Unit 4.pdf

Unit 4: International Trade Source: Worthington, I., & Britton, C. (2015). The Business Environment. Seventh Edition, Pearson. 1. Specialization Suppose that country A is more com...

Unit 4: International Trade Source: Worthington, I., & Britton, C. (2015). The Business Environment. Seventh Edition, Pearson. 1. Specialization Suppose that country A is more competitive than country B in producing the product F. In the other side, country B is more competitive than country A in producing the product H. Specialization should happen and country A should produce the product F and country B should produce the product H. In addition, both countries should trade with each other. Complete specialization is difficult to occur for strategic explanations. 2. Restrictions to international trade Numerous measures are implemented by governments to restrict international trade including: - Quotas: Limitation of the import of specific products into a country. - Tariffs: Taxes imposed on imported products. Source: Worthington, I., & Britton, C. (2015). The Business Environment. Seventh Edition, Pearson.  - Exchange controls: Limitation of buying a currency which prevent the importation of goods. - Subsidies: Financial support of local goods to increase their global competitiveness based on the reduction of the cost of production. - Qualitative controls: Control of product quality and not the quantity or price. 3. Balance of payments The balance of payments registers the international trade transactions of a country over a particular period of time usually one year. It registers the flows of money rather than goods. In importation, the amount of imports is recorded negatively as the money is flowing out of the country. In exportation, the amount of exports is recorded positively as the money is flowing into the country. The money moves across countries to exchange goods and services (current transactions) and for investments purposes (capital transactions). 3.1. Current transactions The current account, which reflects the current transactions, records the flows of money obtained and paid out in exchange for goods and services. It comprises two components: - Visible trade: it represents the import and export of goods. Source: Worthington, I., & Britton, C. (2015). The Business Environment. Seventh Edition, Pearson.  - Invisible trade: it represents the import and export of services. It comprises:  Services: banking, hospitality, insurance, etc.  Interests, profits and dividends.  Transfers: payments to international institutions, grants to developing countries, private transfers, etc. 3.2. Capital transactions Capital transactions represent money flowing across countries for investment purposes. They consist of funds from public and private sectors, and long-term and short-term monetary movements. 4. Equilibrium in the balance of payments There is a balance of payments surplus if the amount of exports surpasses the amount imports in the current account. There is a balance of payments deficit if the amount of exports is lower than the amount imports in the current account. An outflow in the capital account will match a surplus in the current account. 5. Methods of correcting balance of payments deficits Unlike deficit, the surplus is not seen as a problem. In that regard, some actions could be taken to overcome a deficit which is noticed when the money flowing out of the country exceeds the money flowing into the country due to international Source: Worthington, I., & Britton, C. (2015). The Business Environment. Seventh Edition, Pearson. trade. Therefore, the public authorities should promote exports and/or prevent imports through several ways including: - A decrease in the exchange rate has the double influence on making exports to foreign countries cheaper and imports into the country more expensive. Thus, exports are encouraged and imports are discouraged. - Offering subsidies to local companies in order to increase exports. Thus, the price of goods in foreign markets will be reduced. Then, goods offered by domestic firms will be more competitive. - Import controls may prevent the imports into the country. - An increase in the interest rate will make the country more attractive to investors and counterbalance the current account deficit. 6. Exchange rates Exchange rate is the price of a currency based on other currencies. With international trade, it is necessary to exchange currencies. For example, a person from USA wants to buy items from Oman. Then, Omani Riyals have to be given. He will buy Omani Riyals from a bank in exchange of US Dollars. Thus, an exchange rate between Omani Riyals and US Dollars should exist. Source: Worthington, I., & Britton, C. (2015). The Business Environment. Seventh Edition, Pearson. 7. Types of exchange rates - Floating exchange rate: The floating exchange rate is free to vary based on market conditions. It is determined within a free market without government influence. It depends on the demand and supply of the currency. - Fixed exchange rate: it does not change. - Hybrid exchange rate combines the two previous types. 8. Exchange rates and business Business can be affected by the changes of the exchange rates: - The export becomes easier or harder as prices change. - The entry of foreign competitors to domestic markets becomes easier or harder (price effect). - Make trading and investment uncertain. - Add or reduce the cost of imports. Source: Worthington, I., & Britton, C. (2015). The Business Environment. Seventh Edition, Pearson.