Unit 6: International Trade and Globalisation
Balance of Payments
Record of all economic transactions between home country and the rest of the world within a given time period
Current account (CA)
final goods which are physical in nature
Net Income transfers
→ non physical products / invisible trade balance (financial, educational, healthcare)
When inflow > outflow → net income inwards transfer
total income inflow after netting off total income outflows.
(wages, interest, rental and profit)
Goods balance
KFA
Financial account
Direct investments (long term in nature)
Capital account
Refers to capital transfer, non-produced non-financial assets (humanitarian efforts) selling a train, tractor or truck → accounting takes place in capital account
Exchange rate
Direct investment refers to expenditure incurred by firms when they set up business operations in a country, involving the purchase of physical assets
FOR EXAMPLE, when google sets up a new office in harbourfront
Floating exchange rate
Fixed Exchange rate
Portfolio investments (does not involve any purchase of physical capital and is a shorter term type of investment compared to direct investments)
Changes in Value
Short term capital flow
Appreciation
The value of a nation's currency compared to others
Higher demand for exports / low demand for imports
Current account surplus(Exports rise)
Transient movements of financial capital between countries in response to changes in exchange rates and interest rates
When the federal reserve of the United States increases interest rate, there will be a credit item into the US capital and financial account KFA under the short term capital flow component.
Higher interest rates
Globalization, Free Trade and Protectionism
Protectionism
Cons
Pros
Sunrise industry argument
National security (justified reason)
Protect local firms from dumping
Set by government
Pros:
- Can manipulate the currency to suit interests
- Eliminate uncertainty
Cure a trade deficit
Generate revenue for government
Cons:
- The need for foreign exchange and gold reserves
- Opportunity cost of maintaining the exchange rate
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Export revenue being less than import expenditure (x-m) is negative
Therefore, country’s aggregate demand is decreasing
In addition, it also implies that the country’s balance of payments is weakening
Protectionism is justified as it helps to reduce the trade deficit which benefits the country as a result of the macroeconomic advantages conferred. This includes higher AD and therefore economic growth and more employment as well as an improved trade balance in the balance of payments account.
Sunset industry argument
Multi-natonal corporations
Pros host country
MNC refers to a business or a firm with operations and production as well as distribution facilities located in more than one country.
**with the rise of technology, there has been a rise in non-physical distribution facilities
Cons host country
Jobs created may end up becoming Low value jobs
Job creation
Economic growth
Helps to create more jobs in home country due to expansion of business operations especially in terms of higher roles created such as marketing the sale of exports.
When MNCs expand overseas, they typically repatriate some of the profit back to the home country. In doing so, this indirectly contributes to more income flow back to the Singapore economy.
Unethical behaviour
environmental degration
labour exploitation
FREE PORT —> mining company in the Philippines has been accused of environmental damage because of their mining operations
LG, a South Korean MNC’s chemical plant in India was environmentally harmful and killed 12 people.
MNCs may often create substandard working conditions in an effort to cut costs. This can include the creation of unsafe working conditions such as in chemicals plants, whereby workers do not have enough protective equipment. They may also force their workers to work overtime without extra pay and exploit more child labour
The more senior jobs may be assigned to the MNC’s home country workers
Pros Host country
Skills transfer
Real economic growth
Job creation
When MNCs set up production and distribution facilities in these countries, more job positions are made available to run factories and shops, helping to lower unemployment in the host country and can stimulate higher aggregate demand because when MNCs invest, it leads to higher investment spending in the host country. Furthermore, with more people employed, their incomes will increase which stimulates more consumption expenditure. Therefore, it leads to higher aggregate demand and stimulates higher growth via the multiplier effect.
This increases the country’s quality of labour. With higher quality of labour, the country’s productive capacity will rise, leading to higher supply (potential growth)
Singapore in the 1960s to 1980s —> deliberately attracted many Japanese firms to invest in Singapore. Because of the Japanese firms being in SIngapore, they transferred manufacturing and engineering knowledge and skill sets to Singapore.
With higher GDP and income levels, this leads to more real GDP. As more people are employed, they will spend more, leading to higher C + higher I from the MNC = higher AD. There will be a trickle down effect to the smaller firms in the host country.
For example, when DBS set up in China, they typically outsourced certain services such as cleaning, gardening and security from local firms, creating more jobs for locals.
International Specialization
These industries tend to employ many people and their closure can cause high unemployment
These firms are given the chance to develop, grow and become globally competitive.
If not protected, they may be quickly eliminated by firms from low-cost overseas economies and large firms with significant market share and economies of scale
However, these firms may become reliant on government protection
Trade barriers protect them from cheaper imports, slowing down the decline of these industries and allowing employees to seek new work
This is a form of predatory pricing and unfair competition. A country floods another with a large surplus of goods at significantly lower prices than market prices. Once local businesses have been closed down, the predatory firm with monopolistic market share can jack up the price.
Restriction of consumer choice
Restrict revenue and employment
Local firms cannot seek out new foreign markets to export their goods to
Increasing the cost of borrowing imported raw materials can cause imported inflation
Inefficient domestic firms may be protected
A lack of competition causes x-inefficiency as firms have no incentivise to be more productive or efficient
Foreign retaliation
Other countries may setup their own barriers, reducing exports and AD subsequently
Free Trade
Pros
Cons
Increases consumer choice
Allows countries to benefit from specialization
Raises competition and efficiency
Additional business opportunities
Rapid resource depletion and climate change
Reduced opportunities for growth in less-developed countries
Firms may be unable to compete with large MNCs
Methods
Tariffs
Subsidies
Quotas
Embargos
Excessive quality checks and bureaucracy
Advantages
Disadvantages
For Firms
International trade can help firms to exchange information and technology
Obtain high quality raw materials at low cost
Determined by FOREX Market
Pros:
- Increased flexibility
- Freer monetary policy
- Automatically adjust to shocks and foreign business cycles
Bigger market through international trade could encourage economies of scale
For Firms
Dependency on the raw materials from other countries
Tastes in products could change and other countries could produce better products
For Economy
Structural unemployment could occur as countries get more specialized
Over-specialization
Dependency on other countries to supply essential goods and services
Risk of the over-exploitation of certain resources
Cons:
- Speculation
- Volatility
Depreciation
Rise in the value of a currency
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Lower interest rates
For Economy
Higher real GDP due to better utilization of resources instead of using it’s own resources which are less suitable for its products
Allows the economy to consume outside of its PPC curve
It could focus on one type of product which it specializes at and import the other for a cheaper price as well
Efficiency in using resources
This raises living standards and could reduce absolute poverty
Countries with a large supply of unskilled labour could focus on labour-intensive industries
Reduces unemployment and increases economic growth
Capital Transfers
Benefits of being a MNC
Access to various large markets to sell goods to
Avoid trader barriers by locating production in protectionist countries
Easily affected by foreign events such as taxes on exports imposed by foreign governments
Economies of Scale
Can also help reduce transport costs
Absolute Advantage
Comparative Advantage
For Consumers
Enjoy more quantity of goods and services due to higher output which increases living standards
Lower cost of production may be passed on as low prices for consumers
Higher quality products
A country has this advantage when it can produce a product with fewer resources than other countries
A country has this advantage when it can produce products at a lower opportunity cost
If a country can produce machinery better while another produces agricultural products, each country can specialise in the one they can produce better and import to each other to maximise outputs
This improves the international allocation of resources
For Consumers
Changes in comparative advantage
Comparative advantage changes over time as relative costs change
Foreign countries may not follow health and safety standards in the home country
A country could gain control of most of the global market for a product and restrict supply or push up the price
Any event in other countries producing a product like a natural disaster would result in the product not being available
It could change due to new resources, technology, education and training
Low inflation rate
Economies will be producing at low costs and import lower cost products
Build up a reputation for a certain product
This increases sales and attracts ancillary industries
High transportation costs on exports
An example of perfect competition
Can move financial capital in between countries to take advantage of higher interest rates
S.T.E.E.Q
Increased demand, lower supply
Speculation
Lower quality of home goods
Less foreign demand for exports
higher domestic demand for imports
Higher domestic GDP
Higher purchasing power of individuals at home
potential higher demand for imports
Lower foreign GDP
Less purchasing power of overseas countries
lower demand for exports from home country
income received by the country and expenditure incurred by the country in its dealing with other country.
Visible exports
Visible imports
Service balance
Invisible exports
Invisible imports
Primary income --> comprises of income earned by individuals (compensation of employees) and firms (investment income)
When inflow < outflow → net income outwards transfer
Secondary income --> transfers of money, goods or services that are sent out or come into the country without return for anything else eg. donations
Anything in the nature of a capital good
Refers to the expenditure incurred in the purchase of stocks, bonds and other investment grade financial assets
Excess supply of currency
Speculation
Specialization is countries focusing on what they are best at making
This is influence by the quantity and quality of resources in each country, for example weather and land fertility or highly skilled labour force
Greater variety of goods