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Chapter 14 The International Context
Chapter 14 The International Context
The international
context
w w w . s t ud y i n t e r a c t i v e . o r g
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CHAPTER CONTENTS
LEARNING OUTCOMES ------------------------------------------------- 165
BALANCE OF PAYMENTS ----------------------------------------------- 166
CURRENT ACCOUNT DEFICIT / SURPLUS
167
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LEARNING OUTCOMES
a) Explain the concept of the balance of payments and its implications for
government policy.
b) Identify the main elements of national policy with respect to trade.
c) Explain the impacts of exchange rate policies on business.
d) Explain the role
development.
of
major
institutions
promoting
global
trade
and
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BALANCE OF PAYMENTS
The balance of payments records financial transactions between one country and
the rest of world.
The balance of payments comprises three accounts:
1.
Current account;
2.
Capital account;
3.
Financial account.
The current account measures trade in goods and services, net investment
incomes and transfers. The capital account and financial account record flows
of financial capital arising from saving, investment and currency speculation.
9
-92,877
+54,479
+26,940
-13,610
-25,068
+3,393
+18,121
+3,554
Key points:
The sum of the balance of payments accounts must always be zero.
Net errors / omissions arise as a result of statistical errors.
If there is a current account surplus
o
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Then there will be a similar positive amount on the assets and liabilities
section, ie this will consist of inward investment and/or increased overseas
indebtedness, showing how the deficit was financed.
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imports
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Balance
on
current
acct
Time
Deficit
The problem with devaluation being that low price elasticities of demand for imports
and exports immediately following an exchange rate change may lead to an
increase in the deficit. The delayed impact, often due to contracts in place, means
that the volume of imports does not immediately fall away.
Protectionist measures
Aimed at reducing imports, measures might include:
Import tariffs;
Import quotas;
Embargo (total ban);
Administration burdens (excessive paperwork!).
Domestic deflation
An attempt to reduce demand for imports by:
Increasing interest rates;
Increasing taxation;
Cutting government expenditure.
The above measures unfortunately may lead to some unwanted consequences:
namely unemployment, a reduction in the standard of living, and a loss of industrial
output.
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Exercise 1
Index numbers for import and export prices for the two years are given below.
Exports
Imports
2010
150
2011
144
216
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Absolute advantage
Axioms:
Two countries A & B;
Each produce just two commodities, bread and bananas.
Each country has 10 units of resources.
Using all of their resources they can produce
Table 1
Bread
Bananas
Country A
Country B
400
320
Or
Or
400
160
Country A
Country B
Total
Bread
200
160
360
Bananas
200
80
280
Comparative advantage
Despite Country B having an absolute disadvantage in producing both bread and
bananas, the question is whether there is a benefit from specialisation.
The theoretical basis for free trade is comparative advantage theory. Global
resources can be more effectively utilised when countries specialise in producing
those goods and services in which they have a comparative advantage.
Comparative advantage means that that the opportunity cost of producing the good
is less in a country than elsewhere.
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Country B
1 bread = 1 banana
1 banana = 1 bread
1 banana = 2 bread
The above ratios show that Country B has a comparative advantage in bread. As to
produce an extra unit of bread it only has to give up half a banana, compared to
Country A that would need to give up 1 whole banana to produce 1 extra bread.
Thus the two countries specialise in the commodity for which they have a
comparative advantage.
Production based on specialisation, would be as follows:
Table 3
Bread
Bananas
Country A
Country B
Total
320
320
400
400
Overall economic output is therefore 720, which is greater than under selfsufficiency.
Exercise 2
Assume that two small countries, X and Y, produce two commodities P and Q and
that there are no transport costs. One unit of resource in Country X produces 4
units of P or 8 units of Q. One unit of resource in Country Y produces 1 unit of P or
3 units of Q.
Which of the following statements are true?
A
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World Bank
The World Bank is an international financial institution that provides loans to
developing countries for capital programs.
The World Bank's official goal is the reduction of poverty. All decisions must be
guided by a commitment to promote foreign investment, international trade, and
facilitate capital investment.
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GLOBALISATION
Globalisation may be defined as the widespread extension of trade between
countries and a high degree of interdependence of production between countries.
Briefly discuss and makes notes regarding the following headings:
Impact of globalisation
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