International Trade: Understanding the Global Economy

Item 14: International Trade, Balance of Payments, and Exchange Rates

1. International Trade

International trade is the exchange of goods and services between countries.

2. Barriers to International Trade

Some countries place restrictions on international trade through protectionist measures that restrict or distort trade. This may be done to protect strategic sectors, maintain employment, or compensate for imbalances when imports exceed exports.

• Tariff: A tax on imports of goods from another country.
• Quotas: Limitations on the number of goods that can be imported.
• Measures of equivalent effect: Barriers to imports through complex bureaucratic procedures, eventually reducing imports.
• Dumping: A company sells its products at a loss to eliminate competition.
• Aids or subsidies: Financial assistance to domestic firms or exports in order to eliminate foreign competition.

The World Trade Organization (WTO)

The WTO is an international organization that tries to progressively liberalize trade barriers through agreements among its member states.

3. Balance of Payments

The balance of payments is an accounting document that contains all international financial and economic exchanges within a country over a period of time.

The structure includes the current account, capital account, and financial account balance.

The Current Account

• Trade balance (or goods): Records imports and exports of goods, reporting the existence of a deficit or surplus.
• Balance of services: Includes the international sales of services.
• Balance of income: Includes income from investments abroad, such as earned income, border workers, seasonal workers, foreign investment income, and rents in Spain from Spanish emigrants.
• Net current transfers: The supply of money transfers that are being made without consideration. Registers transfers for current expenditure, remittances from migrants to their families, EU subsidies to farmers, and state or private donations for development assistance.

The Capital Account

The capital account includes the balance of capital transfers, the purpose of which is to carry out infrastructure investments in the host country. It also includes income and payments for the purchase or sale of intangible assets.

4. The Financial System and Exchange Rates

Currency: A currency that is not used within a country.

Different Exchange Rates

The exchange rate is the price of one currency against another.

• Flexible exchange rates (or floating): Market forces determine the exchange rate.
• Fixed exchange rates: To avoid constant fluctuations, some countries link their currency to another more important currency.
• Adjustable exchange rates: This system combines the two previously mentioned exchange rates. It intends that exchange rate movements are the minimum possible while trying to leave some flexibility by setting a central rate of a currency with another stronger one, with two bands of fluctuation.

The International Financial System

The International Monetary Fund (IMF), established in 1944, oversees the international financial system.

Why Buy Currencies?

One reason is speculation. Some agents buy foreign currency in order to sell when they are more expensive.

Vocabulary

• Free trade: The absence of barriers to trade in goods and services between countries.
• Protectionism: Economic thought that considers it best for a country's industry to be protected from foreign competition.
• Trade deficit: Where imports of goods from one country are higher than exports.
• Currency: A currency that can be bought and sold in international markets and may be convertible. Convertible currencies can be exchanged for each other without the intervention of the state issuer of each currency.