Question

1. Why do states intervene in foreign trade despite the classic theories of trade predicting positive consequences? (Explain first the causes and consequences of foreign trade according to the classics, then the causes, means and consequences of state intervention)

2.Explain the relationship between economic growth, foreign trade, trade deficits and foreign trade policy.

3. Explain the relationship between the exchange rate, financial crises, foreign investment and the financial structure.

Answer 1

Answer 1] states generally intervene so that domestic country could have trade benefit or trade surplus in overall

according to the classic theory,

the main cause of foreign trade is comparative disadvantage in particular product so that production can be increased by the way of import

but further it is compensated by exporting the product at which the country have comparative advantage

thus in the consequences of this, there is either trade surplus or trade deficit

if exports are more than imports then country have trade surplus

but if the country have import more then export then have trade deficit.

but if the state intervenes, mainly because there is lot of trade deficit and major intervetion of the host country doing maximum trade capturing the maximum share of market

to reduce state use the means of tax on the import and export promotion on the export to encourage the domestic country to export more and import less

with this means there is controll on the exchange, because of tax

for eg, if mobile is importing worth $1000 and tax on it is 70% then it will cost consumer $1700 therefore, due to increase in prices of imported items many consumers will decline their demand.

Answer 2]foreign trade policy is kind of framework made by the domestic country to increase the exports and the ttrade balance to benefit the country and also to make such policy which help the country to import the necessary resources at the minimal cost and covering by increased exports.

thus with the increase in exports and less imports there will be trade surplus, but if the country fails to export more instead imports are more then there will be trade deficit.

with the foriegn trade there is opportunity for the domestic work and the industry to flourish or to get the initiaties to learn drom the competition.

this all lead to increase in the economic growth as increase in exports there will be increase in income and also the overall growth in the market due to competition and opportunities created by them.

Answer3 ] exchange rate refers to the comparision of domestic currency with other currency which reflects the worth one currency have in other currency terms , which help the countries to identify the worth in their currency .

if there is appreciation in the domestic currency then , the worth is increased in comparision to other but if there is depreciation of currency then the worth is decreased.

financial crises is the crises faced by the country , if there is appreciation in currency then the income is higher then before, which help us to reduce finanbicl crises with higher rates

but if there is depreciation of currrency then the income is lower then before, which make the financial crises increase due to the low worth then before.

foreign investment is the orther key factor which plays vital role in trade balance and the national income and foriegn investment yield more money and also help us to get more out of it in terms of income and thus effecting the financial structure as the appreciation and depreciation have direct effect on the income and the budget of the country.