13.2 international trade bop deficit surplus

7/31/2019 13.2 International Trade Bop Deficit Surplus

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AS Economics

International Trade

Tutor2u & Mrs G
http://www.tutor2u.net/http://www.tutor2u.net/http://www.tutor2u.net/


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Aims

To recap the knowledge of Balance of Payments

To understand the positive and negative implications ofinternational trade

To consider short run & long impact of international trade

To discuss whether a BoP deficit/surplus can cause problems

How to resolve a BoP deficit/surplus


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What is meant by

Trade?


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tutor2u

Trade


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Trade (2)


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What is Free Trade?

Free trade represents trade between countrieswithout the introduction of artificial barriers

International trade reflects exchange andspecialization

Exchange: countries supply goods and servicesthat they can produce relatively cheaply andbuy products from other countries that they

would find relatively expensive to produce Specialisation: benefits from trade are

increased if there are economies of scale fromproduction and if countries specialise their

resources in producing certain commodities


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What is Free Trade?

In an open economy, one nation tradesopenly with other

Trade in goods

Trade in services

Free flow of financial capital

Free flow of labour resources


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Intra-Firm Trade

Intra-firm trade is becoming increasingly important

For example a USA fruit drinks manufacturer mightexport some of its raw materials to the UK to producefruit juices that are manufactured / bottled and distributed

to the UK and Western European markets


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Why trade?


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The Potential Advantages from Trade (1)

Competition:

Increased competition for suppliers

Greater pressure on businesses to keep their costs andprices down

Increased competition can lead to a dilution of monopolypower which reduces the potential for exploitingconsumers

This leads to an improvement in the allocative efficiencyof scarce resources


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Comparative Advantage:

If other countries can supply certain goods and servicesmore efficiently it makes economic sense for them todo so

This makes use of the principle of comparativeadvantage

It also leads to an improvement in overall productiveefficiency


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Improvements in dynamic efficiency

Trade tends to speed up the pace of technologicalprogress and innovation across different industries

Trade provides more choice for consumers

Dynamic efficiency gains become apparent over timefor example improvements in the quality andperformance of products at a given price


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Economies of scale (lower LRAC) representing gainsin productive efficiency and leading to higher profitsand lower prices for consumers

Could you draw me aneconomies of scale

diagram?


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Economies of scale

Costs

Output (Q)

SRAC1

SRAC2 SRAC3

Q1 Q2 Q3

AC1

AC2AC3

LRAC

ILLUSTRATING ECONOMIES AND DISECONOMIES OF SCALEProductive efficiency in the longrun is achieved when output isproduced at the bottom of thelong run average cost curve


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Trade is seen as a stimulant to short term aggregatedemand and long run economic growth

Exports are an injection of aggregate demand

A boost to exports will have multiplier effects on the levelof equilibrium national income

There may be extra supply-side improvements fromincreased capital investment between companies andcountries engaged in international trade


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Micro and Macroeconomic Gains

Imports of newtechnologyLRAS effect

Employmentcreation in growth

sectors

Stimulates newcapital investment

and innovation

Makes domesticmarkets morecontestable

Transfer of ideasand best practice -benchmarking

Injection of ADExport led growth

multiplier effects

International Trade


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Concept of Comparative Advantage

First developed by David Ricardo, one of the foundingfathers of classical economics, in 1817

Comparative advantage exists when for a country

The opportunity cost of production is lower

A country is more productively efficient than another

Countries will tend to specialise in and then exportproducts which use intensively the factors which it is best

endowed Exports used to finance imports of other products


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Importance of trade for developing countries

Less dependenceon volatile primary

industries

Imports ofinvestment goods boosts LRAS

Exploitation ofcomparativeadvantage

Transfer oftechnology and

ideas

Employment andhigher real wagesin export sectors

Diversificationinto

manufacturing

Importance of trade fordeveloping countries


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Balance of Payments


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tutor2u

Does a BoP Deficit cause problems?

It depends on the size and nature of the deficit!

The larger the deficit, over a longer period of time the

greater the problems will be!

If its cheap imports & an increase in M???

If its the UK not being competitive and there is a fall inX???


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Short run V long run deficit!

In the Short run.

A deficit might mean that

UK households have abetter standard ofliving

In the Long run

A deficit might cause UK

businesses to suffer,rising unemployment .and falling standards ofliving!


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Curing BoP deficit

Deflation

Direct controls

Devaluation

The 3

Ds

All have issues

with use!


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Can a surplus BoP cause problems?

A surplus suggests lots of economic success

Exporting more than Importing! Again it depends on the

size of the surplus!

And if one country is more successful than others

then this can cause other countries to act to reduce

their deficit and use direct controls!

Surplus can cause inflation as an increase in X = an

injection = outward shift in AD!


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Curing BoP surplus

Reflation

Remove import controls

Revaluation

The 3 Rs

All have issues

with use!


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Whos in the top 5 for .

Surplus Deficit

There are 164 countries

64 are in a surplus&

100 in a deficit


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Surplus

Rank Country Current account balance(million US$)

1China $ 368,200,000,000 2008 est. 2Germany $ 267,100,000,000 2008 est.

3Japan $ 187,800,000,000 2008 est.

4Saudi Arabia $ 141,000,000,000 2008 est. 5Russia $ 97,600,000,000
http://www.tutor2u.net/http://www.tutor2u.net/http://en.wikipedia.org/wiki/List_of_countries_by_current_account_balancehttp://en.wikipedia.org/wiki/List_of_countries_by_current_account_balancehttp://www.tutor2u.net/


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Deficit

Rank Country Current account balance(million US$)

5 Turkey $ -51,680,000,000 2008 est. 4 Italy $ -68,820,000,000 2008 est.

3 United Kingdom $ -72,540,000,000 2008 est.

2 Spain $ -152,500,000,000 2008 est. 1 United States $ -568,800,000,000 2008 est.
http://www.tutor2u.net/http://www.tutor2u.net/http://en.wikipedia.org/wiki/List_of_countries_by_current_account_balancehttp://en.wikipedia.org/wiki/List_of_countries_by_current_account_balancehttp://www.tutor2u.net/


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Global Current account position
http://www.tutor2u.net/http://www.tutor2u.net/http://upload.wikimedia.org/wikipedia/commons/0/09/Current_account_balance_world.PNGhttp://www.tutor2u.net/


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Exchange rates

The value of the

ss

ss


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Learn this acronym.


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Strong

Pound

Imports

Cheap

Exports

Dear

sss

s


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A strong pound pros

A high pound leads to lower import prices -

How??????

H d f ll i h d / li ff


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How does a fall in the pound / sterling affectinflation?

(1) Weaker pound drives up import prices

Higher import prices drive up firms costs

But these are only one element (wages more important)

(2) Higher import prices feed directly into retail basket

E.g. prices of imported computers, cars, household furniture

(3) Weaker pound leads to stronger aggregate demand growth

Faster growth of exports and a slower growth of imports

(4) Negative income effect lower real incomes for consumers

(5) Positive substitution effect cheaper relative prices of UK output

Stronger aggregate demand increases inflationary pressure depending on theamount of spare capacity in the economy


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A strong pound pros

A high pound leads to lower import prices - This boosts the real living standards of consumers at

least in the short run

Cheaper to import raw materials, components and

capital inputs good news for businesses that rely onimported components or who are wishing to increasetheir investment of new technology from overseascountries

A strong exchange rate helps to control inflationbecause domestic producers face stiffer internationalcompetition from cheaper imports and will look to cuttheir costs accordingly


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A strong pound cons

Cheaper imports leads to rising import penetration anda larger trade deficit

Exporters lose price competitiveness and market share this can damage profits and employment in somesectors.

If exports fall, this has a negative impact on economicgrowth. Some regions of the economy are affected bythis more than others

In the North east for example, manufacturingindustry accounts for over 28% of regional GDPwhereas the percentage for the UK as a whole is

just 19%.


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EXAM SKILL


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EXAM PAPER FOR YOU TO DO!

past papers\AQA-ECN22-W-QP-JAN08.pdf
http://www.tutor2u.net/http://www.tutor2u.net/http://past%20papers/AQA-ECN22-W-QP-JAN08.pdfhttp://past%20papers/AQA-ECN22-W-QP-JAN08.pdfhttp://past%20papers/AQA-ECN22-W-QP-JAN08.pdfhttp://past%20papers/AQA-ECN22-W-QP-JAN08.pdfhttp://past%20papers/AQA-ECN22-W-QP-JAN08.pdfhttp://past%20papers/AQA-ECN22-W-QP-JAN08.pdfhttp://past%20papers/AQA-ECN22-W-QP-JAN08.pdfhttp://past%20papers/AQA-ECN22-W-QP-JAN08.pdfhttp://past%20papers/AQA-ECN22-W-QP-JAN08.pdfhttp://past%20papers/AQA-ECN22-W-QP-JAN08.pdfhttp://past%20papers/AQA-ECN22-W-QP-JAN08.pdfhttp://past%20papers/AQA-ECN22-W-QP-JAN08.pdfhttp://www.tutor2u.net/


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t t 2

AQA old exam paper Jan 2008.

Using

Extract C, identify

twomainfeatures in the balance of

payments on current account in theeconomies shown for the period2005 to 2007. (4 marks)

(b) Extract D (lines 2224) refersto deflation in the Japanese

economy allowing exports tobecome an important driver foreconomic growth. Explain howfalling prices might help tostimulate the economic growth of acountry in this way. (6 marks)

(c) Using the data and your

economic knowledge, evaluate thepossible consequences for UKmacroeconomic performance ifthe euro area and the US seek toreduce their balance of paymentsdeficits on current account. (15marks)

13.2 international trade bop deficit surplus

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