payments (BOP)**. Here's how: **1. Exports of Goods and Services** Many MNCs based in Ireland engage in the export of goods and services, contributing positively to the country's current account. These companies often use Ireland's favourable business environment, such as tax incentives and a skilled workforce, to produce goods or offer services that are sold internationally. This export activity enhances Ireland's foreign exchange earnings and helps improve its BOP surplus. **2. Imports of Raw Materials** MNCs involved in manufacturing often need to import raw materials and components from other countries. This importation can lead to a BOP deficit in the short term, as money flows out of Ireland to pay for these inputs. However, this is offset by the value of the finished products being exported, which can contribute positively to the overall BOP when exports exceed imports. **3. Repatriation of Profits** MNCs repatriate profits earned in Ireland to their home countries. This repatriation involves transferring financial gains from Ireland back abroad, which results in money flowing out of Ireland and contribute to a BOP deficit. While MNCs contribute positively through their investments and local spending, the repatriation of profits can create a net outflow of funds, affecting the overall balance. **National Competitiveness** The national competitiveness of a country refers to the overall ability of enterprises in that country to compete successfully in international markets i.e. to be successful at selling goods/services abroad in international markets in relation to its competitiveness. **[Factors Affecting National Competitiveness]** 1. 2. 3. 4. 5. 6. **[Current Obstacles to Ireland's International Competitiveness]** **1. Property Prices** The rising cost of purchasing land and property (especially in critical areas such as Dublin) is prohibitive to investment and thus, reduces our international competitiveness. **2. Infrastructure Despite significant investment** Infrastructure in Ireland is still lacking in rural regions, especially in terms of broadband. Continued progress is required in order to increase our international competitiveness. **3. Utility Costs** The cost of insurance, electricity and other utilities are all rising in Ireland which will only decrease our international competitiveness. **4. Accessing Credit** The Central Bank of Ireland has imposed a strict 3.5 times rule in order to apply for a mortgage. With rising property prices, this means that employers have to increase wages in order for employees to afford a home. **5. Increasing Wage Levels** Persistent increases in the national minimum wage (now standing at €13.50/hour - 2025) have led to an increase in costs for firms, and thus an increase in the price of their products. This reduces the international competitiveness of these goods. **6. Brexit** The UKs withdrawal from the EU has led many to question how Ireland's economy will cope. This has led to a reduction in Irelands international competitiveness. **[Irish Governmental Policies to Improve the Competitiveness of firms in Ireland.]** 1. **Reduce Taxation** A decrease in indirect taxes such as VAT, excise duty on fuel would reduce costs for Irish firms and help improve competitiveness. A decrease in the rate of the employers PRSI contribution will help firms reduce their costs. 2. **Reduce Utility Charges** A reduction in costs for electricity, gas, postage, waste charges state would help to reduce the costs for Irish fi rms and thus improve competitiveness. If measures were taken to reduce insurance premiums, then costs would fall. 3. **Improve the Infrastructure for Business / Workers** Lack of broadband and poor transport infrastructure (gridlock on the M50) in some areas makes some firms less competitive. By improving the infrastructure, it should make firms more efficient and thus reduce costs. 4. **Manage the current housing shortage** The government must increase the construction of houses in the country/provide more social housing and deal with the planning process. These measures should help reduce the cost of housing and reduce pressure on rents. If the government can reduce the cost of housing this would help workers and reduce the pressure for wage increases. 5. **Funding Skills / Education / Training** The government can fund programmes which help develop skills which are needed by firms. This would Ensure the availability of a skilled workforce making workers more efficient and helps reduce costs of firms. Targeted education funding to meet future skills needs in the growth sectors. 6. **Encourage competition in the market / deregulation** Introduce measures which will improve competition and so this may help reduce costs. Increase consumer knowledge by ensuring comparison information is available. Discourage mergers and takeovers which might reduce the number of competing firms 7. **Supporting Enterprise / Entrepreneurship** Improved access to business finance e.g. for start-ups. Incentives for business innovation and invention. Reduce red tape such as excessive legislation; health and safety requirements which may increase costs for business. **The Laws of International Trade** **[The Law of Absolute Advantage]** The Law of Absolute Advantage states that each country should specialise in the production of those goods and services that it can produce more efficiently than other countries. **Step 1: What should each country produce?**  **Step 2: How much output will be produced if they both specialise?** **Step 3: Conclusion** Total output has increased for both. There are 800 more lemons and 2,000 more oranges. Both countries are better off from specialisation and trade rather than attempting to be self-sufficient. [**The Law of Comparative Advantage** ] The Law of Comparative Advantage states that a country should specialise in the production of those goods and services in which it is relatively most efficient (has greatest comparative advantage) and trade for the remainder of its requirements. **Step 1: What should each country produce?**  **Step 2: How much output will be produced if they both specialise?** Country B will now specialise in clothes and resources such as the worker who previously made cars will be reallocated to clothes. Country A will now specialise in cars and resources such as the worker who previously made clothes will be reallocated to cars. **Step 3: Conclusion** It may initially appear that there has been a fall in total output. While total output of clothes has risen from 75 to 120, the total output of cars has fallen from 40 units to 20 units. To address this, we measure the percentage change in total output of both using the formula:  The 60% rise in clothes outweighs the 50% fall in cars, i.e. both countries are better off when they both engage in specialisation and trade. **[The Terms of Trade]** A country's terms of trade is a ratio of its export prices to its import prices. It tells us how much we have to pay for imports or how much our exports earn in terms of our imports. It measures how much a country can import in exchange for its exports. If the terms of trade improve, it means that the country can buy more imports for a given quantity of exports (export prices rise relative to import prices). Conversely, if the terms of trade worsen, the country must export more to afford the same number of imports (import prices rise relative to export prices). TOT is an important indicator of a country\'s **Country A** 10 units of cars = 15 units of clothes From Country A's point of view the opportunity cost of one unit of cars is 1.5 units of clothes and the opportunity cost of one unit of clothes is 0.67. **Country B** 30 units of cars = 60 units of clothes From Country B's point of view one unit of cars is 2 units of clothes and one unit of clothes is 0.5 units of cars. **In Summary:** One car will be traded for between 1.5 and 2 units of clothes. One unit of clothes will be traded for between 0.5 and 0.67 cars. **[Sources of Comparative Advantage for the Irish Economy]** **Sources of Comparative Advantage** refer to the factors that enable a country to produce certain goods or services more efficiently and at a lower cost than other countries. Here are some key sources of comparative advantage for Ireland: 1. 2. 3. 4. 5. 6. 7. 8. **[Assumptions Underlying the Law of Comparative Advantage (LOCA):]** 1. **Ignore the Law of Diminishing Marginal Returns** 2. **Assumes Perfect Mobility of Factors of Production** 3. **Ignore Transport Costs** **Implications of EU Membership** **Brexit** **[The impact of Brexit on the trade relationship between the UK and Ireland]** 1. **Negative effects on Irish exports** **The UK is one or Irelands largest trading partners. Brexit has seen excessive paperwork imposed on imports between Great Britain and Ireland which will inevitably lead to a decline in Exports between the two markets.** 2. **Effect on agriculture sector** **Brexit will reduce the preferential access of EU producers to the UK market and will thereby reduce the cost advantage that Irish agricultural exporters have (increased competition from Australia/New Zealand).** 3. **Labour market effects** **Some export focused businesses may see a reduction in demand for their products in the UK market and thus may make redundancies. In contrast to this, foreign firms from the UK may relocate to Ireland from the UK, leading to an increase in employment.** 4. **Imports from the UK** **Significant administrative barriers being imposed due to Brexit may lead to issues in the supply chain and thus some Irish firms may seek alternative suppliers to those from the UK/ Irish consumers my switch their online shopping from UK sites to EU sites (e.g. Amazon)** 5. **Relocation of UK based firms** **Some UK based firms may move their European headquarters to Ireland to continue to benefit from the EU access due to Brexit.** 6. **Volatile exchange rates** **Due to Brexit, the € to £ exchange rate has seen a lot of volatility. These increases and decreases hamper international trade between the UK and the rest of the EU and make it harder to plan for the future cost of goods and services.** **Free trade vs Customs Union** **A Free Trade Area** means that member countries can trade freely without tariffs /barriers being imposed on one another. (NAFTA - North American Free Trade Agreement between USA, Canada and Mexico) **A Customs Union** is more advanced than a free trade area. In a customs union, member countries agree to trade freely and impose common tariffs on countries that are outside the union. (E.g. The European Union) **Trade Protection (Protectionism)** Trade protection, also known as protectionism, is an economic policy implemented by governments to restrict or limit international trade. The primary objective is to protect domestic industries from foreign competition by making imported goods and services more expensive or less attractive. **[Methods of Trade Protection/ Barriers to Trade ]** **1. Tariffs** A tariff is a tax imposed on imported goods, which raises their prices compared to domestically produced items. This makes imported goods less competitive in the domestic market, encouraging consumers to buy local products instead. For example, in 2018, the US introduced a 25% tariff on steel imported from China, aiming to protect the domestic steel industry from cheaper foreign competition. **2. Quotas** A quota sets a physical or monetary limit on the amount of a specific good that can be imported into a country. This restriction helps manage the volume of imports and can protect domestic industries from being overwhelmed by foreign competition. For example, the European Union imposes quotas on the amount of clothing that can be imported from China to avoid market disruption and to safeguard European textile producers. **3. Embargo** An embargo is a complete ban on trade with a particular country or on specific goods. This measure is often used for political reasons or to enforce international sanctions. For instance, North Korea faces an embargo that restricts trade with other countries, while certain goods from other countries might also be subject to embargoes due to political or security concerns. **4. Subsidies** Subsidies are financial aids provided by governments to support local exporters, allowing them to reduce their prices in international markets. By lowering the price of exported goods, subsidies make these products more competitive abroad. For example, a government might provide subsidies to agricultural producers to help them sell their products at lower prices on the global market, boosting exports and supporting the domestic agricultural sector. **5. Administrative Barriers** These are obstacles related to the regulatory and procedural aspects of trade, such as delays at ports, cumbersome paperwork, and complex customs procedures. These barriers can increase the time and cost of importing and exporting goods, potentially discouraging trade and adding to the overall cost of goods traded across borders. **6. Currency Depreciation** Currency depreciation occurs when a country's currency loses value relative to other currencies. This can make a country\'s exports cheaper and more attractive to foreign buyers, boosting demand for these goods in international markets. For example, if the euro depreciates against the US dollar, European products become less expensive for American consumers, potentially increasing European exports. **[Advantages and Disadvantages of Trade Protection]** **Advantages** **1. Protects New Domestic Firms:** Initially, firms setting up may find it difficult to compete against MNC'S. Imposing a tariff on foreign goods will protect the firm in early years and allow them to compete in the future. **2. Increased Government Revenue** By increasing tariffs, this may help to increase Government Revenue to fund state services such as education/healthcare. **3. Protects Employment:** Discouraging foreign firms competitive imports by imposing a tariff can stimulate and protect domestic employment. **Disadvantages** **1. Retaliation from Foreign Governments** Foreign Governments may respond in kind with tariffs on domestic exports commencing a trade war. **2. Domestic Firms may Become Over Reliant** Businesses may become too dependent on lack of competitiveness due to tariffs which results in less innovation and specialisation. **Exchange Rates** **[Foreign Exchange]** [The exchange rate] is the price of one currency, in terms of another. - In 2024, the price of sterling in terms of euro for an Irish tourist travelling to the UK is €1 = £0.83. - For a British tourist travelling to the eurozone, the exchange rate is expressed as £1 = €1.20 **[A Fall or Rise in the Value of the Euro]** **Appreciation**; the increase in the value of one currency relative to that of other currencies. €1 = \$1.05 €1 = €1.10 € has strengthened / become stronger - The price of euro has risen/increased in terms of the US dollar. - The euro can now buy more dollar than it could previously. - The dollar can now buy fewer euro than it could previously **Depreciation**; the decrease in the value of one currency relative to that of other currencies. €1 = £0.95 €1 = £0.89 € has weakened / become weaker - The price of euro has fallen/decreased in terms of the pound sterling. - The euro can now buy fewer pound than it could previously. - The pound can now buy more euro than it could previously. **[Implications of a weakening Sterling on the Irish Economy]** **1. Eurozone exports to the UK fall:** Exports from the eurozone to the UK become more expensive resulting in a fall in demand.  **2. UK imports to the Eurozone rise:** Goods from the UK become cheaper in eurozone countries resulting in an increase in demand for them. **3 Tourism to Ireland from the UK falls:** The weakening of the sterling makes it more expensive for British tourists to visit Ireland. (and other eurozone countries) This results in lower numbers of British tourists visiting Ireland. **4. Tourism to the UK from Ireland rises:** It is now cheaper for Irish (and other eurozone countries) tourists to visit the UK, therefore tourism to the UK rises.  **5. Cross-Border Shopping:** Those living south of the Northern Irish border have a financial incentive to travel north e.g. shopping in Belfast. Those living north of the border are deterred from coming south having a negative impact on businesses in the Republic of Ireland. **Implications for the Irish Economy of a Weakening of the Euro Relative to Another Currency** **1. Eurozone exports become cheaper in other countries:** This leads to increased demand for exporting firms which can lead to increased employment. **2. Foreign imports become more expensive:** This results in a fall in demand for these goods, however essential raw materials still need to be imported, increasing costs of production for Irish firms. **3. Tourism to Ireland from foreign countries rises:** For example, if the euro is weaker than the dollar, then the euros that Americans\' spend on holidays here are cheaper for them to purchase. **4. External debt is more expensive to repay:** It costs more to repay money borrowed from someone in a foreign country as the euro depreciates. **5. Economic Growth:** A weakening of the currency can lead to economic growth due to the boost to exports and the rise in tourism. This along with the rise in price of imports can cause inflation. **Factors that affect the Exchange Rate of a Currency** 1. **Inflation Rates** A country with a lower inflation rate than another\'s will see an appreciation in the value of its currency. The prices of goods and services increase at a slower rate where the inflation is low. 2. **Interest Rates** Increases in interest rates cause a country\'s currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates. 3. **Country's Current Account / Balance of Payments** A deficit in current account due to spending more of its currency on importing products than it is earning through sale of exports causes depreciation. 4. **Political Stability** A country with less risk for political turmoil is more attractive to foreign investors, as a result, drawing investment away from other countries with more political and economic stability. 5. **Speculation** If a country\'s currency value is expected to rise, investors will demand more of that currency in order to make a profit in the near future. As a result, the value of the currency will rise due to the increase in demand. With this increase in currency value comes a rise in the exchange rate as well. **[Purchasing Power Parity]** According to this concept, two currencies are in equilibrium - currencies being at par when a basket of goods is priced the same in both countries, taking into account the exchange rates. PPP currency rates are considered more accurate than market exchange rates as it compares countries\' currencies through a \'basket of goods\' approach. It can decipher if a currency is over or undervalued compared to another. **The Fair-Trade Movement** **The Fair-Trade Movement** is a global initiative that aims to create more equitable and just trading relationships between developed and developing countries. The movement focuses on several key objectives: - **Equity in International Trade** - **Better Trading Conditions** - **Contributing to Sustainable Development** The fair-trade movement aims to support producers in developing countries by raising awareness and advocating for change, such as ensuring better prices for producers and protecting the rights of marginalised farmers and workers. Consumers are encouraged to choose products with the Fairtrade logo. When a product is Fair-trade certified, it means that producers receive a minimum fair-trade price, and their communities benefit from an additional fair trade premium to support social, economic, and environmental projects. **Fairtrade minimum price:** Consumers of the product know that the producer receives a Fairtrade minimum price. If the market price rises above the minimum Fairtrade price, then the producer receives that higher market price. **Fairtrade premium:** Communities that produce the goods also receive an additional sum of money to be spent locally, e.g. on local schools, environmental projects. This helps promote the sustainable development of these communities. **Global Institutions** **[World Trade Organisation]** The **World Trade Organization (WTO)** is an international organisation that regulates and facilitates global trade between nations. Established in 1995, it provides a framework for negotiating trade agreements, resolving disputes, and ensuring that trade flows as smoothly, predictably, and freely as possible. The WTO has 164 member countries and aims to promote free trade by reducing tariffs, eliminating trade barriers, and enforcing agreed-upon rules. It serves as a platform for trade negotiations, monitors national trade policies, and works to settle trade disputes among member countries. The roles of the WTO include: **1**. **Trade Negotiations:** They facilitate trade agreements between countries. **2. Implementation/Monitoring:** Once a trade agreement is in place, the WTO is responsible for ensuring that it is being properly implemented. **3. Dispute Resolution:** If a country is in a trade dispute with another country, it can bring the grievance to the WTO, which will help to resolve the issue. **4. Building the Trade Capacity of Developing Countries:** The WTO provides assistance to developing nations, e.g. increasing their trading opportunities, reducing trade barriers on exports from developing countries. **[The IMF]** Trade is a central part of IMF activities and it works closely with the WTO to facilitate the expansion and balanced growth of international trade" Key areas include: \- Surveillance \- Policy Advice \- Technical Assistance and Training \- Facilitating Initiatives with other Institutions (WTO, WB) **[The World Bank]** The World Bank supports an open, rules-based, predictable, international trading system. The World Bank Group helps its client countries improve their access to developed country markets and enhance their participation in the world economy. Key areas include: \- Trade Policy and Integration \- Trade Performance \- Trade Facilitation and Logistics **Short Questions** **Q1**  a. €76bn + €91bn = €167bn b. **Economic Growth**: A BOP surplus often signals a robust export sector, which can contribute to overall economic growth. Increased foreign revenue supports domestic industries and can lead to job creation and higher income levels. **Q2** a. **1. Employment**: FDI creates numerous job opportunities. For instance, in Ireland, over 245,000 employees work indirectly for companies facilitated by IDA Ireland. These jobs span a wide range of sectors and often include both direct positions within multinational corporations and indirect roles in supporting industries. b. **Lower Corporation Tax**: Companies often seek to minimise their tax burden by investing in countries with lower corporate tax rates. For example, the corporation tax rate in the US is 21%, while in Ireland it is 15%, making Ireland an attractive destination for firms looking to reduce tax liabilities. **Q3**  a. **Climate**: Ireland has a cool temperature climate. This climate and reliable access to water resources make Ireland an attractive location for data centres and tech firms, which benefit from lower cooling costs for servers and data storage than countries with warmer climates. b. **Improved standard of living**: The NBP will provide high-speed broadband access to everyone, regardless of their location. Once fully implemented, all areas of Ireland will benefit from a modern and dependable broadband network, resulting in more efficient services and better entertainment options, ultimately enhancing the overall standard of living. c. **Economic Equity and Social Inclusion**: Supporting balanced regional development helps reduce disparities between urban and rural areas or different regions, ensuring that all parts of the country have access to economic opportunities, infrastructure, and essential services. This promotes social inclusion, reduces poverty, and prevents overconcentration of resources and opportunities in a few regions, leading to a more equitable distribution of wealth and an improved quality of life for all citizens. **Q4** a. b. **Increased Employment**: A rise in demand for Irish exports abroad will lead to a higher demand for Irish labour to produce these goods domestically, resulting in increased employment in Ireland. **Q5**  A Free Trade area means that member countries can trade freely without tariffs or any other barriers being imposed on one another. Whereas, a Customs Union is more advanced than a free trade area. In a customs union, member countries agree to trade freely and impose common tariffs on countries that are outside the union. **Q6** A **customs union** is a trade agreement between two or more countries that agree to eliminate tariffs, quotas, and other trade barriers on goods traded among them. In addition to free trade among member countries, a customs union establishes a common external tariff (CET) for imports from non-member countries. **Q7**  **(i) Tariffs:** Taxes or duties imposed on imported goods, making them more expensive compared to domestic products. **(ii) Quotas:** Limits on the quantity or value of specific goods that can be imported into a country. **(iii) Subsidies:** Financial support provided by the government to local businesses and industries, reducing their production costs. **Q8** **(i) Lower Labour Costs:** These countries offer significantly lower wages compared to developed nations and even some other emerging markets. **(ii) Strategic Market Access:** Southeast Asian countries like Vietnam, Indonesia, and Thailand provide access to rapidly growing local markets and proximity to other major Asian economies, including China and India. **(iii) Favourable Business Environment:** Many Southeast Asian countries have implemented pro-business policies, such as tax incentives, investment-friendly regulations, and improved infrastructure, to attract foreign direct investment (FDI). **Q9**  **Explanation:** The statement means that Ireland is spending more on foreign goods, services, and income payments than it is earning from its exports and income receipts from abroad. **Reasons:** **(i)** Repatriation of profits by multinationals operating in Ireland. **(ii)** Greater disposable incomes in Ireland which results in an increase in the level of imports. **Q10** **(i) Ignore the Law of Diminishing Marginal Returns**: The LOCA assumes that countries can increase production of a good without facing increasing costs or reduced efficiency, suggesting constant returns to scale. **(ii) Assumes Perfect Mobility of Factors of Production**: The LOCA presumes that factors of production, like labour and capital, can be easily and quickly shifted from one industry to another without any friction or loss. **(iii) Ignore Transport Costs**: The model overlooks the impact of transport costs, assuming that goods can be traded internationally without any additional expenses. **Long Questions** **Q1**   **(b) (i)** **Expand R&D Tax Credits**: Strengthen tax incentives for companies investing in research and development, making it more financially attractive for firms to innovate. This will help Irish businesses develop new technologies and products, boosting their global competitiveness. **Improve Infrastructure**: Invest in upgrading transportation networks and expanding high-speed internet access across the country. Enhanced infrastructure will lower operational costs, improve efficiency, and make Ireland a more attractive location for businesses. **(iii)** A **recession** is an economic term referring to a significant decline in economic activity across the economy that lasts for an extended period, typically recognized as two consecutive quarters of negative GDP growth. During a recession, there is a noticeable drop in consumer spending, business investment, and industrial production. This often leads to higher unemployment rates, lower income levels, reduced consumer and business confidence, and can sometimes result in deflationary pressures. **(c) (i)** **Economic Benefits**: Membership in the EU provides access to the single market, allowing for the free movement of goods, services, capital, and labour among member states. This boosts trade, attracts investment, and fosters economic growth and development. **Political Stability and Security**: Joining the EU offers countries a framework for political cooperation and stability. It also enhances security through collective defence agreements and collaboration on law enforcement, immigration, and border control, making it easier to address transnational challenges. **(iii)** **High Energy Consumption**: Data centres require substantial amounts of electricity to operate, contributing to increased demand on Ireland\'s energy grid. This could drive up energy prices for consumers and businesses, potentially making the economy less competitive. **Environmental Impact**: The energy consumption of data centres often leads to higher carbon emissions, particularly if the energy is sourced from non-renewable resources. This environmental degradation can damage Ireland\'s reputation and may result in future costs related to climate change mitigation and adaptation. **Q.2** **(i) Vulnerable tax revenue position**: MNCs pay most of Ireland\'s corporation tax, which is hugely volatile. This could leave the government finances in a vulnerable position should these firms decide to leave Ireland. Ireland would be more likely to run large current government deficits. **Effects on future economic growth:** if MNCs left the loss of jobs, incomes, profits, and a fall in exports would have a major negative impact on Ireland\'s economic growth with decreases in economic growth there would be a decrease in the overall tax take for the Irish government. **(ii) Exchange Rates**: Fluctuations in exchange rates can significantly impact national competitiveness. For example, if the euro weakens against the pound sterling, eurozone exports, including those from Ireland, become cheaper and more attractive to UK buyers. Conversely, a stronger euro makes Irish goods more expensive abroad, potentially reducing demand and weakening Ireland\'s competitive position in foreign markets. **Costs of Production**: High production costs, such as labour, raw materials, and energy expenses, can reduce national competitiveness. If these costs rise, businesses may pass them on to consumers through higher prices, making goods and services less attractive in both domestic and international markets. For example, high wages or energy costs can make Irish products more expensive relative to those from countries with lower production costs. **Q3**  **(i)** Trade protection, also known as protectionism, is an economic policy implemented by governments to restrict or limit international trade. The primary objective is to protect domestic industries from foreign competition by making imported goods and services more expensive or less attractive. **(ii) Protecting Domestic Industries**: Trade protection shields local businesses from foreign competition, allowing them time to grow and become competitive. This is particularly crucial for new or strategic industries that need to develop capabilities before facing global market pressures. **Preserving Jobs**: By limiting imports, trade protection helps safeguard jobs in domestic industries that might otherwise be threatened by cheaper foreign goods. This ensures that local workers remain employed and that key industries maintain their workforce stability. **(iii)** **Higher Consumer Prices**: Trade protection often leads to increased prices for goods and services, as tariffs, quotas, and other barriers raise the cost of imported products. Consumers may have to pay more for goods that could be obtained more cheaply from foreign producers, reducing their overall purchasing power. **Retaliation and Trade Wars**: When a country implements trade protection measures, other countries may retaliate by imposing their own barriers against the original country's exports. This can lead to a trade war, harming global trade, reducing market access for exporters, and potentially leading to economic downturns. **Q4** **Customs Checks and Border Delays**: Post-Brexit, the UK is no longer part of the EU's single market and customs union. This has led to the reintroduction of customs checks and increased paperwork for goods moving between the UK and Ireland. These new procedures have caused delays at the border, increased costs for businesses, and disrupted supply chains, particularly for industries that rely on just-in-time delivery. **Possible negative effect on Irish exports:** Approximately 15 percent of Irish goods and services exports are destined to the UK. In certain sectors, the UK is an especially important market, such as the agri-food sector where around 40 per cent of exports are destined for the UK. Supplier industries to the export sectors will also be affected. In addition, two-thirds of Irish exporters make use of the UK land bridge to access continental markets, and this could pose problems for Irish exporters who wish to avoid UK ferry ports. **Q5**  **(i)** US - Trade surplus. Ireland\'s exports (29%) exceeds imports from the US (20%). More money coming into Ireland than leaving to the USA. GB - Trade deficit. Ireland\'s imports (18%) exceeds exports to the UK (00%). More money going into Great Britain than coming into Ireland. **(ii) Economic Benefit: Increased choice of goods and services:** Imports allows us to benefit from a greater variety of goods and services than would be otherwise available. We can\'t/don\'t produce certain goods and thus must import these. Greater choice leads to greater standard of living for citizens in Ireland. **Economic Challenge: More dependent on other countries:** This would be especially true if Ireland imports commodities, such as food, oil, and industrial materials. It\'s dangerous if we rely on a foreign power to keep our population fed and our factories running. **Q6** **(i)** The Law of Comparative Advantage states that a country should specialise in the production of those goods and services in which it is relatively most efficient (has greatest comparative advantage) and trade for the remainder of its requirements. **(ii) Ability to attract FDI:** Companies who may wish to locate in Ireland require high speed broadband for connection with world markets. Ireland must offer high standards so as to be competitive with other countries. **More flexible working arrangements:** During Covid-19 working from home has become the norm in many sectors. In order to maintain our economy\'s competitiveness, high quality broadband services nationwide have never been more important in allowing workers to work from home and allowing business activity to continue uninterrupted. **(iii) Fund skills, education and training programmes:** The government can fund programmes which help develop skills which are needed by firms. This ensures availability of a skilled workforce which makes workers efficient and helps reduce the costs of firms. Targeted education funding to meet future skills needs of the growth sectors. **Improve the infrastructure for business:** Roll-out better and greener transport links which are more sustainable. Help improve our ports and airports so that access is maintained/improved to the EU following Brexit. Develop water supply; sewerage facilities and waste disposal so that they become more efficient and less costly. By improving the infrastructure, it should make firms more efficient and thus reduce costs.  **Q7** a. **(i)** **Tariffs**: A tariff is a tax imposed on imported goods, which raises their prices compared to domestically produced items. This makes imported goods less competitive in the domestic market, encouraging consumers to buy local products instead. For example, in 2018, the US introduced a 25% tariff on steel imported from China, aiming to protect the domestic steel industry from cheaper foreign competition. **Subsidies**: Subsidies are financial aids provided by governments to support local exporters, allowing them to reduce their prices in international markets. By lowering the price of exported goods, subsidies make these products more competitive abroad. For example, a government might provide subsidies to agricultural producers to help them sell their products at lower prices on the global market, boosting exports and supporting the domestic agricultural sector. **(ii)** **Encourage European (and International) trade**: Through this support from the EU it allows Airbus to become highly specialised in their production, lowering costs and making them more internationally competitive thereby encouraging trade. It also encourages Airbus to source raw materials throughout Europe. **Firms might become overly reliant on protection:** Protective measures can lead to inefficiency within firms as they rely on a safety net. This security might reduce their incentive to innovate or enhance their products, knowing they have an edge over foreign competitors. **Could trigger retaliation:** The U.S. has expressed dissatisfaction with this perceived unfair advantage and has responded by imposing tariffs on European goods. The current global economic climate suggests increasing tensions, with the U.S. and China also engaged in various trade disputes. **Inequality concerns:** Some firms may benefit from government support, while others are left to fend for themselves. This creates an unfair playing field. Small start-ups, already challenged by the cost structures of larger firms, might be further discouraged if protectionist measures are implemented, potentially deterring new entrants altogether. b. **(i)** A Free Trade area means that member countries can trade freely without tariffs or any other barriers being imposed on one another. Whereas, a Customs Union is more advanced than a free trade area. In a customs union, member countries agree to trade freely and impose common tariffs on countries that are outside the union. **(ii) Free Trade Area:** Being a member of the EU allows Ireland access to an increased market size of over 500 million people. These customers can be exported tariff free. Ireland also benefits from the collective agreements that the EU negotiates with other countries outside the EU. Trade is also made easier within the EU with the removal of barriers / Irish firms can bid for public sector contracts within the EU. **Foreign Direct Investment:** Ireland operates as an export hub on the doorstep of Europe, this location provides an incentive to American firms to provide FDI into Ireland in order to access this market. **(c) (i) Access to larger markets/ Increased sales and profits:** As Ireland is a very small market, entering this foreign market gives Irish SMEs access to more customers and more opportunity to expand. If Irish SMEs can sell more goods abroad this will boost their revenue and consequently their profits. **Economies of scale:** Economies of scale refers to the lower cost per unit a firm enjoys when output increases. If they are successful in increasing sales abroad, they will be able to increase production and gain the advantages of large scale production and benefit from economies of scale. **(ii) Cultural and Language Barriers**: The significant differences in language, business practices, and consumer behaviour between Ireland and China can create challenges for Irish companies. Misunderstandings or miscommunications can arise, and adapting marketing strategies to resonate with Chinese consumers may require considerable effort and local expertise. **Regulatory and Compliance Hurdles**: China has complex and stringent regulations regarding product standards, certifications, and import procedures. Navigating these regulations can be challenging for Irish exporters, potentially leading to delays, increased costs, and the need for specialised knowledge or partnerships with local firms to ensure compliance. **Q8** **(i)** The Law of Absolute Advantage states that each country should specialise in the production of those goods and services that it can produce more efficiently than other countries. Whereas the Law of Comparative Advantage states that a country should specialise in the production of those goods and services in which it is relatively most efficient (has greatest comparative advantage) and trade for the remainder of its requirements. **(ii)** **Natural Resources**: A country with abundant natural resources, like minerals, fertile land, or favourable climate conditions, can produce certain goods more efficiently. For example, Brazil\'s vast coffee-growing regions make it a leading coffee producer. **Skilled Labor and Expertise**: A country with a highly skilled workforce and specialised knowledge in a particular industry can produce high-quality goods more effectively. For instance, Germany\'s strong engineering tradition and skilled labour force make it a leader in manufacturing high-precision machinery and automobiles. **Technological Advancements**: A country with advanced technology and innovation capabilities can produce goods more efficiently or with superior quality. The United States, for example, excels in the production of software and electronics due to its cutting-edge technology sector. **Q9**  **(i) 1. Tariffs**: A tariff is a tax imposed on imported goods, which raises their prices compared to domestically produced items. This makes imported goods less competitive in the domestic market, encouraging consumers to buy local products instead. For example, in 2018, the US introduced a 25% tariff on steel imported from China, aiming to protect the domestic steel industry from cheaper foreign competition. **2. Quotas**: A quota sets a physical or monetary limit on the amount of a specific good that can be imported into a country. This restriction helps manage the volume of imports and can protect domestic industries from being overwhelmed by foreign competition. For example, the European Union imposes quotas on the amount of clothing that can be imported from China to avoid market disruption and to safeguard European textile producers. **(ii) For:** **Job Creation and Economic Diversification**: Protecting infant industries can lead to job creation in sectors that might not otherwise develop. Over time, these industries can diversify the economy, reducing reliance on a narrow range of industries and making the economy more resilient to external shocks. For example, a country reliant on agriculture might use protectionist measures to develop a manufacturing sector, thereby creating new employment opportunities and stimulating economic growth. **Technological Development and Innovation**: By sheltering infant industries from foreign competition, governments can encourage domestic innovation and technological development. As these industries mature, they may develop new technologies and processes that enhance productivity and contribute to broader economic growth. **Against:** **Inefficiency and Lack of Innovation**: Trade protection can lead to inefficiencies within protected industries. With a safety net in place, firms may feel less pressure to innovate, improve quality, or reduce costs, knowing they face limited competition. Over time, this can lead to a lack of competitiveness, with the protected industry becoming dependent on government support rather than improving its efficiency. **Q10** **(i)** A country's terms of trade are a ratio of its export prices to its import prices. It measures how much a country can import in exchange for its exports. If the terms of trade improve, it means that the country can buy more imports for a given quantity of exports (export prices rise relative to import prices). Conversely, if the terms of trade worsen, the country must export more to afford the same number of imports (import prices rise relative to export prices).  **(ii)** **(iii) Effect on export sector:** As prices for exports have increased it may result in increased revenue for the export industry / It could lead to a reduction in demand for Irish exports depending on the elasticities of demand for the product. **Effect on imports:** An improvement indicates falling import prices relative to export prices. Ireland\'s standard of living may improve as a result of the cheaper / increased availability of imports. **Q11** **(i) Current Account:** Tracks trade in goods and services, income from investments, and current transfers (e.g., remittances and foreign aid). **Capital Account:** Records capital transfers and transactions involving non-produced, non-financial assets (e.g., debt forgiveness and asset transfers). **Financial Account:** Covers cross-border investments in financial assets, including direct investments, portfolio investments, and changes in reserve assets. **(ii)** A surplus on the current account means that the money value of imports is less than the money value of exports. A current account surplus indicates that a nation is a net lender to the rest of the world. **(iii) BOP Surplus due to Weak Domestic Demand / Unbalanced Economy / Overreliance on Exports:** A country might experience a large current account surplus because of relatively weak domestic demand. When domestic consumption is low, consumer spending decreases, which can negatively impact employment levels. This situation often indicates that the country is overly dependent on exports, with domestic demand and consumer spending being relatively subdued. **Current Account Surpluses Financing Deficits:** For one country to have a current account surplus, another country must have a deficit. The country running a deficit might respond by implementing protectionist measures. Often, the surpluses enjoyed by developed nations can come at the expense of developing countries that experience corresponding deficits. **Currency Manipulation:** Countries may keep their currency undervalued or prevent its appreciation to make their exports cheaper and more competitive, while making imports more costly. However, such currency manipulation can lead to an overheated economy, creating the potential for economic instability and cycles of boom and bust. **Q12**  **Benefits:** **Economies of Scale**: By accessing larger markets, SMEs can achieve economies of scale, potentially reducing production costs and improving profitability. Larger production volumes can lead to cost savings on materials and operational efficiencies. **Access to New Talent and Innovation**: Operating internationally exposes SMEs to different business practices, technologies, and talent pools. This can lead to innovative ideas and practices that enhance the firm\'s competitive edge and operational efficiency. **Challenges:** **Cultural and Language Barriers**: Differences in language, business etiquette, and cultural norms can create challenges in communication and relationship-building with foreign partners and customers. Misunderstandings or cultural missteps can impact business effectiveness and market acceptance. **Increased Competition and Market Risks**: Entering foreign markets often means facing increased competition from both local and international businesses. Additionally, SMEs may encounter market volatility, political instability, or economic fluctuations that can pose risks to their operations and profitability. **Q13**  a. **Q14** **(i)** The Law of Comparative Advantage states that a country should specialise in the production of those goods and services in which it is relatively most efficient (has greatest comparative advantage) and trade for the remainder of its requirements. **(ii) UK** For each unit of Clothing which the UK imports, provided the UK gives China less than what it would have taken themselves to produce these clothes i.e. less than 4 units of Food, then the UK benefits from trade. **China** For each item of Food which China imports, provided China gives the UK less than what it would have taken them to produce this Food i.e. less than 0.33 units of Clothing, then China benefits from trade. **(iii)**  **Q15** **(i) Costs of Production**: High production costs, such as labour, raw materials, and energy expenses, can reduce national competitiveness. If these costs rise, businesses may pass them on to consumers through higher prices, making goods and services less attractive in both domestic and international markets. For example, high wages or energy costs can make Irish products more expensive relative to those from countries with lower production costs. **Property Prices**: High property prices, including both commercial and residential real estate, can affect competitiveness by increasing costs for businesses and employees. For companies, high rents or purchase prices for office and manufacturing spaces can drive up operating expenses. For workers, high housing costs may require higher wages to maintain their standard of living, which can, in turn, increase labour costs for employers. **Corporation Tax**: The level of corporation tax directly impacts a country\'s attractiveness to businesses, particularly multinational corporations (MNCs). Ireland's relatively low corporation tax rate of 15% has been a crucial factor in attracting foreign investment. A lower tax rate allows businesses to retain a higher share of their profits, making Ireland a more appealing destination for MNCs looking to establish their European headquarters or other operations. This, in turn, enhances national competitiveness by fostering job creation, innovation, and economic growth. **(ii) Access to a Wider Range of Goods and Services**: International trade allows Irish consumers to access a diverse array of products and services that may not be available domestically. This includes specialty goods, foreign brands, and unique products from different cultures, enhancing consumer choice and satisfaction. **Competitive Prices**: By importing goods from other countries, Irish consumers benefit from increased competition, which often leads to lower prices. Competition from international suppliers can drive domestic producers to improve their efficiency and reduce prices, further benefiting consumers through cost savings. **Higher Quality and Innovation**: Exposure to international markets encourages local businesses to innovate and improve their products to remain competitive. Consumers benefit from higher-quality goods and services and can take advantage of new technologies and advancements brought in through global trade. **Q16**  **(i)** The Law of Comparative Advantage states that a country should specialise in the production of those goods and services in which it is relatively most efficient (has greatest comparative advantage) and trade for the remainder of its requirements. **(ii) Ignore the Law of Diminishing Marginal Returns**: The LOCA assumes that countries can increase production of a good without facing increasing costs or reduced efficiency, suggesting constant returns to scale. In reality, as production expands, the cost per unit may increase due to diminishing marginal returns, where additional inputs contribute less and less to output. **Assumes Perfect Mobility of Factors of Production**: The LOCA presumes that factors of production, like labour and capital, can be easily and quickly shifted from one industry to another without any friction or loss. In practice, this is unrealistic, as workers may not have the skills to move between different sectors easily, and capital investments may not be adaptable to new uses. **Ignore Transport Costs**: The model overlooks the impact of transport costs, assuming that goods can be traded internationally without any additional expenses. In reality, shipping goods across borders involves costs such as freight, insurance, and handling, which can significantly affect the overall benefits of trade. **Overlooks Strategic Importance of Self-Sufficiency**: The LOCA assumes that countries should always specialise in producing goods where they have a comparative advantage, without considering strategic reasons for self-sufficiency. For example, during the COVID-19 pandemic, Ireland faced difficulties in sourcing personal protective equipment (PPE) due to global supply chain disruptions, highlighting the importance of maintaining some level of self-sufficiency in essential goods. **(iii) Low Corporation Tax**: Ireland's competitive corporate tax rate of 12.5% is one of the lowest in Europe, making it a favourable location for multinational corporations (MNCs) looking to minimise tax expenses while providing goods and services. This tax advantage attracts foreign direct investment (FDI) and boosts Ireland\'s reputation as a business-friendly environment. **Skilled Labour Force**: Ireland offers a highly skilled and educated workforce, which is appealing to companies in various industries. With strong educational institutions and training programs, Ireland ensures a steady supply of competent professionals, which helps reduce staff training costs for businesses and improves productivity. **Q17** **(i) Economic Growth and Development:** International trade is a significant driver of economic growth for Ireland. Exporting goods and services contributes to the country's GDP and supports overall economic development. Ireland\'s openness to trade allows it to leverage its strengths in various sectors, such as pharmaceuticals, technology, and financial services, which are vital for its economic expansion. **Employment and Investment:** Trade stimulates job creation and attracts foreign investment. Many Irish companies are involved in exporting activities, which directly generates employment. Additionally, Ireland\'s attractiveness as a trade hub encourages foreign multinational corporations to invest in the country, creating jobs and boosting the local economy. Sectors like technology and manufacturing benefit greatly from this foreign direct investment. **Consumer Benefits and Market Access:** International trade provides Irish consumers with a wider variety of goods and services at competitive prices. It enhances consumer choice and quality by allowing access to products from around the world that may not be produced domestically. This competition helps drive down prices and improve the standard of living for consumers. **Economic Resilience and Diversification:** Engaging in international trade helps diversify Ireland's economy, reducing its reliance on the domestic market alone. This diversification makes the economy more resilient to local economic downturns and global economic shifts. A broad export base can buffer against economic volatility and foster stability. **(ii) Protecting Infant Industries**: Governments may restrict trade to shield nascent industries that are not yet competitive on a global scale. This protection allows these industries to develop and gain experience until they can compete effectively in the international market. **Safeguarding Jobs**: Trade restrictions can help protect domestic employment in industries threatened by foreign competition. By limiting imports, governments can prevent job losses and support industries that are vital for the local economy. **National Security**: Governments might restrict trade in certain strategic sectors, such as defence or critical infrastructure, to safeguard national security. Limiting foreign control or influence in these areas helps ensure that a country maintains its sovereignty and security. **Q18**  **(i)** The Law of Comparative Advantage states that a country should specialise in the production of those goods and services in which it is relatively most efficient (has greatest comparative advantage) and trade for the remainder of its requirements. **(ii) South Korea** For each TV which South Korea imports, provided it gives Japan less than what it would have taken itself to produce this TV i.e. less than 3 items of clothing, then South Korea benefits from trade. **China** For each item of clothing which China imports, provided it gives South Korea less than what it would have taken itself to produce this clothing i.e. less than 1/2 TV, then China benefits from trade. **(iii)** **Q19**  ### **Current Account:** The Current Account records the flow of goods, services, income, and current transfers between a country and the rest of the world. It includes four main components: Trade Balance (Goods): This tracks exports and imports of physical goods. A positive balance (surplus) occurs when exports exceed imports, while a negative balance (deficit) occurs when imports exceed exports. Services Balance: This captures the export and import of services such as financial services, tourism, and transport. A surplus in services indicates more services are exported than imported. Primary Income (Investment Income): This records income earned by residents from investments abroad (e.g., dividends and interest) and payments made to foreign investors with investments in the country. Secondary Income (Current Transfers): This includes transfers where no goods or services are exchanged, such as remittances, foreign aid, and contributions to international organisations. ### **Capital Account:** The Capital Account deals with capital transfers and transactions involving non-produced, non-financial assets. It includes: Capital Transfers: These are transfers of ownership of assets, such as debt forgiveness, and the transfer of funds for investment in infrastructure or other capital projects. Transactions in Non-Produced, Non-Financial Assets: This includes the acquisition and disposal of assets like patents, copyrights, and land that are not produced but have economic value.