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