LAST MINUTE REVISION G UIDE
Unit 6
Bala kumar.R.J
Unit 6
INTERNATIONAL SPECIALISATION
MEANING A process of a country concentrating on producing those goods
and services in which they have an advantage
BENEFITS Efficiency in production
Absolute advantage( where one country is able to produce
more and with low cost than other)
Comparative advantage ( where one country is able to produce
at lower opportunity cost than another)
Increased output
Superior factor endowments
Consumers all over the world benefit
Increasing their standard of living
Increase market size and economies of scale
Build up reputation
DISADVANTAGES May be at risk if a substitute is available near by
May be at risk if the raw materials are imported
May be at risk if the exchange rate changes
Decline in demand for other type of goods and services
CURRENT ACCOUNT OF BALANCE OF PAYMENT
Structure of current account
Visible trade: - Records trade in goods such as oil, steel etc. It is calculated by subtracting
visible imports from visible exports. If exports of goods are greater than imports, visible trade
is in surplus. If imports of goods are greater than exports, visible trade is in deficit. This is
sometimes called trade balance. Invisible trade: - Records trade in services such as
tourism, healthcare etc. It is calculated by subtracting invisible imports from invisible exports.
If exports of services are greater than imports, invisible trade is in surplus. If imports of
services are greater than exports, invisible trade is in deficit. Income flows: - Inflows and
outflows of income from employment and investments are
recorded. Examples could include wages, salaries, bonus, rent, profits, dividends, interest etc.
Current transfer flows: - records the value of aids, donations received from other countries
and sent to other countries.
An inflow in the balance of payment is sometimes referred as a credit item
An outflow in the balance of payment is sometimes referred as a debit item
CURRENT ACCOUNT DEFICIT
Occurs when the combined value of the four sections(goods, services, incomes, aids) of the
debit(outflow of money) side is greater than the combined value of the four sections of the
credit(inflows of money) side in the current account. A current account deficit may occur
without a deficit in all the four sections
CAUSES OF CURRENT ACCOUNT DEFICIT
Lack of factor endowments
Economic growth in the country
Lower growth in other countries
A higher exchange rate
CONSEQUENCES OF CURRENT ACCOUNT DEFICIT
Spending beyond their means
Imported inflation
Lower output
Lower employment and income
Lower pressure on exchange rate
HOW TO OVERCOME CURRENT ACCOUNT DEFCIT
To reduce imports, use trade barriers
Subsidies to encourage domestic production
Lowering the exchange rate to make exports cheaper and imports expensive
Encouraging MNC’s and foreign investment
SEZ ( Special Economic Zone)
CURRENT ACCOUNT SURPLUS
Occurs when the combined value of the four sections(goods, services, incomes, aids) of the
credit(inflow of money) side is greater than the combined value of the four sections of the
debit(outflows of money) side in the current account. A current account surplus may occur
without a surplus in all the four sections
CAUSES OF CURRENT ACCOUNT SURPLUS
Better factor endowments
Lower Economic growth in the country
Higher growth in other countries
A lower exchange rate
CONSEQUENCES OF CURRENT ACCOUNT SURPLUS
Foreign currencies
Higher output
Higher employment and income
A higher pressure on exchange rate
Lower debt
Possible inflation
EXCHANGE RATE
The rate of one currency expressed in terms of another currency
TYPES OF EXCHANGE RATE
TYPES ADVANTAGES DISADVANTAGES
FIXED Certain Government
A type of exchange rate where Improve investors’ reserve is used to
against the
otherrate
currencies by
is fixed confidence maintain it
the government or central Increase trade and Reserve cannot be
bank. investment used for other
Government maintains the No speculative purpose
fixed exchange rate using its movement in If the rate is fixed at
exchange rate a higher rate, then
foreign exchange reserve Speculation is the BOP could be
and interest rates. unfavorable
If the value is falling, they act of trading
step in to buy more foreign currency in
currency. And if the value is the foreign
rising, they step in to sell exchange market
more currency. in order to make
Interest are raised to profit. The people
encourage more saving if who do this task is
the value is falling
and the speculator
lowered when the exchange
rate is rising.
FLOATING Market
determined Instability
A type of exchange rate rates are the best Reduce confidence
where the rate is determined rates for buyers and Reduce trade and
by the market forces of sellers investment
demand and supply of the of
No need Lots of speculative
currency. government foreign movement in
Changes in demand and currency reserve to exchange rate
supply brings changes in maintain
exchange arte So government can
focus other areas
MANAGED FLOATING An exchange rate type where market forces and
government play a certain role in determining and
maintaining.
CAUSES OF EXCHANGE RATE FLUCTUATIONS
TYPES OF FLUCTUATIONS
APPRECIATION Increasing the value of the DEPRECIATION
currency against other currencies due to the Falling the value of the currency against
changes in the other currencies due to the changes in the
market forces of demand and supply in market forces of demand and supply in
floating exchange rate floating exchange rate
REVALUATION DEVALUATION
Government raising the value of the currency Government lowering the value of the currency in
in fixed exchange rate fixed exchange rate
CAUSES OF EXCHANGE RATE FLUCTUATIONS
Demand for the currency
Supply of the currency
Inflation Interest rate
Level of exports Level of
imports State of the
economy Speculations
Business activity
Economic growth
CONSEQUENCES OF EXCHANGE RATE FLUCTUATIONS
APPRECIATION DEPRECIATION
Exports expensive Exports cheaper
Exports revenue falls if demand for Exports revenue rises if demand for
exports is elastic. ( may not fall if exports is elastic. ( may not fall if demand
demand for exports are inelastic) for exports are inelastic)
Imports cheaper Imports expensive
Imports expenditures rise Imports expenditures fall if demand for
When imports are greater than exports is elastic. ( may not fall if demand
exports, BOP unfavorable(deficit) for imports are inelastic)
When exports are greater than imports,
Lower output and employment
BOP favorable(surplus)
Higher output and employment
TRADE
Trade between countries is known as international trade. Trade between countries without any trade
restrictions are known as free trade
FREE TRADE
ARGUMENTS FOR /REASONS ARGUMENTS AGAINST
Increased production Infant Industry Argument.
Encourage specialization Harmful goods
Competition Dumping
Innovation Balance of payment deficit
Prestige Culture damages
Friendship
Benefits to consumers
Foreign exchange gains
Employment
Economic growth
TARDE PROTECTION/ TRADE BARRIERS
Restriction placed on imports in order to encourage domestic production
TYPES OF TRADE PROTECTION
Tariffs: - Tax on imports. Tariffs make imported goods more expensive to buy, because the
cost is passed on to consumers. Higher prices reduce demand for the imported goods and
help a nation’s own industries compete. Tariffs also increase government revenue, which can
help reduce a nation’s budget deficit. Quota: - A physical limitation on imports. Subsidies:- A
financial help from government to domestic firms Exchange control:- Restriction of foreign
currency for the importers Embargoes:- Complete ban on imports Standards:- are rules
about the quality of imported
ARGUMENTS FOR AND AGAINST TRADE PROTECTION
ARGUMENTS FOR ARGUMENTS AGAINST
Revenue for the government Limit choice
Avoid dumping High price of imports
Reduce harmful goods Retaliation
Encourage domestic infant industries
Favorable BOP
TRADE BLOCS
TYPES DESCRIPTION EXAMPLES
1 Free trade area • Member countries have free trade NAFTA (North American
Individual tariff when trading with non- Free Trade Agreement)
• member country
Member countries have free trade
2 Custom union • Gulf Cooperation
Council (GCC)
• Common external tariff when trading
with non-member country
All features of custom union
3 Common market • East African Common
Free mobility of factors of production Market,
African and Common
West
•
market.
European Union
4 Economic union • All features of common market
• Common policy on trade, agriculture,
manufacturing
Common currency
•
THE END