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1. International Trade- A firm exports goods or services to consumers in another country. The sale of a good or service across borders.
2. Absolute Advantage- A country uses fewer resources than other countries to produce a given level of output.
3. Comparative Advantage- A country can produce goods at the least opportunity cost compared to other countries with the same resources.
4. Advantages of International Trade
a) Big range of goods for consumers.
b) Larger market size.
c) Lots of competition so they can improve their products.
d) Better political relation.
e) Restructure the economy.
5. Disadvantages of International Trade
a) Countries will become dependant on one another.
b) Demerit goods are allowed to be imported into a country.
c) Depletion of raw material.
d) Decline of the local cottage industries.
6. Terms of trade- Price index of exports divided by the price index of imports.
7. Measured the terms of trade
Terms of trade= Price index of exports / Price index of imports X 100
8. Causes of changes in terms of trade
- Demand Factors
a) Increase in population.
b) Increase in the prices of imported goods.
c) The availability of local substitute.
d) The people’s expectation.
- Supply Factors
a) Using latest technology to increase supply.
b) Political instability.
c) The climate condition in one country.
d) The government intervention.
9. Protectionism- A practice used by governments to protect domestic industries from global competition.
10. Methods of protecting local industries
a) Imposing tariffs to increase the price of the imported goods. There are 2 types of tariffs.
Ad valorem tariff- Based on the value of the good.
Specific tariff- Based on the unit of a good.
b) Quota- The quantity of goods of a specific good that a country permits to be imported without restriction.
- 2 types of quota. Physical Quota & Financial Quota.
Physical Quota- The quantity of imports that are allowed into the country.
Financial Quota- Certain sum of money is allowed to be taken out of the country.
c) Embargo- Ban of the product.
d) Rules & regulations help a country to protect its local industry.
e) Subsidies is provided by government to local producers to lower the cost of production.
11. Reasons for protecting local industries
a) Dumping agreement- An act of charging cheaper prices in overseas markets compared to domestic market.
b) The government must assist them by protecting them against foreign competition.
c) Diversification agreement.
d) Cheap labour argument.
e) Senile industries argument- Industries that are ding in both input & output argument.
f) Solving balance of payments.
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12. Free Trade VS Protectionism
- With free trade, a country can concentrate on the products that it has comparative advantage in producing. The country could be affected by the instabilities of the world market and be exploited by other countries due to its dependency on them. Unless a country is totally dependent on only one country for its needs, it will not be adversely affected by the actions of one country.
- Protectionism is practice to protect their domestic industries. Without protection, local companies might not be able to compete with the foreign companies. If it is protected from foreign competition, the local companies might not improved their quality of their goods & invest in research & development. This will affect the local people to buy the inferior quality products. Other arguments for protectionism are the availability of cheap labour costs. Banning products from other countries could lead to political issues.
13. Balance Of Payments- A record of a country's international transactions for a given time period, usually one year.
14. Main components of balance of payments are capital account, current account, balancing item & the official financing.
15. Credit items- Money inflow or claims made by a country against other countries.
16. Debit items- Money outflow or claims made by other country against a country.
17. Deficit balance of payments- When receipts are less than payments.
18. Surplus balance of payments- When receipts are greater than payments.
19. Balanced balance of payments- When receipts are equal to the payments.
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20. Balance of trade- The difference between the value of imports and the value of its exports.
21. Current Account- The net balance of a country's international payment arising from exports and imports. It also known as balance of trade.
22. First part of current account consists of the visible items. These refer to the imports & exports of goods only.
23. 3 types of balance of trade
a) Surplus balance of trade when value of exports is greater than value of imports.
b) Deficit balance of trade when value of exports is less than value of imports.
c) Balanced balance of trade when value of exports is equal to value of imports.
24. Second part of current account consists of the invisible items. These refer to the imports & exports of services only. The services are tourism, military expenditure, banking, factor payments, foreign embassy and insurance.
25. Both visible & invisible items are known as current balance.
26. Current Balance- The difference between the value of exports & imports of both goods & services.
27. 3 types of current balances
a) Surplus current balance when value of exports is greater than value of imports.
b) Deficit current balance when value of exports is less than value of imports.
c) Balanced current balance when value of exports is equal to the value of imports.
28. Causes of current account deficit
a) High demand for imports of machinery as a result in an outflow of the country's currency.
b) Lack of local expertise so most the expertise are imported to the country.
c) High economic growth causes the demand of imported goods to increase.
29. Measures to solve current account deficit
a) Devaluation- A government’s reduction of the value of its currency.
b) Encourage exports
c) Discourage imports
d) Use of fiscal policy. This can cause the total expenditure on imports falling.
e) Use of monetary policy. Raising the interest rate and the aggregate demand for imported goods will fall.
30. Capital account- The purchase & sales of bonds.
31. Balancing item- An errors that could be due to human or technical errors.
32. Official Financing- It consists of two components. 1st component consists of the loans made by the country. 2nd component consists of the additions & withdrawals of reserves.
33. Foreign Exchange- The number of units of local currency needed to exchange for foreign currency.
34. Factors that influences the price of a country’s currency
a) Inflation- When inflation occur, the exports will be expensive. This will lead to a falling the demand for the exports. Fall in total revenue, the demand for local currency will also fall.
b) Interest rates- Increase in interest rates, more foreign money will flow in. Local currencies will increase.
c) National Income- Increase in national income, there will be growing demand for imported goods. This will increase the demand for foreign currencies.
d) Speculation- Foreign fund managers can influence the foreign exchange markets by buying& selling large amount of foreign currencies.
35. Hot Money- Foreign funds that pursue immediate yields such as high interest rates.
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