International Trade &
Globalisation
International Specialisation
Specialisation at a National Level
Countries specialize in the production of those goods and services in
which they have an absolute advantage or comparative advantage
over other regions or countries
A country has an absolute advantage if it can produce a given
amount of a good or service with far fewer resources and, therefore
at an absolute cost advantage over any country
A country has a comparative advantage in the production of a
good or service if it can be produced it at a lower opportunity cost
relative to other countries
Advantages of Specialisation
Efficiency Gains
Labour Productivity
Increased Productive Capacity
Economics of Scale
Improved Competitiveness
Disadvantages of Specialisation
Overspecialisation
Lack of variety for consumers
High labour turnover
Low labour mobility
Higher labour costs
Globalisation, Free Trade and Protection
Globalisation: The process by which businesses or other
organizations develop international influence or start operating on
an international scale.
Multinationals
Operates in more than one country
Some of the largest companies in the world
Governments often compete to attract multinationals
o Can provide jobs, incomes, business knowledge, skills and
technologies which can help other firms
o Pay taxes on their profits to boost government revenue
Headquarters are based in one country
Advantages Disadvantages
Can reach many more consumers Can switch profits to other
globally & sell far more than other countries to avoid paying taxes
types of businesses on profits
Can minimise transport costs by
locating plants in different Can force smaller local firms
countries to be near raw materials out of business
or big markets
Minimise wage costs by locating in May exploit workers in low-
countries with low wages wage economies
May use their power to get
Can enjoy low average production generous subsidies & tax
costs advantages from the
government
Benefits of Free Trade
For Consumers To Producers To Governments
Cheaper products Larger markets Exports increase
jobs, GDP,
For Consumers To Producers To Governments
incomes
But imports take
Better products Economies of scale
them away
Workers more More produced, more
productive profit
International trade
International Trade increases the number of
products you make
Increased
competition from
international
companies
Lower Prices – Better
Qualities
Trade Protection
Tariffs: Tax on imports, which increases costs for foreign firms
Subsidies: Form of government assistance which helps cut down
production costs of firms
Quota: Quantitative limit on the sale of imports
Embargo: Ban of trade with a certain country
Excessive quality standards and bureaucracy
Protection
Arguments For Possible Consequences
Protection of a young Other countries will retaliate with trade
industry barriers
To prevent unemployment It protects inefficient domestic firms
The loss of domestic jobs from overseas
To prevent dumping
competition will only be temporary.
Because other countries Trade barriers have increased the gap
use barriers to trade between rich and poor countries
To prevent over-
Arguments For Possible Consequences
specialisation
Foreign Exchange Rates
The exchange rate is the price of a country’s currency in terms of
another country’s currency
Most countries have a floating exchange rate, which means no set
value for their currency compared with any other currency
Currency is a commodity. Thus, the value of a currency is
dependent on the demand and supply of that currency in the foreign
exchange market.
An appreciation in the value of currency means its exchange rate
against other countries has risen
A depreciation in the value of currency means its exchange rate
against other countries has fallen
Exchange Rate Fluctuations
Demand for a currency comes from foreign money flowing into the
country. If demand rises, the currency’s value will rise in relation to
the other currency
Supply of the currency comes from domestic money flowing out of
the country. If supply rises, the currency’s value will fall
A currency might depreciate A currency might appreciate
because: because:
Demand for other currencies
There is a balance of payments
rises as domestic consumers buy
surplus
more imports
Demand for the currency rises as
There is a balance of payments
overseas consumers buy more
deficit
exports
A currency might depreciate A currency might appreciate
because: because:
Interest rates fall relative to Interest rates rise relative to other
other countries countries
People move their savings to This attracts savings from
bank accounts overseas overseas residents
Inflation rises relative to other Inflation is lower than in other
countries. This makes exports countries, so exports will be
more expensive, and demand for cheaper, and overseas demand for
them and the currency needed them, and the currency required
to buy them falls to pay for them, will rise
People speculate that the
People speculate that the
currency will fall in value, and
currency will rise in value, and
they sell their holdings of the
they buy more of the currency
currency
Consequences of Exchange Rate Fluctuations
An appreciation of the currency will make exports more expensive
and imports will be cheaper, and vice versa
If PED<1 for exports, an exchange rate appreciation will improve a
current account deficit
If PED<1 for imports, an exchange rate depreciation will worsen a
current account deficit
Types of Exchange Rate
Floating exchange rate: it is determined by the forces of the
market supply and demand
Managed floating exchange rate: it is influenced by the state
intervention
Fixed exchange rate: it is set by the government and maintained
by the central bank buying and selling the currency and changing
interest rates
Floating Exchange Rate
Advantages Disadvantages
Automatic
Uncertainty
stabiliser
Frees internal Lack of
policy investment
Management Speculation
Flexibility
Can avoid
inflation
Lower reserves
Fixed Exchange Rate
Advantages Disadvantages
Elimination of uncertainty and Foreign exchange reserves
risks needed
Speculation deterred Internal objectives sacrificed
Restricts international
Prevents currency depreciation
competition
Attracts foreign direct
investment
Current Account of Balance of Payments
Structure
Visible trade account: the difference between the export revenue
and import spending on physical goods, e.g. cars, washing machines
Invisible trade account: measures the difference between export
revenue from and import spending on services, e.g. banking,
insurance and tourism
Income flows: e.g. interest, profit and dividends flowing in and out
of the country
Current transfers: e.g. grants for overseas aid.
Secondary Income - Income transfers between residents and non-
residents of a country.
Balance of Payments Deficit Balance of Payments Surplus
Money flowing out greater Money flowing
than in. in greater than out.
Current + Capital + Financial is Current + Capital + Financial is
negative. positive.
Trade Deficit
This means people are buying more imports and may be spending
less on products made by domestic firms
Deficit may be a symptom of a declining industrial base
Foreign exchange for the national currency is likely to fall
Increases prices of imports and cause import inflation
Trade Surplus
This means people are buying fewer imports and may be spending
more on products made by domestic firms
Surplus may result of economic growth
Foreign exchange for the national currency is likely to rise
Increases in the prices of exports
Policies to achieve balance of payments stability
Supply-side policy will increase domestic production and exports
which can correct a current account deficit
Expansionary fiscal policy, by reducing taxes and increasing
government expenditure can increase the total demand for imports
to fix current account surplus, and vice versa
Contractionary monetary policy can correct a current account
deficit, and vice versa
