chapter 2 if

7/25/2019 Chapter 2 If

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Factors Affecting International

Trade Flows

Inflation

If countrys inflation rate increases relative to the

countries with which it trades, its current accountwill be expected to decrease, other things beingequal. Consumers in that country will prefer topurchase more foreign goods due to high localinflation, while the countrys export will decline.

Therefore, relative increase in a countrysinflation rate will decrease its current account, asimports increase and exports decrease.


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Trade Flows

National Income

If countrys income level increases by a higher

percentage, its current account will be expected todecrease, other things being equal. !ith the increasing

income level, the consumption of goods also increases.

percentage of that increase in consumption will most

li"ely reflect an increased demand for foreign goods.

Therefore, relative increase in a countrys income

level will decrease its current account, as imports

increase.


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Trade Flows

Exchange Rates

#ach countrys currency is valued in terms of other

countrys currencies through the use of exchange rate.The value of most currencies can fluctuate over timebecause of mar"et and $ovt. forces. If a countryscurrency begins to rise in value, its current account

balance will decrease as imports increase and exportsdecrease. s the currency strengthens, goods exportedby that country would become more expensive to theimporting country. s a result, the demand for suchgoods will decrease.


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Trade Flows

Exchange Rates

%or example, computer that costs in &.'. mar"et

for ( )** will require a payment of C( )+ by theCanadian importer if the Canadian dollar is valuedat C( )-(*.*. /ow if C( )-(*.0*, it wouldrequires a payment of C( )12, which mightdiscourage the Canadian demand for &.'.computer.

Therefore, strong local currency is expected toreduce the current account balance.


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Trade FlowsGovernment Restrictions and Tariffs & Quota

If a countrys $ovt. imposes a tax on imported

goods, which is referred to as Tariffs, the price

of the foreign goods can increase drastically.

In addition to tariff, the $ovt. can reduce its

countrys import by enforcing a 3uota ormaximum limit that can be imported.


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Correcting A alance of Trade

!eficit 4y reconsidering the factors that affect the

balance of trade, some common correction

methods can be developed. %or example, a floating exchange rate

system may correct a trade imbalance

automatically since the trade imbalance willaffect the demand and supply of the

currencies involved.


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Factors Affecting !FI

Changes in Restrictions/ew opportunities may arise from the removal of government barriers.

"rivati#ation

5%I has also been stimulated by the selling of government operations.

"otential Economic GrowthCountries with higher potential economic growth are more li"ely to

attract 5%I.

Tax Rates

Countries that impose relatively low tax rates on corporate earnings aremore li"ely to attract 5%I.

Exchange Rates

%irms will typically prefer to invest their funds in a country when that

countrys currency is expected to strengthen.


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Factors Affecting International "ortfolio

Investment

Tax Rates on Interest or !ividends

Investors will normally prefer countries where the

tax rates are relatively low.

Interest Rates

6oney tends to flow to countries with high

interest rates.

Exchange Rates

%oreign investors may be attracted if the local

currency is expected to strengthen.


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Agencies that Facilitate

International Flows

International $onetar% Fund I$F'

(orld an) Grou*

(orld Trade +rgani#ation (T+'

an) for International ,ettlements I,'


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International $onetar% Fund I$F'

The I6% is an organi7ation of )2 member countries.

#stablished in )819, it aims

To promote international monetary cooperation and

exchange stability:

To foster economic growth and high levels ofemployment:

To provide temporary financial assistance to help ease

imbalances of payments

In particular, its compensatory financing facility attempts

to reduce the impact of export instability on country

economies.

-ou ma% learn more a.out the I$F at htt*/00www1imf1org


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IR!= International 4an" for


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I!A/ International !evelo*ment

Association I5 was set up in )89* as an agency that lends

to the very poor developing nations on highly

concessional terms. I5 lends only to thosecountries that lac" the financial ability to borrow

from I4


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IFC/ International Finance Cor*oration

The I%C was set up in )89 to promote

sustainable private sector investment in

developing countries, by financing privatesector pro>ects: helping to mobili7e

financing in the international financial

mar"ets: and providing advice and technicalassistance to businesses and governments.


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$ IGA/ $ultilateral Investment Guarantee Agenc%

The 6I$ was created in )8 to promote %5I

in emerging economies, by offering political ris"insurance to investors and lenders: and helping

developing countries attract and retain private

investment.


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IC,I!/ International Center for

,ettlement of Investment !is*utes

The IC'I5 was created in )899 to facilitate thesettlement of investment disputes between

governments and foreign investors, thereby

helping to promote increased flows of

international investment.


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To learn more about the !orld 4an" $roup and its

organi7ations, visit=

http=??www.worldban".org

http=??www.worldban".org?ibrd

http=??www.worldban".org?ida

http=??www.ifc.orghttp=??www.miga.org

http=??www.worldban".org?icsid


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(orld Trade +rgani#ation (T+'

dministering !T@ trade agreements: 'erving as a forum for trade negotiations:

Aandling trade disputes:

6onitoring national trading policies:

Broviding technical assistance and training for developingcountries: and

Cooperating with other international groups.

Created in )88, the !T@ is the successor to the $eneral

greement on Tariffs and Trade $TTD. It deals with the globalrules of trade between nations to ensure that trade flows smoothly,

predictably and freely. t the heart of the !T@Es multilateraltrading system are its trade agreements. Its functions include=


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an) for International ,ettlements I,'

'et up in )82*, the 4I' is an international organi7ation that fosters

cooperation among central ban"s and other agencies in pursuit ofmonetary and financial stability. It is the Fcentral ban" of Fcentral

ban"sG and Flender of last resort.G

The 4I' functions as=). forum for international monetary and financial cooperation:

+. ban" for central ban"s:

2. center for monetary and economic research: and

1. n agent or trustee in connection with international financial

operations.


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To learn more a.out the (T+ and the I,2

visit/

http=??www.wto.org

http=??www.bis.org


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Regional !evelo*ment Agencies

gencies with more regional ob>ectives relating toeconomic development include=

HThe Inter;merican 5evelopment 4an":

HThe sian 5evelopment 4an":HThe frican 5evelopment 4an": and

HThe #uropean 4an" for


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Chec) out the following regional agencies/

Inter;merican 5evelopment 4an"=

http=??www.iadb.org sian 5evelopment 4an"= http=??www.adb.org

frican 5evelopment 4an"= http=??www.afdb.org

#uropean 4an" for

chapter 2 if

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