Unit 6
International Specialization
Globalization, Free Trade and Trade Protection
Exchange Rate
BoP (Balance of Payments)
It records how well or how badly a nation's economy is doing in international trade
Specialization allows the economy to produce a greater volume of a specific good or service more efficiently
It is the rate at which 1 currency will be exchanged by the other
Globalization is the act of increasing social, technological, political and economic independence between people around the world
Advantages of Specialization: Higher Output, Lower Costs. Spread of ideas and technology, Increase in competition, Increased employment and incomes, Opportunities to increased international trade
Disadvantages of Specialization: Over-reliance on other countries to supply other essential goods and services, Over specialization, Limited consumer choice, Over-exploitation of resources, Structural unemployment due to focusing on a type of service or good
Types of trade barriers
Tariffs, Subsidies, Quotas, Embargos
Tariffs are barriers that indirectly tax the prices of the imported good to help the local companies
Subsidies are government grants paid to local companies to be able to sell their products at local prices than overseas companies
Quotas is the limit on the volume of an imported good allowed into a country
Embargos are complete bans of a certain good or service into a country
Advantages of trade protection
To protect infant/sunrise industries
To protect strategic industries such as agriculture, energy and defence
To protect domestic firms from dumping
To limit over specialization
To correct a trade imbalance
Disadvantages of trade protection
Reduces the gains made from trade
Restricts consumer choice
Restricts new business opportunities
Inefficient firms who are protected by trade barriers will continue to be inefficient
Other countries will retaliate against a country's trade barrier
The value of one's currency in terms of another country's currency
Currency Appreciation is an increase of value of a country's currency with respect to another foreign currency
Currency Depreciation is the loss of value of a country's currency with respect to another foreign currency
Factors affecting Exchange rate
Changes in demand for exports and imports
Inflation
Changes in interest rates
Speculation
Entry and departure of MNCs
Exchange rates system
Floating Exchange Rates
Fixed Exchange Rates
Managed Exchange Rates
Price determined only by demand and supply, no government intervention
Fixed currency value, no fluctuation
Echange rate influenced by a government
Consists of 4 components
Trade in goods
Trade in services
Primary Income
Secondary Income
Balance of Trade
Balance of Trade Surplus
Balance of Trade Deficit
Country's Exports > Country's Imports
Country's Exports < Country's Imports
Primary Income is the income governments receive from wages and rent from non-residents - the wages and rent paid to the non-residents
It is the current transfers received from non-residents - the current transfers given to non-residents